Interchange Fee
The fee paid by a merchant's bank to a cardholder's bank for processing a card transaction, forming the largest component of merchant payment processing costs.
Interchange fees are transaction fees that the acquiring bank (merchant's bank) pays to the issuing bank (cardholder's bank) every time a card transaction is processed. They represent the largest component of a merchant's total payment acceptance cost, typically 1.5–2.5% for consumer credit cards and 0.2–0.5% for debit cards in the US, varying by card type, transaction type, and merchant category.
Interchange rates are set by the card networks (Visa and Mastercard) and published in detailed interchange tables that specify hundreds of different rates based on combinations of: card type (consumer credit, debit, business, premium rewards, corporate), transaction type (card-present/swiped, card-not-present/online, contactless), merchant category code (MCC), and transaction qualification (meeting data requirements for best rates).
Higher-interchange cards — premium rewards cards, business cards, corporate cards — cost merchants more but provide cardholders with more points or cashback. The cardholder effectively earns rewards partially funded by the merchant's interchange payment. This creates tension between merchants (who want lower interchange) and banks and card network (who benefit from high interchange).
Merchants access interchange through their acquiring bank at one of three pricing models: Interchange-Plus (merchant pays actual interchange + a fixed processor markup — most transparent), Tiered (transactions bucketed into qualified/mid-qualified/non-qualified tiers — often more expensive), or Flat Rate (uniform rate like Stripe's 2.9% + $0.30 — simple but often more expensive for high-volume merchants).
The Durbin Amendment (2011) capped debit card interchange for large banks at $0.21 + 0.05%, significantly reducing costs for merchants accepting debit from major bank customers. Credit card interchange remains unregulated in the US, unlike in the EU where it's capped at 0.3% for consumer credit cards.
FAQs
What is interchange-plus pricing and why is it better for merchants?
Interchange-plus pricing passes the actual interchange rate (set by Visa/Mastercard) directly to the merchant, plus a fixed processor markup (e.g., interchange + 0.2% + $0.10). This is the most transparent model because merchants see exactly what the card network charges vs. what the processor charges. High-volume merchants typically save 0.3–0.8% vs. tiered or flat-rate pricing.
Why do business credit cards cost merchants more in interchange?
Business and corporate card interchange rates are higher than consumer rates because businesses use these cards for larger transactions (where the absolute fee is substantial), because business card spending is more predictable (lower default risk for issuers, offset by higher processing cost), and because issuers offer more valuable rewards/benefits on business cards requiring higher interchange to fund.
Can merchants surcharge customers for credit card fees?
In the US, merchants can surcharge credit card transactions in most states (a few states prohibit it), subject to card network rules limiting surcharges to the merchant's actual processing cost (max 3% for Visa). Debit card surcharges are prohibited by card network rules. Surcharging must be disclosed clearly before transaction and requires card network notification.
Related Terms
Payment Gateway
Software infrastructure that processes, verifies, and authorizes online and in-person payment transactions between merchants and customers.
Chargeback
A forced reversal of a payment transaction initiated by a customer through their bank, placing the financial liability back on the merchant.
Merchant of Record
The legal entity responsible for processing customer payments, managing tax compliance, and handling refunds and chargebacks for digital goods and services sales.
PCI DSS
The Payment Card Industry Data Security Standard — a set of security requirements for organizations that handle cardholder data, mandated by card networks.
