Interchange is the fee paid by the acquiring bank to the issuing bank on every card transaction. It is set by the card networks and varies based on the card type, transaction type, merchant category, and how the transaction is processed. Interchange is the largest component of card processing costs for most merchants and the primary revenue source for card-issuing banks.
When a cardholder uses a credit or debit card to make a purchase, the issuing bank fronts the funds and assumes the risk of cardholder non-payment. Interchange compensates the issuer for that credit risk, the cost of fraud losses, the reward programs funded by premium cards, and the operational cost of maintaining the cardholder relationship.
Merchants do not pay interchange directly to card issuers. Instead, the acquiring bank pays interchange to the issuing bank and passes that cost through to the merchant as part of their processing fees, either transparently as a line item under interchange-plus pricing or bundled invisibly into flat or tiered rates.
Diving Deeper into Interchange
Interchange is the foundation of the economics of card acceptance. It is simultaneously the largest cost component in merchant processing, the primary revenue source for card issuers, and the mechanism through which card networks create incentives for card issuance and acceptance. Understanding interchange — how it is structured, what drives the rate on any given transaction, and how it appears on merchant statements — is essential for any merchant evaluating their processing costs or negotiating with processors.
How Interchange Rates Are Set
Interchange rates are set by the card networks, primarily Visa and Mastercard, and published in interchange tables that are updated twice per year, typically in April and October. The tables contain hundreds of individual rate categories, each defined by a specific combination of card type, transaction type, merchant category, and data qualification criteria.
Neither merchants nor processors negotiate interchange rates. They are fixed for all participants in the network. What processors negotiate is their markup on top of interchange, not the interchange rate itself.
What Drives the Interchange Rate on a Given Transaction
The interchange rate that applies to any specific transaction is determined by several factors evaluated at the time of clearing.
Card Type
The type of card used is the most significant driver of interchange rates. Consumer credit cards, consumer debit cards, commercial credit cards, and commercial debit cards each have fundamentally different rate structures. Rewards credit cards carry higher interchange rates than standard consumer credit cards because the issuer uses the interchange revenue to fund the rewards program. Commercial cards carry some of the highest interchange rates because they are used for business spending where the issuer assumes higher credit risk and provides enhanced reporting features.
Transaction Type
Card-present transactions qualify for lower interchange rates than card-not-present transactions of the same card type. Within card-present, chip and contactless transactions qualify for lower rates than magnetic stripe swipe transactions. The physical presence and cryptographic authentication of the chip reduces fraud risk, and interchange rates reflect that risk difference.
Merchant Category Code
The merchant’s MCC affects interchange rates for some card types and in some programs. Supermarkets, gas stations, utilities, and certain other categories have specific interchange programs with rates that differ from standard consumer rates. Some categories receive preferential rates as card network incentives for merchant adoption.
Data Qualification
The completeness and accuracy of the transaction data submitted at clearing affects whether a transaction qualifies for the best available interchange rate. Submitting AVS data, using the correct transaction type indicators, clearing within required timeframes, and meeting other data quality requirements all affect qualification. Transactions that fail to meet qualification criteria downgrade to higher interchange categories.
Interchange Rate Examples
Interchange rates in the United States typically range from around 0.05% plus a small per-transaction fee for regulated debit cards to over 2.5% for premium rewards credit cards in card-not-present environments. A standard consumer Visa credit card transaction in a card-present chip environment might attract an interchange rate around 1.51% plus $0.10. The same card used for an online purchase might attract 1.80% plus $0.10. A Visa Infinite rewards card used online might attract 2.30% plus $0.10.
These are illustrative examples. Actual rates vary by specific card product, merchant category, and data qualification, and are updated periodically by the card networks.
The Durbin Amendment and Regulated Debit
The Dodd-Frank Wall Street Reform Act of 2010 included the Durbin Amendment, which directed the Federal Reserve to regulate interchange rates on debit card transactions issued by banks with assets over $10 billion. The resulting regulation capped regulated debit interchange at approximately 0.05% plus $0.21 per transaction, a fraction of unregulated debit and credit interchange rates.
The Durbin Amendment created two tiers of debit interchange: regulated rates for large bank issuers and unregulated rates for smaller bank and credit union issuers. Merchants who process a significant share of debit transactions benefit substantially from routing eligible transactions to regulated networks. Payment facilitators and ISOs with merchants in high-debit categories such as grocery and convenience pay close attention to debit routing optimization.
Interchange and Merchant Processing Costs
For most merchants, interchange represents between 70% and 90% of total card processing costs. The processor’s markup and network assessment fees make up the remainder. This means that understanding and optimizing interchange qualification is the highest-leverage opportunity for merchants to reduce their processing costs.
Interchange optimization strategies include ensuring transactions qualify for the best available rate through proper data submission, routing debit transactions to regulated networks where applicable, ensuring card-present transactions process as chip or contactless rather than magnetic stripe, and reviewing processing statements for transactions that have downgraded to identify and correct systematic qualification failures.