What Are Interchange Rates? [And 10 Ways To Reduce Them]

Behind the scenes of every credit card transaction are processes and payment infrastructures that come with costs — and credit card networks charge businesses interchange fees for these costs.

Credit card interchange rates affect every credit card payment you accept as a business, so it pays to know about these fees, how they affect credit card payments, and how your business can manage them effectively. Strategies for lowering your interchange fees can help your bottom line, too. 

Learn what credit card interchange fees are, how they work, and why interchange rates matter to any business that accepts credit card payments.

What Are Interchange Fees?

Also known as interchange rates, swipe fees, or credit card interchange fees, interchange fees are part of the fees businesses pay to accept credit card payments. Any time a customer uses a credit or debit card to make a purchase, the business accepting the payment must pay an interchange fee to facilitate the transaction. 

Card networks, such as Visa, Mastercard, American Express, and Discover, charge these fees to cover the cost of processing and managing payment infrastructure.

Acquiring banks calculate interchange rates and factor in these fees when charging their merchant clients for processing credit card payments.

The interchange fee is typically a small percentage of the transaction value, a flat fee, or a combination of a percentage and a flat fee. Credit card interchange rates often range from 1% to 3% of the transaction but depend on various factors.

Why Interchange Fees Matter

For merchants relying heavily on credit card transactions, that 1% to 3% fee can add up and eat into operational costs. You should clearly understand interchange fees and devise a strategy to manage them so your business doesn’t pay more than necessary to accept credit card payments. 

You may be able to optimize payment acceptance methods and implement fraud-prevention measures to reduce interchange rates. For example, your business might encourage customers to use debit cards instead of credit cards, as interchange fees are typically lower for transactions made with debit cards as opposed to credit cards.

How Interchange Fees Work

When a customer makes a purchase using a credit or debit card, the transaction goes through a series of steps:

1. The customer presents the card to the merchant.
2. The merchant initiates the transaction through the payment processor using a payment terminal or online payment gateway.
3. The payment processor securely sends the payment details to the acquiring bank, which accepts payments on behalf of the merchant. 
4. Once the acquiring bank receives the transaction details, it routes the information to the appropriate card network. 
5. The card network connects the acquiring bank with the issuing bank, which holds the customer’s account.
6. The issuing bank reviews the transaction details, including verifying the availability of funds and checking for any potential fraud indicators.
7. After performing these checks, the issuing bank approves or declines the transaction and sends its decision to the acquiring bank through the card network.
8. The acquiring bank relays the decision to the payment processor, communicating the approval or decline to the merchant.
9. If the transaction is approved, the acquiring bank initiates and settles the funds transfer from the customer’s account to the merchant’s.

Performing all these steps comes with costs, which is where interchange fees come in. These fees cover the costs of processing transactions, mitigating fraud risks, maintaining the payment infrastructure, and providing customer rewards programs.

Understanding Interchange Fee Factors

Interchange fees are affected by factors determining the overall cost of processing credit card transactions:

• Card Type: Types of cards, such as credit cards, debit cards, and prepaid cards, have varying interchange fee structures. Credit cards typically have higher interchange fees compared to debit cards. Credit card transactions often involve more risk, such as the potential for chargebacks or credit defaults.
• Transaction Type: Interchange rates can differ based on whether the transaction is in-person (card present) or online (card not present). Card-not-present transactions have an increased risk of fraud so they generally have higher interchange fees.
• Risk Factors: Risk factors include the merchant’s industry, transaction size, and processing method. For example, certain industries, such as travel or online gaming, are considered higher risk and may have higher interchange fees.
• Rewards Programs: Credit cards that offer rewards programs, such as cash-back or travel rewards, often have higher interchange fees.
• Processing Technology and Security: Merchants who use advanced payment technologies, such as EMV chip cards or contactless payments, may qualify for lower interchange fees as these methods provide enhanced security measures.
• Card Network Regulations: Each card network sets its interchange fee structure and periodically adjusts it based on various factors. Card networks may introduce new regulations or modify existing ones, affecting interchange rates. 
• Transaction Volume: Higher transaction volumes generally lead to lower interchange fees as merchants demonstrate their ability to handle more transactions and reduce the associated risks.
• Merchant Category: Card networks classify merchants into different categories based on their business type, each with an interchange fee rate. For example, retail merchants may have different interchange fees than e-commerce or travel-related merchants.
• Other Factors: Additional factors, such as the card network, card program, transaction size, and authorization method, may also influence interchange fees. 

Major Credit Card Interchange Rates

Each credit card network charges unique interchange rates. Here’s an overview of the typical credit card interchange rates for Mastercard, Visa, Discover, and American Express:

• Mastercard Interchange Rates: Interchange rates for Mastercard credit cards typically range from around 1.15% to 2.55%, plus a per-transaction fee of $0.05 to $0.10, depending on the specific card type and transaction characteristics. Debit card interchange rates are generally lower, ranging from 0.7% to 1.9%, with a per-transaction fee of $0.05 to $0.25.
• Visa Interchange Rates: For Visa credit cards, interchange rates typically range from 1.15% to 3.15%, plus a per-transaction fee of $0.05 to $0.10. Debit card interchange rates vary from 0.05% to 1.75%, with a per-transaction fee of $0.04 to $0.25.
• Discover Interchange Rates: Discover interchange rates for credit cards generally fall between 1.8% and 2.55% plus a per-transaction fee of $0.05 to $0.10, while debit card interchange rates typically range from 1.12% to 1.76%, plus a per-transaction fee of $0.05 to $0.22. 
• American Express Interchange Rates: American Express interchange rates typically range from 1.4% to 3.15%. Debit cards generally range from 0.79% to 1.99%, with a per-transaction fee of $0.10 to $0.15. American Express cards are known for their higher acceptance costs.

Hot Tip:

Credit cards typically have higher interchange fees than debit or prepaid cards because credit cards often come with additional benefits and rewards programs, partly funded by the interchange fees.

How Payment Processors Work

Payment processors, also known as merchant service providers, facilitate card payments between merchants, card networks, and issuing banks. Processors serve as intermediaries, managing the data associated with credit and debit card transactions. 

Usually, a merchant’s payment processor collects the interchange, assessment, and processing fees associated with accepting card payments. The processor may deduct fees off the top before you receive payouts, or you may pay fees afterward in a lump sum. 

When you choose a payment processor, consider the nature and size of your business, transaction volume, specific industry requirements, and the level of customer support needed. Additionally, analyze the interchange fee structures, pricing transparency, additional services, and integration capabilities to determine the best fit for your business.

Hot Tip:

Some payment processors, such as Square and Stripe, combine point-of-sale systems, hardware, and payment processing. 

Interchange Fees vs. Processing Fees

Interchange fees and processing fees are 2 different components of credit card acceptance costs. 

• Interchange fees are charged by card networks and paid by acquiring banks to issuing banks. These fees are passed on to merchants.
• Processing fees are charged by acquiring banks to merchants to cover the costs of processing credit card transactions, including the acquiring bank’s services, such as transaction authorization, settlement, and customer support.

Interchange fees are non-negotiable, but processing fees are usually negotiable. Interchange fees are generally higher in value and are determined by varying factors, some of which merchants may not have much control over. In contrast, processing fees are typically a smaller percentage of the transaction value but can still add up over time.

While interchange fees are non-negotiable, merchants can explore options for obtaining the best possible processing rates by comparing offerings from different acquiring banks or payment processors. Negotiating competitive processing fees can help merchants optimize their cost structure and improve profitability.

Who Pays Interchange Fees?

Ultimately, consumers pay interchange fees, but merchants get the bill. 

Interchange fees are paid by acquiring banks to issuing banks, but it doesn’t stop there. Acquiring banks and payment processors charge merchants for interchange fees — and then merchants charge consumers, either in the overall cost of products and services or as a credit card use fee. 

Interchange Fee Regulations

The Federal Reserve regulates credit card interchange fees to ensure fairness and transparency in the payment card industry. It also has the authority to regulate and set standards for debit card interchange fees under the Durbin Amendment, which was introduced as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Signed into law in 2010, the Dodd-Frank Act introduced comprehensive financial regulatory reforms to enhance consumer protection, promote market stability, improve transparency in financial transactions, and increase accountability of financial institutions, promoting fair practices in the payment card industry. The Act established regulatory bodies such as the Consumer Financial Protection Bureau (CFPB) and the Financial Stability Oversight Council (FSOC) to oversee and regulate various aspects of the financial industry, including interchange fees.

The Durbin Amendment of the Dodd-Frank Act put caps on debit card interchange fees for transactions issued by banks with more than $10 billion in assets and requires that debit card interchange fees be reasonable and proportional to the processing cost. And businesses may set a minimum credit card charge of up to $10.

It also promotes competition and transparency among card networks, mandating that merchants can choose between at least 2 unaffiliated payment card network options for transactions.

For businesses, these regulations mean cost savings in interchange fees and negotiation opportunities with the ability to choose preferred payment card networks. However, businesses must ensure compliance with the regulations imposed by the Dodd-Frank Act and other applicable legislation, which may involve adjusting payment processing systems and procedures.

In addition to the Federal Reserve, international organizations oversee interchange fees and related regulations. For example, the European Union has implemented regulations such as the Interchange Fee Regulation (IFR), which caps interchange fees for certain types of card transactions within the E.U.

International Interchange Fees

Each country has its own credit card payment system and regulations, so interchange fees can vary for businesses operating internationally and making cross-border transactions.

A transaction involving cards issued in one country and used in another is considered a cross-border transaction. Cross-border transactions often have higher interchange fees due to increased risk, currency conversion, and the involvement of multiple payment networks and regulatory frameworks.

For example, suppose a U.S.-based merchant accepts a payment from a customer using a European credit card. In that case, the interchange fee may be higher than a domestic transaction due to the cross-border nature of the payment. The interchange fee will depend on the agreements between the card networks, acquiring banks, and issuing banks involved in the transaction.

If your business frequently accepts international payments, you might prefer to use international payment service providers. Or, you may want to consult with financial experts to optimize your cross-border payment processes to minimize interchange fees on international transactions.

Some countries have strict regulations that cap interchange fees, while others have more market-driven fee structures. For example, the European Union has implemented regulations to harmonize interchange fees within the member states. The Interchange Fee Regulation (IFR) caps interchange fees for card-based transactions within the European Economic Area.

10 Ways To Lower Credit Card Interchange Fees

While card networks set interchange fees and can’t be directly negotiated, there are strategies you can implement to optimize your payment processes and potentially reduce your overall interchange costs. Use these strategies to lower interchange fees with interchange optimization:

1. Negotiate with Payment Processors and Acquirers: Understand their pricing models and explore opportunities for negotiating better rates for processing fees. When negotiating, consider transaction volume, average ticket size, and your business’s overall financial health.
2. Optimize Payment Acceptance Methods: Evaluate your payment acceptance methods to ensure you use the most cost-effective options. For example, using PIN-based debit transactions instead of signature-based transactions can lower interchange fees. You can also save by avoiding manually keyed transactions.
3. Enact Fraud Prevention Measures: Robust fraud prevention measures can reduce the risk of chargebacks and fraudulent transactions, which may qualify your business for lower interchange rates associated with lower-risk transactions. For example, you can use address verification, require CVV codes, and maintain PCI DSS compliance.
4. Use Technology and Data Analytics: Invest in technology and data analytics tools to gain insights into transaction patterns, customer behavior, and potential areas for optimization. These insights can help you identify opportunities to reduce interchange fees.
5. Optimize Transaction Processes and Improve Data Quality: Streamline your transaction processes to minimize errors and improve data quality. Accurate transaction data can help you qualify for lower interchange rates by meeting specific criteria set by the card networks.
6. Utilize Interchange Optimization Tools: Explore using interchange optimization tools provided by some payment processors or merchant service providers. These tools analyze transaction data to identify potential cost-saving opportunities and optimize interchange rates.
7. Explore Alternative Payment Options: Consider integrating alternative payment options such as digital wallets like Google Wallet or Automated Clearing House (ACH) payments. These payment methods may have lower interchange fees than traditional credit card transactions.
8. Evaluate Merchant Category Codes (MCCs): Review your assigned Merchant Category Codes (MCCs) regularly to ensure they accurately reflect your business’s primary activities. Certain MCCs may be associated with higher interchange rates, so selecting the most appropriate code can help optimize your fees.
9. Educate Staff and Customers on Cost-saving Measures: Train your staff on best practices for accepting and processing payments to minimize errors and ensure compliance with interchange regulations. Additionally, educate your customers about the costs associated with credit card payments and encourage them to consider alternative payment methods when possible.
10. Monitor and Analyze Fee Structures and Statements: Regularly review your fee structures and statements to understand the specific interchange rates you are being charged. Analyze the data to identify any discrepancies or potential areas for improvement. Stay informed about industry updates and changes in interchange rates to adjust your strategies proactively.

You can potentially reduce your interchange fees by implementing these strategies and staying proactive in managing your payment processes. Consult with payment processors, financial advisors, or industry experts to optimize your interchange costs while maintaining compliance with card network regulations.

Final Thoughts

Interchange fees play a crucial role in the credit card payment ecosystem and significantly impact both businesses and consumers. 

Businesses should clearly understand interchange fees and develop effective strategies to manage and reduce them, particularly for businesses heavily reliant on credit card transactions.

You can potentially lower interchange fees and improve your bottom line by adopting strategies such as optimizing payment acceptance methods and implementing fraud prevention measures.