This article is part of a larger series on Payments.
Interchange fees are costs merchants pay to accept and process credit and debit card payments. They consist of a small fixed fee plus a percentage of total sales, set by card networks (Visa, Mastercard, Discover, American Express) to cover the costs and risks associated with processing card transactions. Typical interchange fees range from 1.29%–3.5%.
How Interchange Fees Are Calculated
Percentage of total sales
The credit card interchange rates are based on a percentage of a merchant’s monthly transactions and expressed as a percentage and a fixed fee. There is no singular way of computing interchange fees, mainly because card networks assess these fees based on constantly fluctuating economic and financial factors such as:
- Time value of money: Accounts for the estimated change in current and future value of a currency (inflation).
- Risk of doing business: A financial institution’s assessment of a business’s likelihood of being exposed to fraud.
- Cost of moving money: Determines the overall cost of transferring funds to different locations and methods.
Note that each card network evaluates these factors differently, so they all have different interchange rates. (We include an average range of these different rates later in this article.)
There are hundreds of different possible rates within each card network for different consumer and business credit and debit cards, transaction types (card-present, keyed, and online), business types (retail, government, travel, etc.), and business sizes (businesses processing over $750 million can typically qualify for lower rates).
Factors That Impact Interchange Fees
The next question merchants need to ask is, “How do I know which interchange fee applies to my transactions?”
In general, the interchange fee you pay depends on the card brand your customer pays with and the transaction you are processing. While the card networks use different rates, they consider similar factors to identify which fee is applicable for any type of merchant:
- Merchant Category Code (MCC): Your MCC is based on the type of business you run. (Retail, supermarket, fuel, and travel businesses each have different interchange rates, for example.)
- Type of card: There are different types of credit cards. Cards that offer lots of awards and benefits for the cardholder typically come with higher interchange fees for the merchant.
- Card owner: Consumer, business, government, and nonprofit credit cards also come with their own interchange fees.
- Card association: Credit card associations (Visa, Mastercard, etc.) set their own interchange rates, so there’s variability, which we’ll cover further down.
How Businesses Are Charged Interchange Fees
Merchants generally don’t need to worry about calculating interchange fees as they are built into the rates you pay to your payment processor. You will often see interchange fees incorporated into one static processing fee: 2.6% + 10 cents, for example. Or, the processor will pass along the direct interchange fee with its markup, so there is more variability with each transaction.
Every time a merchant processes a credit card transaction—swipe, chip, keyed-in, or online—that merchant collects the money paid for their products or services. However, they also pay third parties some of that money (markup, interchange, and assessment fees).
Typically, the payment processing systems are connected to the merchant’s bank (the merchant account), so the money is automatically withdrawn. You don’t have to pay interchange fees like you would a utility bill or standard invoice.
Interchange fees are but one component of total credit card processing fees, along with assessment fees and markups. Interchange fees are typically the highest of the three and non-negotiable.
How Interchange Fees Are Regulated
Interchange fees are regulated through legislation. Australia, for instance, places a cap on interchange fees at 0.88% for credit and 0.22% or 0.165 Australian dollars for debit transactions.
In the US, debit card transactions are capped at 0.05% + 22 cents for issuing banks with more than $10 billion in assets. Meanwhile, as of this writing, there is no government-mandated cap for credit card interchange fees.
Interchange Fee Controversies
Antitrust: The lack of transparency in how member banks of card networks determine interchange rates can be used to create anticompetitive opportunities (collusion). One of the largest antitrust case settlements happened in September 2018, where Visa, Mastercard, and several large banks in the US agreed to pay an estimated $5.6 million to hundreds of merchants for excessive fees.
Credit Card Interchange Rates by Network
Below is an average range of the latest interchange fees by network. Note that these are just based on the common rates—business, reward, and international credit cards will all have higher fees. High-volume businesses, like B2B companies or businesses processing billions of dollars in transactions, can also qualify for different processing tiers, which offer lower rates.
Interchange Fees: Frequently Asked Questions (FAQs)
Strictly speaking, interchange fees are non-negotiable. However, if you process business credit cards (one business selling to another), the amount of data required for the transaction is significant in determining the interchange rate. These are known as Level 2 or Level 3 transactions.
The more data provided, the more secure the transaction is assumed to be—and the lower the rate becomes. It’s important to remember that while a business transaction may qualify for a Level 2 or 3 rate, it will be charged as Level 1 (generally associated with consumer purchases) if you do not provide the required information.
See if you qualify for Level 2 or Level 3, or B2B payment processing—one of the only ways for small businesses to lower interchange fees.
For most storefronts, the customer likely has the card and enters it into a payment terminal. This is a card-present (CP) transaction. But sometimes, the card isn’t physically available—you might enter the card manually or take payment over the phone, for instance. These, and all online transactions, are card-not-present (CNP) transactions. CNP transactions are inherently riskier, so they incur higher fees.
Rates may also fluctuate depending on how much information has been entered. To lower your rates, you want to provide as much information as possible to show that the transaction is legitimate and mitigate fraud risk. Use Address Verification Service (AVS) and include the authorization ID and order number when you settle the transaction. We also recommend settling transactions within three days of the sale.
You may have heard of free credit card processing, but these methods do not truly eliminate your card processing fees, especially interchange fees. Free credit card processing, or zero-cost processing, essentially allows businesses to pass along their card processing cost to consumers. However, not all states consider these methods legal, and some consumers may avoid businesses that implement them.
Find out if free credit card processing is right for your business in this guide.
Interchange rates might be pesky, but they’re necessary. And while mostly out of your control, understanding what interchange fees are will help you to find the most affordable overall rates and keep more for your profit. To calculate what processor will provide the lowest rates for your business, check out our guide on the cheapest credit card processing companies. Or you can learn how to accept credit card payments if you’re just starting out.