DEFINITION of 'Interchange Rate'

A fee charged by banks that covers the cost of handling and credit risk inherent in a bank credit or debit card transaction. Interchange fees are usually paid to the bank funding a transaction and thus bearing the risk. The fee itself is calculated based on authorization costs, losses due to fraud and credit and the average bank cost of funds. The interchange rate is revised on a regular basis.

BREAKING DOWN 'Interchange Rate'

For credit card transactions, this fee is also called the issuer's reimbursement fee. In this case, the fee is usually paid by the merchant bank accepting the draft to the bank that issued the card. This bank then in turn passes the fee on to the cardholder.

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