DEFINITION of 'Interchange Rate'

An interchange rate is 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, in turn, passes the fee on to the cardholder.

How Interchange Rates Are Determined

Interchange rates are set by credit card companies such as Visa, MasterCard, Discover, and American Express. With Visa and MasterCard, the rate is set on a semiannual basis, usually in April and then in October. Other credit card companies might set their rates annually.

Each credit card company sets its own interchange rates, but the fees are paid by every merchant bank or institution that conducts a transaction with a cardholding consumer. In addition to the interchange rate, credit card processing companies might include another fee that is passed along to retailers as part of their processing fees.

Different types of cards that come from the same credit card company may be assigned different interchange rates. How the transaction is completed can also influence the rate that is charged. For example, a purchase completed with a swipe of a Visa debit card at a retail location will have a different interchange rate than if a retailer does not have the Visa debit card present and the information must be keyed in. A prepaid debit card would have a different rate than a business credit card. The size of the retailer or business can also affect the rate as larger companies may able to negotiate for lower rates with the credit card companies.

The interchange rate is usually expressed as a percentage of the transaction, plus a flat fee that might be as much as 30 cents. Even higher fees may be incurred dependent on the type of transaction. Retailers are not the only ones who face charges from interchange rates. Almost any entity that accepts credit or debit card payments will see such fees. This can even include charities that accept donations via debit or credit.

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