What Is an Interchange Rate?
An interchange rate is a fee that a merchant is required to pay with every credit card and debit card transaction. Also known as "swipe fees," financial companies charge this fee in return for accepting the credit risk and handling charges inherent in credit card transactions.
Interchange rates are set by the credit card companies and revised periodically. These rates vary, not only by network (e.g., Visa, MasterCard), but also the type of transaction, such as supermarket, airline, etc. Of note, debit card transactions had an average rate of 0.78% in 2019.
- Interchange rates are a per-swipe fee charged by banks to merchants using credit or debit cards.
- The fee is justified as a buffer against the credit risk of consumers who borrow to make these purchases that financial companies become exposed to.
- The fee usually takes the form of a small percentage of the overall transaction amount and is currently higher for credit than debit cards to account for the additional risk of a credit transaction.
Understanding the Interchange Rate
The interchange rate is calculated based on authorization costs, losses due to fraud and credit, and the average bank cost of funds.
For credit card transactions, this rate 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 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 $0.30. 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.
Interchange Fee Regulation
The Durbin Amendment is a part of the Dodd-Frank Wall Street Reform and Consumer Protection Act that limits transaction fees imposed upon merchants by debit card issuers. The amendment, named after U.S. Sen. Richard J. Durbin and introduced in 2010, proposed to restrict these interchange fees, which averaged $0.44 per transaction based on 1% to 3% of the transaction amount, to $0.12 per transaction for banks with $10 billion or more in assets.
The amendment was based on the belief that interchange fees were not reasonable and proportional to card issuers' costs. When the bill became law in 2010, interchange fees were capped at $0.21 per transaction plus 5% of the transaction amount. Some banks implemented new fees and eliminated free services in an attempt to offset their interchange fee revenue losses.