Interchange Rate: Definition, Calculation Factors, Examples

What Is an Interchange Rate?

The term interchange rate refers to a fee that a merchant must pay with every credit and debit card transaction. Rates are set by payment card issuing companies in exchange for accepting the credit risk and handling charges inherent in these transactions. Interchange rates are set by financial companies and revised periodically. Rates vary based on the network used and are often a percentage of the transaction amount, a flat fee, or a combination of both. Transaction types also determine the rate that is charged, so the rate for a supermarket purchase is often lower than airline transactions.

Key Takeaways

  • Interchange rates are a per-swipe fee charged by banks to merchants using credit or debit cards.
  • Fees are charged by payment processing companies like Visa, Mastercard, Discover, and American Express.
  • The interchange rate is normally a small percentage of the transaction amount and is currently higher for credit card transactions compared to those made with debit cards.
  • Interchange is justified as a buffer against the credit risk of consumers who borrow to make these purchases that financial companies become exposed to.
  • Interchange fees are divided up between merchants' banks and the credit card issuing company.

Understanding an Interchange Rate

Fees are an integral part of the revenue generated by banks and financial service companies. These charges range from administration fees to account fees. They can be levied on clients and nonclients alike. Some institutions also collect fees from merchants whenever they execute transactions that are used to make purchases with credit or debit cards. These are called interchange fees or swipe fees.

The amount of an interchange fee depends on an interchange rate. They are charged as a flat fee, a percentage of the transaction amount, or a combination of both. They are often vary based on the merchant and type of transaction that takes place. The type of card also affects the interchange rate, which means they are different for debit, credit, and prepaid cards. Money collected goes from the merchant is divvied up between the merchant services company (which is also known as the payment processor) and the customer's card issuer.

The interchange rate is calculated based on a number of factors, including 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.

Almost any entity that accepts payment cards incurs these fees so retailers aren't the only ones that are affected. This means that even charities that accept donations via debit or credit must pay interchange fees.

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 may include another fee that is passed along to retailers as part of their processing fees.

Some merchants pass on the interchange fee directly to their customers as an additional surcharge, especially for transactions under a certain amount. The majority of businesses, though, include transactional costs into their products and services.

Transactional Factors

Different cards offered by the same card company may be assigned different interchange rates. As noted above, the rate is usually expressed as a percentage of the transaction. It may also be a flat fee or a combination of both the percentage and flat rate. And there are a number of factors that can affect the fee that is charged.

The size of the retailer or business can impact the associated rate. Rates may be higher for smaller businesses, where the volume of sales is typically lower than a large retailer with a national presence. That's because bigger companies (think Walmart and Target) can generally negotiate lower rates with card companies.

Another factor that can influence the interchange rate is the type of transaction being executed. The way the transaction is completed can also influence the rate that is charged. For instance:

  • The interchange rate for Visa debit card transactions may be different if the card is swiped at a terminal than if the merchant keys in the information. So a point-of-sale (POS) purchase using a card's magnetic stripe or RFID chip is often lower than a card-not-present transaction. This type requires merchants to manually enter the card information into a terminal.
  • A prepaid debit card has a different rate than a business credit card. Debit card transactions tend to come with lower rates because the risk is lower, as the money is present in the cardholder's account. Card companies charge higher fees for credit card transactions because there is a risk of default—that the cardholder won't pay their credit card bill.

Interchange Fee Regulation

Financial services companies are some of the most heavily regulated entities in the economy and the world. So it should come as no surprise that interchange fees and rates also fall under the purview of financial regulators, notably under the Durbin Amendment, which is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The amendment, named after U.S. Sen. Richard J. Durbin, limits transaction fees imposed upon merchants by debit card issuers. It proposed restrictions to 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.

It 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.

Credit Card Interchange Rates

The majority of interchange fees for credit cards are charged by the world's two largest credit card companies: Visa and Mastercard. Discover also charges fees similar to those levied by Visa and Mastercard. As noted above, each company charges different fees for different cards. So debit cards that bear the Visa, Mastercard, and Discover name typically come with lower rates. High-end Visa, Mastercard, and Discover credit cards, such as point, cashback, and elite cards (gold and platinum cards) come with higher fees.

American Express, which offers credit and charge cards, also imposes fees on merchants. Rather than referring to them as interchange rates, the company calls them discount rates. Discount rates work the same way as interchange rates. Fees are often a combination of a percentage of the transaction as well as a flat fee.

The table below highlights some of the key rates based on the different card types and transactions. Note that the rates listed are for regulated banks under the Durbin Amendment. These are for card-issuing institutions that have more than $10 billion in assets. Fees may differ for cards that are issued by smaller institutions.

Card Transaction Type Interchange Rate
Visa Debit: Supermarket, Retail, Gas Station 0.05% + $0.21
Credit Tier 0, 1: Supermarket - Credit (Signature Preferred/Infinite Cards) 1.55% + $0.05
Credit: Insurance (Traditional Rewards Cards) 1.43% + $0.05 
Fuel (Signature/Infinite Cards) 1.15% + $0.25 ($1.10 Cap)
Mastercard Debit: Charities 1.45% + $0.15
Debit: Utilities 0.00% + $0.65
Credit: Airline (World High Value Cards) 2.30% + $0.10
Credit: Restaurants (World Cards) 1.73% + $0.10
Discover Debit 1.02% + $0.16
Rewards 1.71% + $0.10
Commercial 2.30 + $0.10
American Express Travel and Entertainment (more than $1,000) 2.40%
Healthcare (less than $500) 1.60%
Restaurants (less than $200) 1.60%
Mail order and Internet 2%

Can Interchange Fees Be Negotiated?

Most merchants do not have the option of negotiating interchange rates. That's because they are set by card issuing companies and are revised periodically. But there are large corporations that may be able to negotiate rates with payment processing companies because of the sheer volume of transactions that they execute on a daily basis.

Who Is the Interchange Feed Paid to?

The interchange fee is a percentage of the transaction amount, a flat fee, or a combination of both that is taken when the transaction is executed. A portion of the card goes to the merchant's payment processing company but the majority is sent to the card issuing company, such as Visa and Mastercard.

Do Debit Cards Have Interchange Fees?

All transactions incur interchange fees, including those made with debit cards. These charges, though, are generally lower than those made with credit cards. That's because there is less of a risk of loss to the card issuer as the system allows for the money to be withrdawn from the account right away.

What Are Interchange Reimbursement Fees?

Interchange reimbursement fees are also called transfer fees. These are charges that are agreed upon between card issuing companies and payment processors and provide a financial benefit to different financial entities in the system. Businesses and other merchants aren't responsible for these fees.

Article Sources
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  1. Federal Reserve Board. "Regulation II (Debit Card Interchange Fees and Routing)."