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Interchange Fees Explained

Interchange Fees Explained

*Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been reviewed, approved or otherwise endorsed by the credit card issuer. This site may be compensated through a credit card issuer partnership.

This article was last updated Apr 01, 2019. Terms and conditions may have changed. For the most accurate information, please consult the issuer website.

If you’re a merchant, you have to deal with various fees and operating costs that may seem like you’re being nickel-and-dimed. One of the fees you’ll incur for accepting credit and debit card payments is an interchange fee. This is typically charged as a percentage of the total transaction and a flat rate, but varies widely depending on type of card used.

Interchange fees are constantly fluctuating, and a recent report by The Wall Street Journal warns merchants of upcoming fee increases. Visa® and Mastercard® are preparing to raise fees in April, while Discover is planning to increase certain interchange fees, such as fees for rewards cards used at restaurants and when select cards are used for online shopping. This isn’t just a setback for business owners, as they say the increased fees may trickle down to consumers.

We’ll review exactly what interchange fees are and why card issuers say the fee benefits merchants, consumers and issuers.

What is an interchange fee?

Interchange fees (aka merchant processing fees, interchange reimbursement fees or swipe fees) are the costs merchants incur when they accept credit or debit card payments.

Each time a credit or debit card transaction is processed, the merchant is required to pay an interchange fee to facilitate the transfer of payment from the cardholder’s bank (issuer) to the merchant’s bank (acquirer). Interchange fees help cover the cost of risk associated with card payments, among other factors.

The fee varies by network — Visa, Mastercard, Discover and American Express® — and by several other factors, such as the merchant’s industry (retail, supermarket, hotel/car rental, airline, etc.), transaction type (swiped, inserted, tapped or manually keyed) and type of card used.

For example, Visa charges different interchange fees based on the type of Visa card used — Visa Signature®, Visa Infinite® or Traditional Rewards. In addition, fees vary based on how the transaction is classified — “retail key entry,” “card not present” or “e-commerce,” to name a few.

Transactions where cards aren’t present are deemed riskier than point-of-sale transactions that require a physical card. So, if a consumer makes a purchase with a mobile wallet, the interchange fee will be higher than if the card was presented at checkout and swiped or inserted into the payment terminal.

Average interchange fees

Merchants can expect to pay an average 1.18% to 2.33% interchange fee per credit card transaction, while debit card transactions have lower fees of .67% to .73%, according to Nilson Report data from 2017. The fees differ due to the greater risk of processing credit card payments versus debit card payments.

However, the Federal Reserve Board (FRB) caps interchange fees for “covered transactions” that are made with many debit cards from major card issuers at $0.21 plus 0.05% of each transaction. An additional 1 cent fraud-prevention adjustment may apply.

The average interchange fee for covered debit card transactions was $0.22 to $0.24 in 2017, according to the FRB. Interchange fees are higher for “exempt transactions,” such as select reloadable general-use prepaid cards and debit cards issued by government-administered payment programs. FRB data found exempt debit card transactions have higher interchange fees, averaging $0.25 to $0.52 in 2017.

What’s the purpose of interchange fees?

Interchange fees have been the topic of hot debate over the past decade, with many retailers balking at how much those fees eat into their profits. Rewards cards, in particular, have been targeted for their high processing fees, with many merchants taking their concerns all the way to the Supreme Court.

However, the card issuers say they help facilitate electronic payments. According to Visa’s website, “[They] use interchange reimbursement fees as transfer fees between financial institutions to balance and grow the payment system for the benefit of all participants.”

Similarly, Mastercard’s website states, “[An interchange fee] enables banks that issue electronic payments to deliver tremendous value to merchants, governments and consumers.”

Here are some ways interchange benefits various groups:

  • Merchants: Receive guaranteed payment and fraud protection and provide an efficient buying experience for consumers.
  • Governments: Can experience efficiencies and help promote financial inclusion.
  • Consumers: Enjoy the convenience and safety of electronic payments.
  • Issuers: Can bear the risks and costs associated with using electronic payment methods.

Bottom line

Currently, there’s no way to avoid interchange fees for credit and debit card transactions, unless you opt to operate a cash-only business. However, you may be able to take certain steps to potentially reduce the cost of interchange fees. For example, you can limit the type of transactions you accept to lower-cost methods, such as point-of-sale options like swiping or inserting cards. Just know, you may discourage consumers who prefer to pay with card-not-present options, such as mobile wallets or online purchases.

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