Interchange fees: What they are, how they work, and why they matter

Interchange fees are a standard feature of accepting card payments, yet many businesses find them confusing. These charges, paid by merchants to the cardholder's bank through a processor or acquiring partner, fund the systems and protections that make digital payments possible. Still, they add up fast – and for some, they quietly chip away at profit.

If your business relies on card payments – especially across markets or at scale – understanding these fees isn't optional. It's the foundation for smarter cost control and a more informed approach to payments.

What are interchange fees?

Each time a customer taps or enters a card, the transaction moves through a network of participants:

• The cardholder
• Your business (the merchant)
• The acquiring bank or payment provider
• The cardholder's bank (the issuer)
• The card network (like Visa, Mastercard, or American Express)

The issuing bank charges an interchange fee, which flows through the acquirer and lands on your monthly statement. These fees support everything from fraud checks to infrastructure and network upkeep.

How are interchange fees calculated?

Fees usually combine two components:

• A percentage of the transaction value (e.g. 1.5%)
• A flat fee per transaction (e.g. $0.20)

For example, on a $100 sale with a 1.5% + $0.20 rate, you'd pay $1.70 in interchange. One sale doesn't sting. But across thousands of payments, the impact grows quickly.

What influences interchange fees?

Several factors shape the fee applied to a transaction:

1. Transaction environment

• Card-present: Lower cost, lower fraud risk (in-store)
• Card-not-present: Higher cost, greater fraud risk (online, over the phone)

Learn the difference between card-present and card-not-present transactions.

2. Card type

• Debit: Generally less expensive for merchants
• Credit: Especially premium or rewards cards, come at a higher cost

3. Card network

• Each sets its own fee structure. Visa and Mastercard often cost less than American Express.

4. Merchant category

• Some industries benefit from reduced rates (e.g. government, utilities)
• Others – like travel or digital services – tend to pay more

5. Transaction size

• Flat fees can disproportionately affect small-ticket sales

Who sets interchange rates?

Card networks set interchange tables and publish them periodically. These rates are collected by issuing banks but not determined by them.

In the UK and EU, consumer card interchange is capped:

• Debit cards: 0.2%
• Credit cards: 0.3%

These caps exclude commercial and foreign-issued cards, where fees can be significantly higher.

The connection between interchange fees and fraud prevention

Interchange isn't just a processing charge. It helps fund the tools that protect transactions. Issuers use it to:

• Maintain fraud detection technology
• Manage disputes and chargebacks
• Support data security compliance (e.g., PCI DSS)

For merchants, this means fewer bounced payments, less fraud exposure, and quicker access to verified funds.

How interchange fees affect your business

Interchange fees show up everywhere, whether you notice them or not. Here's where they have the most impact:

Operating margin

For card-heavy businesses, these fees represent a notable cost line. For low-margin models, that's a serious concern.

Pricing decisions

To absorb the cost, some businesses:

• Adjust their pricing structure
• Add a surcharge (where legal)
• Set minimum spend thresholds

Payment mix strategy

Not every business can absorb higher fees. But refusing card payments outright risks lost sales and lower customer satisfaction.

Working with your provider

Since interchange is bundled with other charges, clarity is key. Review:

• Fee statements line by line
• The pricing model: bundled or interchange-plus?
• Contract terms and non-standard markups

Customer experience

Even if card payments cost more, offering choice helps drive loyalty. Removing options often backfires.

Practical ways to reduce fee exposure

You can't control the interchange rate, but you can control how it affects your business. Consider: