Interchange Rates

Accepting credit card payments allows you to offer multiple payment options to your customers and grow your business. They are a quick and convenient way to make a payment in-store or online, especially when it comes to contactless payments. And, while credit cards are essential for every business, they do have one negative side: interchange rate. What Is an Interchange Rate? An interchange rate is a fee the merchant’s bank pays to the card-issuing bank for every credit or debit card transaction. Also known as a swipe fee, it is charged to cover the bank’s handling costs, fraud and bad debt costs, and for the risks associated with accepting credit card payments. This fee is set by the credit card companies, such as Visa, Mastercards, and AMEX, and varies from one company to another. Apart from the company, many other factors determine the value of the interchange rate, such as type of transaction, type of card, location, levels of data, etc. Learn more about NFC Mobile Payments. Understanding the Interchange Rate The interchange rate is paid by the merchant for accepting credit card payments. It is charged by the card-issuing bank, credit card payment network (Visa or Mastercard), payment processors (the issuing bank or a third party), payment gateways, and the merchant’s bank. They all charge a small percentage of each credit card transaction plus a small fixed amount, e.g. 1.5% + 0.20. This fee is paid to the card-issuing bank whereas card associations take a minor fee called “network fee” which is smaller, around 0.05%. Interchange Rate Paid to the Card-Issuing Bank The card-issuing bank charges this fee because it is the entity that advances credit to consumers and takes on the risk associated with credit card approval and transactions. Since they are the responsible ones, they collect the biggest percent of the fee charged. But, how do these banks make a profit? Most people think banks profit from charging late payment fees and interest to people who have fallen into credit card debt. Although there is some truth, most of their profit actually comes from charging interchange fees. Just think about it… Millions of people use credit cards for making payments each day and the bank charges a small fee each time they use their card. That would be something like charging 0.1% on millions of daily transactions…. And, that’s A LOT! Interchange Rate Paid to Credit Card Networks The biggest percentage goes to the card-issuing bank, but there is also a certain amount paid to credit card networks, such as Visa and Mastercard. Although these networks charge a minor fee of around 0.05% per transaction, they also collect a lot of money because there are millions of transactions made per day with cards issued by them. Let’s say that 3-4 million people use Visa and Mastercard cards to make around $50 per day. $0.025 is charged per transaction, which means these networks collect $75.000 – $.100.000 per day. And, the actual number of people and transactions is far higher. So, imagine the networks’ profit per day, month, and year. No wonder Mastercard has made something over $8.1 billion in net revenue in 2019. Interchange Rate vs Credit Card Processing Fees As a merchant, you need to be aware that the interchange rate doesn’t make your credit card fees. It does make 70%-90% of them, but it’s only part of your processing fees. It’s because your payment processor and credit card company also get part of them. The Interchange Rate Isn’t Static We know that you know the interchange fees, but do you know that they aren’t static? Banks and credit card networks regularly change the interchange rate based on the current value of money, costs of money transferring, and the risk associated. For example, Visa and Mastercard change their interchange rates twice a year, in April and October. That’s why you need to keep an eye on your transaction rate and check it regularly. The Interchange Rate Regulation You may or may not know that there is a special regulation for setting the interchange rate. It’s known as The Durbin Amendment and was introduced in 2010. This law limits the transaction fees charged by debit card issues upon merchants. After its passing, the interchange rate went from 1%-3% per transaction, which was around $0.44 on average, to $0.21 + 5% of the transaction amount. This regulation was created because the interchange rate was too high and non-proportional to the card issuers’ costs. In order to cope with the reduced fees, some banks have implemented new fees and removed free services to prevent revenue losses. How Is the Interchange Rate Calculated? The interchange rate is set by the card-issuing company (Visa, Mastercard, AMEX, Discover) and paid by the merchant bank. It’s usually set on a semiannual basis, but can also be set annually, depending on the credit card company. Every credit card company sets a different interchange rate, which depends on various factors. The rate is in the form of percentage with companies defining it as a flat rate plus a percentage of the sale’s cost. Factors Affecting the Interchange Rate Card Type One of the factors that affect the interchange fee is the type of card used to make payment. Namely, debit card transactions have around 6 times lower rates than credit cards because they are much easier and safer to approve. This is because the funds come from the customer’s bank account and it’s simple to confirm that there is enough money for the transaction to complete. On the other hand, credit card transactions require the card-issuing bank to extend the credit to the customer and then cover the cost of the transaction themselves. Another reason for higher fees is the higher chance of fraud, which is often nowadays. Apart from these two card types, customers can also use rewards cards. These cards cover a part of the transaction cost, but in return have a higher interchange rate. Hence, while the customer pays less, you, the merchant, pay more for their perks. Rewards cards especially