By Mary Vizcaino July 17, 2025
Interchange fees are a part of nearly every credit or debit card transaction, yet many business owners don’t fully understand what they are or why they exist. These fees can seem hidden, especially for small businesses trying to manage tight margins. However, they play a critical role in how modern payments function, supporting the flow of funds between cardholders, banks, and merchants.
For many merchants, interchange fees feel like an unavoidable cost of doing business. They see the deduction on each card payment and wonder who benefits from it. The reality is more layered. These fees are not randomly assigned or fully controlled by processors; rather, they are guided by a set of industry standards and decisions made by powerful financial institutions.
What Are Interchange Fees?
Interchange fees are transaction-based fees paid by a merchant’s acquiring bank to the customer’s issuing bank every time a credit or debit card is used. While they are ultimately passed along to the merchant, they are part of a broader framework that enables card payments to happen quickly and securely.
Why Interchange Fees Exist
Interchange fees compensate the issuing bank for risks such as fraud, credit underwriting, and cardholder rewards programs. They also help cover the infrastructure required to maintain a functioning payment system. In essence, they act as a balancing mechanism between different entities in the transaction chain.
Where They Appear in the Payment Flow
When a customer pays using a card, the funds move from the customer’s bank (the issuer) to the merchant’s bank (the acquirer). The interchange fee is taken from the transaction total and passed back to the issuer. What the merchant receives is the amount minus this fee and any additional charges from the processor.
Who Actually Sets Interchange Fees?
Many business owners assume their payment processor sets the interchange fees. While the processor may determine your total cost, the base interchange rates are actually set by the card networks like Visa, Mastercard, Discover, and American Express.
The Role of Card Networks
Card networks design and publish interchange fee tables, which list fees based on card type, business category, transaction method, and other variables. These fees are reviewed and revised periodically, often twice a year. The card networks consider factors like fraud risk, transaction volume, and consumer incentives when adjusting the fees.
Issuing Banks and the Networks
While networks set the rates, issuing banks are the ones that receive interchange fees. The banks do not individually decide the rate per transaction, but they benefit from the framework set by the network. Each time their cardholder makes a purchase, they receive a portion of the transaction through the interchange fee.
The Acquiring Bank’s Role
Acquiring banks (the merchant’s bank) act as intermediaries. They pay the interchange fee to the issuer, deduct their own markup and processing costs, and pass the remaining amount to the merchant. This is why merchants often see varying total fees, even though interchange itself is fixed by the network.
How Interchange Fees Are Calculated
There’s no single fixed interchange rate. Instead, the fee depends on multiple variables that interact at the point of sale. Understanding these factors can help merchants better anticipate what they’ll be charged per transaction.
Key Factors That Influence Interchange Rates
The card type used (debit, credit, rewards), the way the card is processed (swiped, dipped, keyed-in, or online), and the merchant category (retail, restaurant, healthcare) all play a role in determining the interchange rate. Higher-risk transactions or categories tend to attract higher fees.
Transaction Method and Risk
In-person transactions where the card is physically present typically carry lower interchange fees because they’re considered less risky. Card-not-present transactions, such as online purchases or keyed-in payments, usually have higher rates to offset the increased risk of fraud.
Example of a Fee Breakdown
A Visa rewards credit card used at a beauty salon might have an interchange rate of 1.65 percent plus $0.10 per transaction. A debit card with a PIN may carry a lower rate of 0.80 percent plus $0.15. These figures are illustrative, but they show how different card types influence the fee.
Why Interchange Fees Vary Across Merchants
Not every merchant pays the same interchange rate. While the base rates are set by the card networks, how they’re applied can vary based on your industry, business model, and even transaction volume.
Merchant Category Codes (MCC)
Each business is assigned a Merchant Category Code, which helps networks identify the industry and apply appropriate interchange rates. Some categories, like utilities or nonprofits, may receive reduced rates. Others, like hospitality or travel, may have higher default fees.
Transaction Volume and Negotiation
Larger businesses or those with high transaction volumes may qualify for lower overall rates, not necessarily by altering interchange, but by negotiating lower processor markups. Smaller businesses typically pay standard rates unless they join a collective or use simplified pricing from a payment provider.
Location and Regulation
Interchange fee structures can also be influenced by geography. In the United States, interchange rates are higher than in regions like the European Union, where regulations cap interchange fees. Government rules can also influence how fees are disclosed and passed on to customers.
The Controversy Around Interchange Fees
Interchange fees have faced criticism from business groups and regulatory bodies for being opaque and overly expensive. The debate centers on transparency and fairness, especially for small businesses that may not have the leverage to negotiate lower fees.
Criticism from Merchants
Many small businesses argue that interchange fees are unfairly high and limit their ability to remain profitable. Since these fees are non-negotiable and tied to every card transaction, they often feel like a hidden tax on modern commerce.
Regulatory Scrutiny
In several countries, including Australia and members of the EU, interchange fees have been capped or tightly regulated. In the U.S., the Durbin Amendment placed limits on debit card interchange fees for large banks but left credit card fees mostly untouched.
Card Network Justifications
Card networks argue that interchange fees are necessary to support fraud prevention, innovation, and rewards programs that benefit consumers. They also emphasize that electronic payments are more efficient than cash handling, which carries its own operational costs.
Interchange Fees and Rewards Programs
An often-overlooked aspect of interchange fees is their connection to credit card rewards. Every time a consumer earns points or cashback, that reward is funded in part by the interchange fee paid by merchants.
Who Pays for the Rewards?
Issuing banks use a portion of the interchange revenue to fund cardholder perks, such as airline miles or purchase protection. This means merchants are indirectly subsidizing consumer rewards with each swipe or tap.
The Trade-Off for Merchants
While this may seem unfair to merchants, offering credit card payment options can increase customer spending and loyalty. Businesses that accept cards, even with higher interchange fees, often see more sales than those limited to cash or check.
Can Merchants Avoid or Reduce Interchange Fees?
Although merchants cannot negotiate interchange rates directly, there are strategies to reduce overall processing costs and improve pricing predictability.
Choosing the Right Processor
Working with a transparent processor who passes interchange fees directly through to you without unnecessary markups can result in lower costs. Some processors use flat-rate or tiered pricing models that bundle fees, making it harder to see what’s really being charged.
Encouraging Low-Fee Payment Types
Encouraging debit card use, particularly those with PIN authentication, can reduce interchange costs compared to premium or rewards credit cards. Displaying signage or offering incentives may help influence customer choices.
Proper Terminal Configuration
Using the right payment hardware and ensuring that transactions are categorized correctly can help avoid unnecessary downgrade fees. Proper setup ensures you receive the best possible rate within your MCC and transaction type.
The Future of Interchange Fees
As digital payments continue to evolve, so too will the conversation around interchange fees. Industry trends, new technologies, and regulatory developments will likely reshape how these fees are structured and applied.
Push for Greater Transparency
Merchants are demanding more transparency around interchange fees, especially in pricing breakdowns from processors. There’s growing pressure on providers to simplify how fees are presented and to educate business owners on what they’re really paying.
Technological Shifts
The rise of alternative payment methods, including mobile wallets and real-time payment networks, may challenge the dominance of traditional card-based payments. If these systems reduce reliance on issuing banks, the role of interchange fees could change.
Regulatory Developments
Future legislation could impose new caps or rules on interchange fees, especially as small businesses lobby for relief. Monitoring policy updates in your country or region can help you stay ahead of potential cost changes.
Final Thoughts
Interchange fees are a fundamental part of the payment system, but understanding them doesn’t have to be confusing. While merchants don’t have direct control over these fees, gaining clarity on how they are set and why they exist can lead to smarter decisions and better cost management.
Whether you’re a small business owner just starting out or a growing enterprise looking to improve your margins, being informed about interchange fees is essential. By choosing the right partners, optimizing transaction methods, and staying up to date with industry changes, you can navigate the payment landscape with greater confidence and control.