Interchange Fee

Every time a customer pays by card, a small percentage of the transaction value flows from the merchant's acquiring bank to the customer's issuing bank as compensation for the credit risk, fraud liability, and funding costs the issuing bank assumes by guaranteeing the payment.

How Are Interchange Fees Determined?

Interchange fees are not set by acquiring banks or payment processors they are set by the card networks (Visa, Mastercard, American Express, UnionPay) and published in their interchange schedules, which are updated periodically.

The rate applied to any given transaction depends on a combination of variables:

Card type: a premium rewards card, a corporate card, or a platinum card carries a higher interchange rate than a standard debit card. The richer the cardholder benefits funded by the issuing bank, the higher the interchange rate required to fund them.

Transaction type: card-present transactions (in-person, chip, contactless) carry lower interchange rates than card-not-present transactions (online, over the phone). The absence of physical authentication increases fraud risk, which the issuing bank prices into the interchange rate.

Merchant category code (MCC): the category in which a merchant operates influences the interchange rate applied to its transactions. Some categories government, education, utilities benefit from reduced interchange rates as a matter of card network policy.

Geographic market: interchange rates vary significantly by country and region. European interchange rates are capped by regulation (0.2% for debit, 0.3% for credit under the EU Interchange Fee Regulation). US rates are unregulated and typically higher. Rates in emerging markets vary widely by card network and issuing bank.

Transaction amount: some interchange structures include a fixed per-transaction component in addition to the percentage rate, which disproportionately affects low-value transactions.

Interchange Fee vs. Merchant Discount Rate

These two terms describe different levels of the payment cost stack and are frequently confused:

The interchange fee is the wholesale cost the fee the acquiring bank pays to the issuing bank. It is set by the card network and non-negotiable at the merchant level.

The merchant discount rate (MDR) is the total fee charged by the acquiring bank or payment processor to the merchant. It encompasses the interchange fee, the card network assessment fee, and the acquirer's own margin. The MDR is what the merchant actually pays interchange is the largest component within it.

A merchant negotiating with an acquirer on pricing is negotiating the acquirer's margin and fees, not the interchange rate itself. Interchange passes through the acquirer at cost.

Interchange Plus Pricing vs. Flat Rate Pricing

How interchange is passed through to the merchant depends on the pricing model offered by the acquirer or payment processor:

Interchange plus pricing (also called pass-through pricing) charges the merchant the actual interchange rate for each transaction plus a fixed acquirer margin. This model is fully transparent the merchant sees exactly what interchange was charged on each transaction and what the acquirer added on top. It is the most cost-efficient model for high-volume merchants because the acquirer margin is predictable and the interchange cost reflects the actual card mix.

Flat rate pricing charges the merchant a single blended rate on all transactions regardless of card type or transaction method. Simple and predictable, but typically more expensive than interchange plus for merchants with a favorable card mix because the flat rate is set to cover the acquirer's cost on higher-interchange cards, meaning merchants who predominantly process low-interchange debit transactions effectively subsidize those who process high-interchange premium credit cards.

Tiered pricing groups transactions into tiers qualified, mid-qualified, and non-qualified each with a different rate. Widely criticized for opacity, as the acquirer determines which tier each transaction falls into, often with limited transparency to the merchant.

Interchange and Cross-Border Transactions

Cross-border transactions where the issuing bank and acquiring bank are in different countries typically carry higher interchange rates than domestic transactions. The additional risk, currency conversion complexity, and regulatory variance associated with cross-border card flows are priced into the interchange rate by the card network.

For businesses processing significant cross-border payment volumes, the interchange differential between domestic and international transactions is a meaningful cost driver. Routing transactions through local acquiring relationships in key markets where the acquiring bank and issuing bank are in the same country converts cross-border interchange rates into domestic ones, often producing material cost savings at scale.

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