What Is An Interchange Fee?

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Credit card processing is much more complicated than many people realize — which is why businesses rely on credit card processing systems to ensure that credit and debit card transactions can be completed safely and securely. Since credit card interchange fees can be as much as 3.5% of the total transaction, it’s a good idea for business owners to compare service providers and look for a processing system that allows them to keep their interchange fees as low as possible.

What are interchange fees?

Every time a retailer processes a credit or debit card payment, the merchant pays an interchange fee. This fee, often called a “swipe fee,” is designed to cover the costs associated with accepting, processing and authorizing card transactions.

In most cases, a credit card interchange fee will include a small fixed fee plus a percentage of the total sale. These fees and percentages can vary based on the type of card used by the consumer (Visa vs. Mastercard, for example), the merchant category code associated with the business making the transaction and the credit card processing service that keeps the whole system running.

Small-business owners who want to lower the cost of interchange fees may want to compare merchant service providers and look for a pricing model that could save them money over time.

How do interchange fees work?

When a consumer makes a purchase using a credit card or debit card, a number of things have to happen in a very short period of time — including requesting and receiving authorization, checking for fraud and processing the payment. The cost of this processing is covered by the interchange fee.

A small portion of the interchange fee goes toward the credit card processing service, and the rest goes to the bank or credit card company associated with the card that was used to make the purchase.

The amount charged for interchange fees has recently come under scrutiny by regulators and legislators, who argue that credit card companies are making too much profit off these everyday transactions. However, it’s unlikely that interchange fees will go away any time soon.

How are credit card interchange fees calculated?

Credit card interchange fees are calculated in three different ways. First, the business owner pays a processing fee that varies depending on the credit card issuer and may also vary based on factors like transaction method and merchant category code.

Then, the business owner pays an assessment fee that varies depending on card issuer but otherwise remains fixed — that is, it doesn’t change depending on factors such as whether customers make purchases online or in person.

Lastly, the business owner pays the credit card processing service that completed the transaction. These charges can be fixed-rate or percentage-based depending on the merchant service provider, which is why it’s a good idea to shop around for the best rates before choosing a credit card processing service.

Here are the processing and assessment fees associated with the major credit card networks:

Credit card interchange fee example

John has opened up a small restaurant offering fast food and takeout. At first, he only accepts cash payments — that way, he won’t have to deal with interchange fees. However, he quickly realizes that he is losing customers who prefer to pay by credit or debit. John signs up with a merchant service provider that offers credit card processing, and within a few months his turnover and profits have increased. Even though John is now paying interchange fees, he’s getting much more business — and many more satisfied customers.

How much do interchange fees cost John? Let’s say that a customer places a $25 takeout order and pays with a Visa credit card. John might pay about $0.33 in processing fees and $0.06 in assessment fees on the $25 transaction along with any charges associated with using his service provider.

What affects interchange fees?

The average interchange fee is between 1.5 percent and 3.5 percent of the total transaction. That said, the amount a merchant pays every time a customer swipes a card is determined by several factors.

Certain credit card issuers may charge slightly different interchange fee rates, for example, which is why some retailers choose to accept Visa or Mastercard but not American Express. In some cases, interchange fees are higher when a consumer makes a purchase online and lower when a consumer makes a purchase in a brick-and-mortar retailer.

Some retailers pay higher interchange fees than others, based on the merchant category code associated with the business — and many credit card processing services offer different pricing models that may save retailers money on interchange fees depending on the amount and variety of transactions processed.

The bottom line

Interchange fees help businesses cover the cost of quickly processing debit and credit card transactions. In most cases, interchange fees are a part of doing business. But if you are a small-business owner who wants to lower the amount of money you pay in interchange fees, look for a credit card processing service offering a pricing model that could reduce your total swipe fee costs.