Interchange fees make up the majority of the card processing fees you are charged. It’s important to know what they are, how they work, and how much you’ll be charged so you can make better plans for your business - operating costs, pricing strategy, and even your business model are affected.
In this post, I’ll explain what interchange fees are. I’ll explore how they work, why they are charged, how much they cost, and how to reduce them.
What are interchange fees?
Interchange fees (or interchange reimbursement fee or interchange rate) are fees charged between banks in order to process card payments. The acquiring bank (the merchant’s bank) pays an interchange fee to the cardholder’s issuing bank - this fee is passed on to the merchant.
Card networks (the card issuer, like Mastercard and Visa) are responsible for setting the interchange fee.
Why are interchange fees charged?
The interchange fee covers various costs associated with card processing, including:
- Network maintenance: the fees support the maintenance and operation of card networks, including measures to prevent fraud, and more.
- Compensating issuing banks: issuing banks pay for providing and maintaining payment cards, their associated bank accounts, credit lines, and customer reward schemes. The interchange fee compensates them for the cost of this.
- Compensating acquiring banks: acquiring banks pay interchange fees when processing card payments, so merchants paying this compensates them for the work and costs associated with it.
How much is the interchange fee?
There is no set interchange fee as it varies depending on a few factors we’ll discuss in the next section. Regulations are in place, however, to cap interchange fees to protect businesses from exploitation. Currently the caps are:
| Country | Debit / Prepaid cards | Credit cards |
| UK | 0.2% | 0.3% |
| EEA | 0.2% | 0.3% |
Interchange fees can change twice a year. It is either a fixed percentage of the transaction, a flat rate, or a combination of both.
For the most accurate figures, you can check the different card scheme’s websites (please note that Discover and American Express do not publish their interchange rates):
What factors affect interchange fees?
Interchange fees vary for a number of reasons. The main influential factors are:
- The type of payment card: credit cards, rewards cards, and commercial payment cards carry higher fees than standard consumer debit cards.
- The type of transaction: card present (in person) payments have lower interchange fees than card-not-present (online) payments.
- Your industry: your business is assigned a Merchant Category Code (MCC) based on your industry and risk factors. Some MCC’s get lower interchange rates.
- The region(s) the transaction took place in: transactions in the same country as your business (domestic) are cheaper than transactions between multiple countries (cross-border).
Interchange pricing models
The pricing model of your payment processor may be different to other processors. Here are the main pricing models.
Interchange+
This is the most transparent pricing model. You pay the exact interchange fee set out by the card network, and then a markup set by the payment processor.
Tiered
This is a bit more complicated as each transaction is filed into a tier based on the risk/reward involved. Low tier transactions include basic non-reward credit cards, but high tier transactions cover premium rewards credit cards.
Flat rate
Some processors charge a complete flat rate for all transactions (either a set percentage, flat fee, or combination of both). This usually ends up more expensive than interchange plus.
Subscription
This isn’t as common but some processors charge a monthly subscription for their fees which covers interchange fees. You’ll get lower transaction fees, but the monthly cost doesn’t suit all business types.
How can I reduce my interchange fees?
Whilst you won’t be able to get rid of interchange fees, there are a few things you can do to try and reduce them:
- Negotiate: You can negotiate with your payment processor for lower rates. If your business has a higher volume of transactions, you’ll have a better chance of negotiating a good deal.
- Encourage debit/cash transactions: These transactions have lower/no interchange fees attached. Be wary of deterring customers who would prefer to use a credit card.
- Improve card processing practices: Make sure you settle transactions quickly (24 hours max) and use security measures like encryption and tokenisation to reduce risk.
- Provide more complete transaction data: For some card types with higher interchange fees, provide more information about the transaction to qualify for lower fees.
- Review your statements often: Interchange fees can change twice a year so keep an eye on how they fluctuate and consider a different provider if the fees are too steep!
Things you cannot do:
- Impose a surcharge on card payments: Since 2018, it has been illegal for UK businesses to charge extra for making a card payment. So, definitely don’t try this!
Why should I care about interchange fees?
It’s a pain to learn the ins and outs of interchange fees, but it’s important for your business. These fees affect:
- Your operating costs.
- Your pricing decisions.
- Your cash flow.
- Your business model (will you move to cash-only, card-only, or combo?).
- Your choice of payment processor.
Frequently Asked Questions
- What is the difference between interchange fees and scheme fees?
Interchange fees are charged by the cardholder’s bank. Card scheme fees are charged by the card scheme for using its network.
- How do companies make money from interchange fees?
Interchange fees are used to fund things like customer rewards programmes, or they can be used towards the company bottom line.
- Can you avoid paying interchange fees altogether?
Unfortunately not. You can try and negotiate for lower fees or shop around with Cardswitcher for a company with the lowest card processing fees.
- If a customer asks for a refund, will I be refunded the interchange fee I paid?
Usually not. Transaction fees in general are usually non-refundable, because it is paying for a service your payment processor carried out for you (the payment processing). Interchange fees fall under this category.
Conclusion
Whilst you can’t get out of paying interchange fees, you can save money by going with the cheapest payment processing provider that offers all of the services you need.
Cardswitcher compares the payment processing market for you in just a few clicks. See if you should switch providers today - click the button below.
