What are Interchange Fees?
Interchange fees are transaction fees paid by the merchant's acquiring bank to the cardholder's issuing bank each time a card payment is processed. They are the largest component of card processing costs and are set by the card networks (Visa, Mastercard) rather than by individual banks.
How Interchange Fees Work
Every time a customer pays by card, the merchant's acquiring bank pays an interchange fee to the customer's issuing bank. This fee compensates the issuer for the risk of lending money to the cardholder, fraud protection, and the cost of maintaining the card account.
The merchant never pays interchange directly — it is included in the merchant service charge (MSC) set by their acquirer. But interchange typically makes up 70-90% of the total processing cost.
What Determines the Rate
Interchange rates vary based on several factors:
- Card type: Consumer debit cards have lower rates than credit cards. Premium and corporate cards have higher rates
- Transaction type: Card-present (chip and PIN) transactions have lower rates than card-not-present (online/phone) transactions
- Merchant category: Charities, supermarkets, and utilities often qualify for lower rates
- Region: UK/EEA interchange is capped by regulation. International transactions have higher rates
UK Interchange Caps
Since 2015, EU regulation (retained in UK law) caps interchange fees at:
- Consumer debit cards: 0.2% of the transaction value
- Consumer credit cards: 0.3% of the transaction value
These caps apply to domestic UK transactions. Commercial cards and international transactions are not capped.
Reducing Interchange Costs
Businesses can reduce interchange costs by ensuring transactions qualify for the lowest applicable rate. This includes providing complete transaction data (address verification, security codes), using chip-and-PIN where possible, and choosing the correct merchant category code.
Phone payments are classified as card-not-present transactions, which typically attract higher interchange rates than in-person payments. Paytia helps businesses optimise their phone payment processing by ensuring all required transaction data (including CVV verification) is captured and submitted correctly through its DTMF suppression platform, helping transactions qualify for the best available interchange rates.
Frequently Asked Questions
Who pays interchange fees?
The merchant's acquiring bank pays interchange fees to the cardholder's issuing bank. The acquirer passes this cost to the merchant as part of their merchant service charge. The cardholder does not pay interchange fees directly.
Why are card-not-present interchange fees higher?
Card-not-present transactions (online and phone payments) carry higher fraud risk because the card cannot be physically verified. The higher interchange rate compensates the issuing bank for this increased risk.
Can interchange fees be negotiated?
Interchange fees themselves are set by the card networks and cannot be negotiated. However, you can negotiate the acquirer's markup on top of interchange. Interchange-plus pricing models separate the interchange cost from the acquirer's margin, giving merchants more transparency.
See how Paytia handles interchange fees
Book a personalised demo and we'll show you how our platform works with your setup.
Request a Demo