What are Interchange Fees?

What Are Interchange Fees?

An interchange fee is the amount that a merchant's bank (the acquiring bank) pays to the customer's bank (the issuing bank) every time a card transaction is processed. It is essentially the cost that the card-issuing bank charges for its role in the transaction -- covering fraud risk, processing costs, and the interest-free credit period that cardholders enjoy.

Interchange fees are set by the card networks -- Visa, Mastercard, American Express, and others -- not by individual banks. They are published as schedules that vary depending on the type of card, the type of transaction, and the merchant's industry. While the merchant never pays the interchange fee directly, it forms the largest component of the merchant service charge that their acquiring bank or payment processor levies on each transaction.

How Interchange Fees Work

To understand interchange, it helps to follow the money through a typical card transaction:

• A customer pays £100 using their Visa debit card
• The merchant's acquiring bank processes the transaction and receives £100 from the card network
• The acquiring bank pays an interchange fee -- say 0.2% (20p) -- to the issuing bank
• The card network (Visa) takes a small scheme fee -- perhaps 0.02% (2p)
• The acquiring bank adds its own margin and charges the merchant a total merchant service charge -- perhaps 0.5% (50p)
• The merchant receives £99.50

The interchange fee is the wholesale cost at the heart of this chain. The merchant service charge that businesses see on their statements includes the interchange fee plus the acquirer's margin plus the card scheme fee.

What Determines the Interchange Rate

Interchange fees are not one-size-fits-all. They vary based on several factors:

Card Type

Debit cards typically carry lower interchange fees than credit cards. Within credit cards, rewards cards and premium cards (like Visa Infinite or Mastercard World Elite) carry higher interchange because the issuer needs to fund the rewards programme. Commercial and corporate cards also tend to have higher rates.

Transaction Type

How the payment is made affects the fee. Card-present transactions (where the physical card is used at a terminal) are considered lower risk and attract lower interchange. Card-not-present transactions -- online, over the phone, or by mail -- carry higher rates because of the increased fraud risk.

This is directly relevant to telephone payments. Because phone payments are classified as card-not-present, they typically incur higher interchange fees than in-store transactions.

Merchant Category

Some industries receive preferential interchange rates. Charities, government bodies, and certain utility companies may qualify for lower rates. High-risk industries, conversely, may face higher costs.

Transaction Authentication

Transactions that use strong authentication (such as 3D Secure for online payments or PIN verification for in-store) may qualify for lower interchange rates because they carry less fraud risk. This is one of the reasons card networks encourage the adoption of authentication technologies.

Interchange Fee Regulation

In the UK and EU, interchange fees are capped by regulation. The Interchange Fee Regulation (IFR), which came into effect in 2015, sets the following caps for consumer cards:

• Debit cards 0.2% of the transaction value
• Credit cards 0.3% of the transaction value

These caps apply to four-party card schemes (Visa and Mastercard) but not to three-party schemes like American Express, where the network also acts as the issuer. Commercial cards are also exempt from the caps, which is why businesses sometimes see higher charges when customers pay with corporate cards.

The regulation was introduced to increase transparency and reduce the cost of card acceptance for merchants. Before the caps, interchange rates in some European countries were significantly higher, and the fees were largely invisible to merchants who simply saw a blended rate from their acquirer.

Interchange Plus Pricing

Historically, most payment processors charged merchants a single blended rate that bundled interchange, scheme fees, and the processor's margin into one percentage. This made pricing simple but opaque -- merchants had no way of knowing how much of their fee was interchange and how much was profit for the processor.

Interchange plus (IC+) pricing breaks this apart. The merchant sees the actual interchange fee for each transaction, plus a fixed markup from the processor. This transparency allows businesses to understand exactly what they are paying and why. It also makes it easier to compare processors, because you are comparing their markup rather than a blended rate that may hide wide margins.

Impact on Businesses

For businesses processing significant volumes, interchange fees represent a substantial cost. Even at the regulated cap of 0.3% for credit cards, a business processing £1 million per month in credit card payments is paying £3,000 in interchange alone -- before adding scheme fees and acquirer margins.

Understanding interchange helps businesses make informed decisions about which payment methods to encourage, how to negotiate with their payment processor, and where they can reduce costs. For example, encouraging debit card payments over credit card payments saves 0.1% on every transaction at the interchange level.