The Basics of Card Interchange Fees

The Basics Of Card Interchange Fees

Interchange fees, which are set by card networks like Visa and MasterCard, are the fees paid by Merchants to processors for processing card transactions. Specifically, interchange is provided by acquiring banks to card-issuing banks, but the costs are passed on to the Merchant.

Card issuers make over $30 billion annually from interchange fees, making interchange a lucrative, but necessary, business for card issuers. According to card issuers and card networks, processing fees like interchange fees are imposed to cover the costs and risk of processing card payments.

To understand the basics of card interchange fees, one must appreciate the number of variables that enter the equation of each credit or debit card transaction. There are thousands of interchange rates. They depend on a variety of factors, including but not limited to the following:

  • Card Program Type (Basic or Rewards, Credit or Debit)
  • Card Network (Visa, MasterCard, American Express, or Discover)
  • Card Capture Method (Keyed, Swiped or Chip)
  • Security and Authentication (PIN, Zip Code, and Inputted Card Information)
  • Merchant Category Code
  • Size of Transaction
  • Size of Card-Issuing Bank (for debit)

Typically, the details of the most current interchange rates of Visa, MasterCard, American Express, and Discover are published annually on their respective websites.

Lowering Interchange Fees


If a Merchant wishes to accept payments by debit and credit card, there is no way to completely avoid interchange fees and other card processing fees. There are factors that can help Merchants lower their interchange fees, however.

Merchants who accept cards in specific networks can usually access more information about interchange rates from card networks. Once the basics of interchange fees are understood, Merchants can lower the costs of interchange fees by increasing security.

Accepting chip cards, swiping cards and accepting PINs during in-person transactions can drop transactions to a lower interchange rate. In online transactions, Merchants can request additional authentication information of the customer, such as an address or a zip code, or the CID/CVV (Customer Identification Number/Card Verification Value) on the back of the customer’s card.

During electronic B2B transactions, companies can submit Level 2 or Level 3 data to reduce the rates of interchange. Level 2 data includes transaction date, transaction amount, tax amount, customer codes or PO number, zip codes, and the name of the Merchant. For example, if an automotive parts distributor company accepts payments from commercial clients, they may wish to request level 2 data from those clients to qualify for a lower interchange rate on transactions.

There are other methods for lowering interchange fees, including negotiating with processors and shopping for better rates.

Incentive-Based Card Steering for Interchange Optimization


Because interchange fees are set by card networks, the basics of interchange fees cannot be changed directly by Merchants, Billers, and other organizations. However, new payment technology enables Merchants to encourage their customers to use debit and credit cards that cost less to process, resulting in lower interchange costs over time.

Incentive-based payment card/tender-type steering is a new industry solution that calculates the cost of processing a card payment in real-time before the customer completes payment. The system then presents alternative card payment choices to the customer alongside incentives for choosing them. These alternative choices cost less to process than the card that the customer presented originally. When the customer chooses a lower cost card, the Merchant saves on interchange and the customer receives an added benefit.

The benefit to the customer can take the form of cash incentives, such as a reduced transaction total, or a noncash incentive, such as a coupon.

How Specific Industries Can Save On Interchange


Depending on the industry, Merchants, Billers, and other industries stand to save on their interchange fees by following best practices and using an incentive-based card steering solution when accepting payments.

  • Recurring Billers

When debit or credit card information is keyed in by a customer to pay bills on a recurring basis, the Biller will be locked into a specific rate of interchange for as long as the customer chooses to pay on a recurring payment using that payment method. To secure lower interchange rates, it is important for recurring Billers to encourage their customers to use an optimal card from the start. By incentivizing the use of lower cost cards and capturing security information, recurring Billers can save on interchange. Billers can also incentivize customers to use ACH payments.

  • Subscription e-Commerce Providers

Much like recurring Billers, subscription e-commerce providers need to secure the most optimal card types at the beginning of the customer relationship to save on interchange. Incentive-based card steering ensures that subscription e-commerce businesses can optimize every transaction and every subscription for interchange.

  • General e-Commerce Merchants

General e-commerce Merchants need to save on interchange during each online transaction. Incentive-based card steering presents every customer with alternative payment options at the point of checkout, giving e-commerce Merchants a better chance to save on every transaction.

  • Brick and Mortar Merchants

Merchants that maintain brick and mortar establishments, such as retailers or wellness providers, can save the most on interchange by following every security measure for each transaction and accepting payments through an integrated platform. Many brick and mortar Merchants are now accepting payments through devices that differ from traditional POS systems, such as iPads.

As Merchants continue to adopt this model for payments, they may be able to include an incentive-based card steering solution for their in-person customers. Those brick and mortar Merchants who also have an online sales component to their business can use incentive-based card steering to optimize every online transaction.