Interchange fees explained

Interchange fees can be confusing, but they affect all businesses that accept card payments, so it’s important to understand what it is, how they’re calculated and why you have to pay it.

After reading this blog you’ll be in the know and have a better understanding of the fees you’re paying.

What are interchange fees?

Whenever a customer purchases something from your business using a credit card or debit card, a small percentage of that transaction will be used as a fee to pay the issuing bank (the customer’s bank). This fee is called an interchange fee. They can cover:

• handling costs
• fraudulent activity
• the costs of bad debts

Good to know:

Of the three fees, the most significant chunk is usually down to the interchange fees, estimated to be around 70-90% of the total fees. Don’t worry about having to keep track of the three different fees either, they’re all a part of the interchange++ pricing structure. Wondering what the ++ stands for? Well, that’s just referring to the acquirer markup fee and the card scheme fee.

Why are there interchange fees?

You may be wondering why these fees are necessary. Well, without the issuing bank providing the customer with their form of payment, i.e. the card, as well as performing a number of checks to determine whether to accept or reject the payment, and without the payment provider supplying the payment gateway and the methods of payment, such as a card reader, the transaction would not be possible. So, they take a small cut so that they can continue to provide the merchant with the support and the software needed for a successful business.

Also, when it comes to credit cards, the issuing banks are actually putting themselves at risk. They cover that risk by charging the merchant.

How much are interchange fees?

You’d think it was the issuing bank that would set the rates since they receive the fees, right? Wrong. They are actually set by the card schemes.

They won’t be the same for every merchant because they vary on region and what card scheme is being used, as well as a number of other reasons that we will go into later. On average, they range between 0.3-0.4% for European transactions or considerably higher at 2% in the United States.

The fees aren’t set in stone either and are regularly updated. For example, both Visa and Mastercard change and publish their new rates every April and October. So it’s a good idea to keep up to date on the latest rates via the card network websites so you know how much you’ll be charged.

Here are the two most popular card schemes:

• Visa’s European rates
• Visa’s American rates
• Visa’s Australian rates
• Mastercard’s European rates
• Mastercard’s American rates
• Mastercard’s Australian rates

How interchange fees are calculated

The cost of the fee can also change due to a range of transactional factors. Here are the different scenarios that can affect the calculation of the interchange fee:

• Different card network rates – Each card scheme will set its own unique interchange rates. This means that the cost of a customer paying with a Visa card won’t be the same as another customer with an American Express card, which is usually more expensive. In fact, there are many businesses that don’t accept Amex because their fees can be quite hefty.
• Physical card vs. card-not-present – When the card is present during a face-to-face transaction compared to a transaction that takes place either online, over the phone or via the customer’s digital wallet, the rate of the fees can be impacted. Card-present transactions, particularly when the customer uses their PIN, are often charged less because they pose fewer fraudulent risks.
• What type of merchant you are – Every merchant will be given a Merchant Category Code (MCC) depending on what they sell. This code indicates the risk level of the business, and therefore, will affect the cost of the interchange fee. The riskier the business, the higher the fee.
• If the card type used is a business card or an individual card – This one is pretty self-explanatory, if the customer pays with a company card, then higher interchange fees will apply.
• If the card used is a rewards card –  Rewards cards also incur higher fees – usually so that the extras the rewards programs are offering are covered.
• Cross-border transactions – If the card-issuing bank and the business are in two different countries then higher fees may apply.

As you can see, there are many transactional factors that can impact the interchange fee, so no business will be charged exactly the same.

Interchange++ pricing vs. Blended pricing

Just to confuse matters even more, when joining a payment provider you won’t just be presented with one pricing model. The alternative to interchange++ pricing is blended pricing. But, what’s the difference between the two? Let’s take a look at the benefits of interchange++ pricing versus blended pricing.

Pros of the Interchange fees pricing structure

• Much more transparent with a detailed breakdown of all the payment card processing costs, including the acquirer markup fee, the card scheme fee and the interchange fee.
• Only have to pay the interchange fee that your card issuer charges you, which sometimes can actually be lower than the fixed rate.

Larger businesses or businesses that have been around for a while and understand the fees are more likely to go for this option because you’ll get the true cost of payments.

Pros of the Blended fees pricing structure

• Much more basic structure without the intricate breakdown costs, ideal for small businesses just starting out.
• Charges an average processing cost, along with a fixed markup rate making it easier to understand what you’ll be getting charged each transaction.

Although Blended is much simpler to understand, sometimes they can work out more expensive than interchange++.

Want to know more? Then check out our blog about interchange pricing versus blended pricing.

Interchange fees regulation

It’s hard to believe that interchange fees weren’t always regulated. This led to controversy, including how large businesses could use their clout to negotiate lower rates, leaving smaller businesses to pay the full amount.

Thankfully, progress has been made to better regulate interchange fees across the world, including the introduction of fee caps and stricter rules to enforce them.

Interchange fees across the world

Global interchange fees, including in Europe, USA, Canada and India will vary quite a bit but, on average, the fee is approximately 0.99%.

At the time of writing, these are the average caps for credit cards and debit debits across the different regions. But remember, they do change bi-yearly, so be sure to use the links above to find out the most accurate rates.

These may just be averages but there are some exceptions to keep in mind:

• In North America and the EEA (European Economic Area), fee caps only apply to consumer cards and not corporate/business cards.
• In Mexico, the caps depend on the industry and some rates are negotiable.
• The EEA introduced the regulatory rules in 2015, making it one of the cheapest regions worldwide. Since the fees are capped in all EEA countries, it’s a good place if you’re thinking of setting up cross-border transactions. 

Brexit and interchange fees

Brexit has affected many areas of business, interchange fees being one of them. Initially, the UK government decided to stick to the EU regulation on these fees with caps of 0.2% (debit) and 0.3% (credit) and, domestically, not much has changed since.  

However, in October 2021 Mastercard and Visa revised the interchange fees for cross-border transactions between the UK and EEA. This has led to cost increases for UK businesses. They now have to pay interregional capped consumer rates. But the way both card networks have gone about it is slightly different. 

Mastercard key changes

Mastercard has made changes that specifically affect card-not-present transactions. The changes only affect UK businesses buying things across-regions. It does not impact EEA businesses, who can continue to make purchases from outside the EEA in the UK at the old rates. 

Visa key changes

Visa has announced even more changes than Mastercard. More specifically, Visa’s changes will impact cross-region card-not-present transactions, consumer refund transactions and commercial transactions.

Unlike Mastercard, Visa will demand that EEA markets also have to pay increased rates to deal with UK businesses. So it won’t just be a one-way street. 

Although there are some differences, the changes in the rates are currently the same. For both Visa and Mastercard, the interchange fees have risen from 0.2% pre-Brexit to 1.15% post-2021 for debit transactions. For a credit transaction, the fees will increase even further from 0.3% to 1.5%

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Hopefully, we’ve helped you gain a better understanding of interchange fees. But, if you’re still unsure and need some guidance on which pricing structure is suitable for your business, then get in touch. We’ll be more than happy to help.