Credit Card Processing

Interchange Fees Explained: Definition, Rates, and Common Questions

Read Time: 11 min


If you’re shopping for a merchant service provider that will help you accept credit card payments, you’ll undoubtedly come across interchange fees. Interchange rates are a crucial aspect of credit card processing fees, and interchange determines the amount you pay for each payment method your customers use. As a small business owner, it’s critical to understand what interchange is and how it works. This will help you better protect yourself against it or plan for it when making business decisions that may impact your profit margins.

What do small business owners need to know about interchange fees? Small businesses often have many questions about interchange rates, which can make them hard to understand at first glance. This article can help you understand interchange fees better so you’ll know what to expect when accepting credit card payments from your customers.

What is an Interchange Fee?

An interchange fee is a small percentage of money that your processor or merchant service provider charges for every credit card transaction. These fees are deducted from the total amount of that purchase, meaning you will receive less than what your customer paid when they use their card to make payment. Interchange rates vary by network, type of card, and other factors. Discover more about how these fees work and why they can be so frustrating for small business owners by scrolling down!

How do interchange rates work?

Interchange rates vary depending on what type of card is used and other factors. They can be very frustrating for small business owners. The way that interchange rates work is every time a customer uses their credit card to make payment, the merchant who accepts that transaction must pay an interchange fee. This fee is usually between 1-2% of the total transaction amount. Discover what small business owners need to know about these sneaky little fees by scrolling down!

what is interchange rates

What are some common interchange fees?

Interchange rates can vary by network. They are usually between 1-2% of the transaction amount, but this is not always the case. This means interchange rates can quickly eat into your profits if you’re not careful. There are many different kinds of credit cards, so it’s important to understand what type of card has been used before you can determine how much interchange rates will cost you. Discover all this and more by scrolling down!

What are the average interchange rates for Visa and MasterCard?

Interchange rates vary depending on what kind of card is used, but the average interchange amount for Visa and MasterCard is between 1-2%.

How are Interchange Fees Charged to Businesses?

Interchange rates usually range between 1-2% of the transaction amount, but they can be higher in some cases.

When a customer uses their credit card to make a payment for their purchase, an interchange fee is charged to the merchant. This fee is usually between 1-2% of the total transaction amount. What are the different Interchange rates for each credit card network? The interchange fee amount charged to merchants varies depending on what kind of card was used. There are 3 ways merchant processors can quote interchange fees. Certain costs remain the same across the board, where others are totally up to each processor. Below are the 3 types of fee structures that you will come across.

What is a flat-rate fee structure?

Sometimes, you will receive a flat rate fee structure. A flat-rate interchange fee is what most businesses pay. Aggregators like Paypal, Stripe, and Square charge a flat fee of 2.95%. This means you pay the same fees on any type of card that is swiped. They can also charge fees on top of that. For instance, to process payments through Stripe, you may pay 2.9% + $0.30 for each card swiped.

What is a tiered fee structure?

A tiered fee structure is when individual transactions fall into one of three pricing tiers, depending on the type of card used. Since there are multiple interchange levels, the cost to accept different types of cards varies widely. In an effort to simplify pricing, merchant service providers will lump several types of cards into three tiers. The different tiers apply to cards like rewards cards, standard-issue cards, and debit cards.

For example, if you sign up for a tiered fee structure and your customer pays with a debit card, you will be charged the lowest tier of fees. However, if they pay with a rewards card, which is in the highest tier, those are the fees you will pay. These structures are heavily dependent on your processor or merchant service provider, so make sure to shop around for different rates before making a final decision.

What is surcharging?

For smaller businesses or just those that process smaller transactions, this could mean a great deal of savings. This fee structure is when you transfer all the credit card processing fees to your customers. This means you’d surcharge between 3-5% on top of all transactions. This implies that there would be a discount for paying cash. Certain states don’t allow surcharging, so make sure to comply with your local laws.

What is interchange-plus?

An interchange-plus structure is when your merchant service provider charges you a percentage on top of your interchange cost. This additional fee, in short, is their profit. The profit is split between the merchant service provider, their processor, and any other stakeholders. For example, they might tell you that any time someone pays with a Visa Debit card, they will charge you 0.2% on top of interchange. This means if interchange is 1.2%, they’ll charge you 1.4% for the whole transaction.

Interchange-plus vs flat rate fees (pros and cons)

Interchange-plus is a popular interchange pricing model and it’s easy to see why. It provides transparency and convenience because you know what fees you will have to pay from the get-go. Unfortunately, since there are so many different variables that contribute to your final price, it can be difficult for business owners to estimate how much they should plan to spend.

Pros of interchange plus

The biggest pro of interchange-plus is that you pay the actual rate that applies to the card. With this fee structure, you will not overpay for a card that falls into a certain tier. However, the major con of interchange-plus is that while it may seem less expensive, the fees can really add up. You may be attracted to the idea of only paying interchange plus 2%, but that may come out to paying over 4% on that transaction. Merchants often get tied to the number that comes after interchange, without understanding that they’re paying both fees. Misleading merchant service providers will not clearly state what interchange rates are, so it’s critical to ask.

Common questions about interchange fees

Here are answers to some common questions about interchange fees:

Why do interchange rates exist?

Interchange fees are necessary for card processing companies to make money. They cover the cost of processing credit cards, making them available for customers, and more.

Are interchange fees negotiable?

Yes and no. Interchange fees are already negotiated by card brands and individual banks, so they cannot change. However, you can and should negotiate interchange-plus fees with your processor or MSP. Oftentimes, processors will try to earn your business by offering you the lowest rates, so take advantage of that.

What are interchange rates by country?

Interchange rates vary depending on what country you’re in. For example, if you live in the United States, your interchange fee is between 1-2%. If you lived in Peru, this would be closer to 3.5%.

interchange fees

Who Pays Interchange Fees?

When a customer pays for something with a credit card, it is typically split between the merchant service provider, their processor, and any other stakeholders. For example, if you sign up for an interchange-plus pricing model and your customer uses a Visa Debit card to pay for something, you may be charged 1.2% on top of the interchange rate. This means if your interchange rate is 1.2% on that card, you will be charged a total of 2.4% on that transaction.

Your processor will only take a small percentage of this, but that is their entire profit. They use this profit to pay for things like customer support and software development that allow them to provide services in the first place. This is also the money they will use to offset any losses incurred by the account (i.e. chargebacks).

Transactional Factors that Affect Interchange Rates

Every time a customer pays for something with a credit card, the interchange rate applies. Sometimes, this is the only fee you will pay, but most of the time there are other transactional factors that determine your final rates and fees. This information should always be clearly outlined in any contract you sign with your merchant service provider. Below are some transactional factors that can impact your rates:

Card type

There are different types of credit cards all with different interchange fees. A debit card is the cheapest to accept and carries the lowest interchange, followed by standard issued bank cards, rewards cards, corporate rewards cards, and then AMEX. Some cards fall into a certain tier, meaning they fall into a more competitive pricing model. This does not mean you cannot accept these types of cards for transactions, it just means the interchange rate may be higher.

Transaction type

If you run transactions that are considered high risk (i.e. an eCommerce purchase), your rates will likely be lower than if you run low risk transactions (i.e. a donation).

Time of day and week

Some cards have different interchange rates for transactions during the day and during the weekend.

Payment processor

Some merchant service providers will use multiple processors to run their transactions, and each one comes with a different interchange rate. You’ll need to ask your MSP if they do this and which rates you will be charged for each transaction.

Merchant category code (MCC)

This is an industry code placed on all business transactions. This determines the interchange rate that will be used for each transaction. For example, if you are a gas station, your MCC might be different than a restaurant’s.

Fraud rates

If your business tends to see more chargebacks than average (i.e. if you sell high-ticket items), your interchange rate will include higher fees associated with fraud prevention. This may be added on top of other transactional factors mentioned in this list.

Payment method

The type of payment method used by your customer for the transaction is very important. Card Not Present transactions (those done online, over the phone, or through a virtual terminal) are considered riskier and have higher interchange rates associated with them. On the flip side, cards taking in person via a physical terminal (EMV/chip/pin) are considered relatively low risk and have low interchange rates associated with them.

Merchant location

Some interchange rates can be different based on where your business is located. For example, if you operate in the United States and accept transactions from Canada, there may be additional processing fees that not all merchant service providers include in their standard interchange rates.

As mentioned earlier, these are just some of the factors that determine your final rate once an interchange rate is applied. When you take everything into consideration, your rates can vary anywhere from 2-10%, depending on the cards being used for transactions and the type of business you run. That said, it is always best to have a clear understanding of what your interchange rates are when acceptig payments online.

Why do Interchange Rates Change?

The banking industry is a complex environment that changes constantly. New technologies and security updates are always being released, which means the way transactions take place can change as well. These changes affect interchange rates for merchants who accept electronic payments from cards.

A common myth is that interchange fees increase because of greed from credit card companies and banks. In reality, interchange fees are driven by the banks’ need to recover losses they experience for processing credit card transactions. Interchange rates are set by Visa and MasterCard, which makes them not only difficult for merchants to understand but also difficult to challenge.

How to Calculate Interchange Fees

interchange fees

Calculating interchange can be complicated. You can find out what your interchange rates are by:

Looking at your merchant agreement

  • Talking with your merchant services provider to see if you’ve undergone any rate increases
  • Calculate your effective rate by dividing your fess by your total processing volume for a month
  • Trying to calculate interchange fees for individual transactions can be daunting. This is because you’ll need to know the exact payment type and method used and consult Visa, and Mastercard’s interchange tables.

What Can You Do to Save Money?

If you’re like most small business owners, you don’t like surprises when it comes to your monthly expenses. This is why many businesses choose to switch their merchant services providers every few years. If your current MSP does not include interchange rates in their package pricing or if they fail to communicate interchange rates with you, you should consider switching providers. You can also go back to your provider and try to renegotiate lower rates. This would save you significant time and hassle. Additionally, if your MSP does not include free equipment or if their monthly fees are very high, it may make sense for you to switch and find a payment processor that has lower fees and better terms.

Average Credit Card Interchange Rates

Here are the average interchange rates for each payment method:

  • Card not present: 1.60%+$0.10 – 2.60%+$0.15
  • Card present: 0.10%+$0.10 – 2.35%+$0.10*

*This does not include AmEx interchange rates, which are much higher.

It’s very important to remember this is strictly interchange fees. This does not include other processor fees, such as a monthly fee or PCI Compliance fee.

Interchange Fee Regulation in the United States

Credit card interchange fees are among the most common, but they also impact how much merchants pay for things like gift certificates and wire transfers. These fees are also regulated in Canada, Australia, and the European Union (EU). 

Today, almost all countries with a developed economy regulate interchange fees in some way, shape, or form. Some have complete price caps on interchange rates while others focus solely on transparency. The problem is that despite regulation, interchange fees are still a very common way for businesses to be charged hidden fees. The only way to avoid these hidden fees is to do your research and partner with a trustworthy merchant service provider.

Final Thoughts

Interchange fees can be a big headache for small business owners. These add-on charges add up quickly and go unnoticed by many merchants. If you’re unsure what your current interchange rates are, don’t hesitate to contact your merchant services providers today. They’ll have the information you need at no charge and could even help you lower your rates.

If you’re not 100% satisfied with your interchange rates, you should consider switching to another provider. Just make sure the new MSP has transparent pricing and low costs before committing to a contract. You can also go back to your current provider and try to renegotiate your lower rates. This is an option that many business owners take advantage of to save serious money.

It’s important to remember interchange fees are not the only cost of doing business. There will always be some type of cost that goes into accepting credit cards, but with these hidden costs you can better plan for them and save more money long-term.