Interchange Fee
What Is an Interchange Fee? Definition and How It Works
Definition
An interchange fee is the per-transaction fee paid by a merchant's acquiring bank to the cardholder's issuing bank each time a card payment is processed, set by the card networks and varying by card type, transaction type, and region.
How it works
When a cardholder uses a credit or debit card, money moves through a four-party system: the merchant, the acquirer, the card network, and the issuer. The interchange fee compensates the issuer for the credit risk, fraud liability, and infrastructure costs it absorbs in authorising and guaranteeing the transaction.
The fee is set by the card network and published in their interchange rate schedules. Visa and Mastercard update their US schedules twice a year, typically in April and October. The schedules run to hundreds of line items covering combinations of card type, merchant category code, transaction channel, and acceptance method.
The acquirer pays the interchange fee to the issuer. In practice, the merchant pays the acquirer the full Merchant Discount Rate (MDR), which bundles interchange, scheme fees, and the acquirer's margin. The merchant does not pay the issuer directly.
Interchange is the largest component of what a merchant pays to accept cards. For a typical US consumer credit card, interchange sits in the 1.5-2.1% range per transaction. Commercial and premium cards carry higher rates. Debit cards carry lower rates, partly regulated in the US under the Durbin Amendment for issuers with over $10B in assets.
Interchange rates are not directly negotiable with card networks. Merchants influence their effective interchange rate indirectly through MCC assignment, transaction data quality (Level 2 and Level 3 data for B2B transactions), and acceptance channel.
Why it matters
Interchange is the biggest cost lever in card acceptance: for most merchants, interchange accounts for 70-80% of total card processing costs. Understanding which rates apply to your transaction mix is the starting point for cost optimisation.
Card mix matters: accepting a lot of corporate or premium travel cards means paying materially higher interchange rates. Merchants selling to B2B buyers should evaluate whether Level 2/3 data submission qualifies them for lower commercial card interchange rates.
Card-not-present transactions cost more: online transactions carry higher interchange rates than in-person chip transactions because the issuer takes on more fraud risk. This is the structural cost difference between physical and digital retail.
Interchange-plus pricing makes costs visible: under blended pricing, interchange is bundled into a flat rate. Under interchange-plus, interchange passes through at actual cost and the acquirer charges a separate margin. Merchants processing significant volume benefit from the transparency of interchange-plus.
Regional variance is significant: EU interchange is capped at 0.2% for debit and 0.3% for credit under the EU Interchange Fee Regulation. US interchange is uncapped for credit. A merchant operating in both regions will see substantially different effective costs per transaction.
With PXP
PXP operates on interchange-plus pricing structures for enterprise merchants, meaning interchange passes through at actual network rates with a separate, transparent acquiring margin. PXP's settlement statements itemize interchange, scheme fees, and acquirer fees separately, supporting accurate cost attribution across acquirers and markets.
Frequently asked questions
Who sets interchange rates?
The card networks set interchange rates. Visa and Mastercard publish their rate schedules publicly and update them on a regular cadence, typically twice per year in the US. Merchants and acquirers do not set interchange rates; they can only influence which rate category applies through transaction data quality, MCC, and acceptance method.
Can merchants negotiate lower interchange rates?
Not directly with card networks. Interchange rates are non-negotiable for individual merchants. However, merchants can reduce their effective interchange rate by optimising for lower-rate categories: submitting Level 2/3 data for B2B card transactions, using card-present acceptance where possible, and ensuring correct MCC assignment.
Why do premium and corporate cards have higher interchange rates?
Premium consumer cards carry higher interchange to fund rewards programs offered by issuers. Corporate and commercial cards carry higher rates because issuers take on more credit risk and provide additional data services. The merchant effectively subsidises cardholder rewards through interchange.
What is the EU Interchange Fee Regulation and how does it affect merchants?
The EU Interchange Fee Regulation (IFR) caps interchange at 0.2% for consumer debit cards and 0.3% for consumer credit cards for transactions within the EEA. This cap significantly reduces card acceptance costs for EU merchants compared to uncapped markets like the US. Commercial cards and non-EEA-issued cards are not subject to these caps, which is why merchants see higher effective interchange on cross-border and B2B card transactions.
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