Mahi Sall, Advisor, Fintech-Bank Partnerships, Payments and Financial Inclusivity
January 25th, 2023
Mahi Sall is the CEO & Founder of FinXpair, a Berlin-based strategic advisory boutique firm focu[...]
What Are Interchange Fees and How are they Charged?
Jul 27, 2023
Businesses of all sizes will often end up paying a lot more in subtle fees and charges than most realize. Interchange fees happen to be some of the most prolific among them. A proper understanding of what an interchange fee is, what are the other fees associated with it, and how they are all charged by the merchant should be considered critical knowledge for all business owners. Let’s get started with an introduction to exactly what an interchange fee is.
Interchange Fee
An interchange fee is imposed on a merchant each time a customer pays using their credit or debit card. They are applicable to both online and offline transactions. This fee is charged by the merchant services provider who is responsible for processing credit/debit card transactions for the concerned business. However, the merchant services provider does not get to keep the money they collect as interchange fees.
See: Biden Proposes Cap on U.S. Credit Card Fees to Save Consumers $9 Billion
The amount is instead transferred to the credit card company or bank that issued the credit/debit card which was used for the transaction. The purpose of the interchange fee imposed is that of insuring or covering the credit card company or bank against potential risks of loss from bad debts, fraudulent transactions, and the like.
Interchange Rates
The interchange fee will always be equal to a percentage of the concerned credit/debit card transaction. The dynamic rate which determines what percentage of the transaction will be charged as the interchange fee is called the interchange rate. Debit/credit card networks such as Visa, MasterCard, American Express, Discover, etc., are the ones who both set and change the interchange rates. Any changes they make can be quite frequent, but generally limited to twice a year at most.
Interchange rates will vary widely depending on the merchant services provider, the credit/debit card network, the bank, the specific card, the transaction amount, and more. However, credit card transactions are generally charged at a higher interchange rate than debit card transactions. Online payments made via debit/credit cards are charged at higher interchange rates than point-of-sale (POS) transactions because Card Not Present (CNP) is deemed a higher risk factor than POS.
Transaction Fees
The total amount which is deducted from each credit or debit card transaction by a merchant service provider before it’s deposited in their merchant account is known as the transaction fee. In other words:
Interchange Fee + Payment Processing Fee = Total Transaction Fees
It can get very expensive for a business if they are not careful in managing their transaction fees. As Interchange Plus pricing allows merchants to pay their interchanges fees at the lowest rate possible per transaction, it’s an assured step towards cutting down on total transaction fees. Combined with Interchange Plus’s low payment processing rates, the amount of money saved per year can be quite staggering for merchants who process a high volume of card payments.
Finally, we must take a look at the assessment fees as well, even though they’re not charged on every transaction. Assessment fees are charges levied on merchant accounts by credit card networks in return for allowing the merchant to accept payments made via a debit/credit card managed by them. The assessment fee is charged on the basis of how many times the network’s cards are used to make payments by customers per month.
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