The Complete Guide to Interchange Fees and Rates

Interchange fees are the fees charged by credit card issuers to merchants for processing credit card transactions. These fees are generally a percentage of the transaction total, and vary depending on the type of card being used (i.e. rewards cards typically have higher interchange rates than regular cards). In addition to the interchange fee, merchants also have to pay a separate fee (known as the “merchant discount rate”) to their credit card processor.

The vast majority of interchange fees are paid by the merchant, with the remainder being shouldered by the card issuer. In recent years, there has been a growing trend of issuers starting to pass on a portion of these fees to cardholders in the form of annual or monthly charges.

Why Do Interchange Fees Matter?

Interchange fees matter because they are a major source of revenue for credit card issuers, and have a direct impact on the bottom line of businesses that accept credit cards. For example, a business that accepts $10,000 in credit card payments per month and pays an interchange rate of 2.5% would end up paying $250 in fees to the issuer.

Because interchange fees are a percentage of the transaction total, they also have a direct impact on the prices that merchants charge for goods and services. In general, the higher the interchange rate, the higher the prices that merchants must charge in order to cover their costs.

What is the Average Interchange Rate?

The average interchange rate varies depending on the type of card being used. For example, rewards cards typically have higher interchange rates than regular cards. In general, however, the average interchange rate for all types of cards is around 1.5%.

How Are Interchange Fees Regulated?

Interchange fees are regulated by the card networks (i.e. Visa, Mastercard, etc.) and not by the government. The card networks set the interchange rates that issuers must charge for each type of card, and these rates are generally the same across all issuers.

The card networks periodically review and adjust interchange rates, and these changes can have a significant impact on the revenue of both issuers and merchants. For example, a small increase in the interchange rate for rewards cards can lead to a significant increase in the fees that merchants must pay to accept these types of cards.

What is the Durbin Amendment?

The Durbin Amendment is a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act that aims to regulate interchange fees. The amendment gives the Federal Reserve the authority to set maximum interchange rates for debit card transactions, and also requires issuers to provide greater transparency around these fees.

The Durbin Amendment went into effect in October 2011, and led to a significant decrease in the interchange rates that issuers could charge for debit card transactions. As a result, many issuers started charging monthly or annual fees to customers in order to offset the loss of revenue from interchange fees.

What is the Interchange Plus Pricing Model?

The interchange plus pricing model is a pricing structure used by credit card processors. Under this model, the processor charges a fixed percentage rate (known as the “interchange plus rate”) on top of the actual interchange fee charged by the issuer. For example, if the interchange rate for a particular transaction is 1.5% and the processor’s interchange plus rate is 0.5%, then the total fee charged by the processor would be 2.0%.

The interchange plus pricing model is generally considered to be more transparent and fair than other pricing models, such as tiered pricing, because it allows merchants to know exactly how much they are paying in fees for each transaction. In addition, the interchange plus pricing model typically results in lower overall costs for merchants, since the processor’s markup is generally lower than the markups charged by other pricing models.