INdustry Guide

Understanding Credit and Debit Card Interchange Fees

What purpose do interchange fees serve, how are they set and is there a way to avoid paying them?

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What is an interchange fee?

Interchange fees — also known as interchange reimbursement fees — are expenses paid by billers and merchants to card-issuing banks for each transaction processed through a credit or debit card network. Credit and debit card interchange fees cover the cost of issuing cards, any handling costs associated with card usage and rewards provided to cardholders.

What is the difference between association or assessment fees and interchange fees?

Although association fees are sometimes mistaken for interchange fees, they’re distinctly different and applied in different settings. An association fee, also known as an assessment fee, is a fee that merchants and billers pay to card brands for use of their network, systems and brand. An interchange fee, by comparison, is a fee that merchants and billers pay to card issuers to offset the cost of processing each transaction.

What is the average interchange fee?

It’s impossible to provide an average, as interchange rates vary greatly depending on a number of factors. Factors that cause interchange rates to vary include:

  • The industry in which the merchant or biller operates
  • Whether the transaction is a card-present (CP) or card-not-present (CNP) transaction
  • The type of card used (for example, a debit card vs. a credit card, a consumer card vs. a commercial card, a rewards card and so on)
  • Which bank issued the card
  • The card brand, such as Visa, Mastercard or Discover
  • What security validations the merchant or biller conducted at the time of the transaction, such as address verification, card verification value (CVV) code validation and/or strong customer authentication (SCA)

How are interchange rates set?

Interchange rates are negotiated between card brands and issuing banks and are based on a variety of factors, including transaction type, card type, industry category and processing method.

Card brands also negotiate with merchants and billers on behalf of issuing banks for lower interchange rates in exchange for greater card acceptance. Interchange rates depend entirely on how much it costs issuing banks to provide and maintain credit and debit cards. Certain cards, such as corporate cards or rewards cards, are more expensive to issue than others and have higher interchange rates as a result.

The same is true for certain transactions, especially those that carry a high risk — for example, a card transaction made at a casino would come with a higher interchange rate than one made for a household utility bill. Finally, there are factors that impact the overall cost of card processing and, by extension, interchange rates. For example, a card may qualify for a specific interchange rate, but if it’s processed without the appropriate risk mitigation measures — such as address verification or CVV code validation — it may be downgraded to a more expensive interchange rate.

Man holding up a golf Airfrance American Express Credit Card
Client making a wireless payment on a card machine at a store

Does interchange pricing vary by country?

Interchange fees on domestic card transactions vary by country due to differences in regulatory frameworks, market dynamics and agreements between payment networks and local financial institutions. Cross-border transactions are more complex because they must be supported by, procedurally aligned with and meet the requirements of each country involved in the transaction. For this reason, interchange rates on cross-border transactions tend to be higher than those on domestic transactions.

What is the difference between credit and debit card interchange fees?

The difference between credit and debit card interchange fees comes down to the difference between credit and debit cards: Debit cards draw from a bank account and, therefore, available funds, whereas credit cards draw from a line of credit. Since drawing from a line of credit carries greater risk than drawing from existing funds, interchange rates on credit card transactions are typically higher than those for debit cards. Additionally, the Durbin Amendment, which is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, limits the amount of interchange fees that can be charged on debit cards issued by large banks — that is, any bank with greater than $10 billion in assets — to $0.21, plus 0.05% of the transaction. Card issuers are also permitted to charge an additional $0.01 for fraud detection.

Although unregulated banks and credit unions — essentially, any financial institution with less than $10 billion in assets — can charge higher interchange fees than the regulated debit rate, interchange rates on these transactions are still lower than those on credit card transactions. 

Client making a wireless payment on a card machine at a store

How often are interchange fees adjusted?

Interchange fees are routinely adjusted to reflect changes in interest rates and market conditions. Although different card issuers and card brands maintain their own schedules, many major issuers and brands adjust their interchange rates on a semi-annual basis, around April and October.

Are interchange fees regulated?

Yes, interchange fees are regulated, and those regulations vary from country to country. For the purposes of this guide, we’ll focus on interchange regulations within the United States — the primary one being the Durbin Amendment to the Dodd-Frank Act, which limits the amount of interchange fees that can be charged on debit cards issued by larger banks to $0.21, plus 0.05% of the transactions. Under the Durbin Amendment, card issuers are also allowed to charge an additional $0.01 for fraud detection.

Can merchants and billers avoid interchange fees?

The only way to completely avoid interchange fees is by not accepting credit cards and debit cards, which isn’t a viable option for most businesses given the popularity of card-based payments. Merchants and billers can, however, minimize interchange fees by encouraging card-present transactions, reducing chargebacks and fraud, properly categorizing transactions and working with knowledgeable payment processors.

Merchants and billers in certain industries can also enroll in various programs that major card brands offer. For example, Visa offers a lower rate to billers in the utility industry that do not charge a convenience fee to consumers. Visa also offers lower interchange rates on debt repayments for merchants and billers enrolled in their program. Merchants and billers can also lower their interchange fees by implementing security measures, such as address verification, on eCommerce transactions.

ACI Worldwide offers a robust interchange optimization program to help merchants and billers reduce interchange rates and pay the lowest possible interchange fees. We work closely with our clients and prospects and carefully review their card statements to help them optimize costs. To learn more, contact the payment specialists at ACI Worldwide today.