What Are Interchange Fees and How Are They Calculated?

The interchange fee is the fee that an issuer receives for authorizing, clearing and settling a purchase made with an eligible debit card. It also covers other services provided to the merchant by the issuer, such as fraud prevention. Interchange fees are typically expressed as a percentage of the transaction value in cents. Interchange fees rates vary between merchants based on several factors, including the type of business.
Interchange fees are paid by the merchant's financial institution to an acquiring bank, which processes payments for merchants. The interchange fee is passed along to all parties participating in the transaction – cardholders, issuing banks, acquirers and merchants – who all pay a share of the fee based on individual payment rules. Exact payment shares are determined by card type, issuer and merchant category code. Interchange fees are based on the total value of the transaction, which means merchants pay more when customers use premium cards for larger purchases.
Issuers receive interchange fees when they issue debit cards to cardholders. As a result, issuers have an incentive to increase the number of debit cards they issue. Interchange fees also help support rewards programs, because issuers can use interchange fees to offset some of their operating costs.
Processing networks (also known as associations) set the rules that govern these payments. According to these rules, financial institutions are required to charge merchants an interchange fee for each card transaction they process. The interchange fee, together with assessments and other fees, are the primary sources of revenue for associations.
Interchange Fees: How They Work
Merchants typically pay an acquiring bank that processes debit card transactions on their behalf at least one cent for each transaction. That's because debit cardholders tend to be more price-sensitive than credit cardholders – merchants have an incentive to try and avoid credit card fee increases that would result from a rate increase.
Merchants typically pay more per transaction on premium cards, such as rewards cards, because they cost issuers more to process. Moreover, those issuers may pass some of those costs along by increasing the interchange fee paid by merchants accepting those cards.
Merchants also pay other fees to financial institutions for debit transactions, such as processing fees and assessments. Those fees may be based on the total dollar amount of the transaction or on a fixed dollar amount per transaction, depending on your merchant agreement. Portions of these other fees are used to support rewards programs.
Interchange fees on debit card transactions help financial institutions cover the cost of providing customers with access to their money through debit cards, including costs involved in operating customer accounts and risk management expenses.
Interchange fee revenue also helps support credit unions' commitment to low prices by helping finance the high-tech equipment, sophisticated software systems and knowledgeable employees needed to process the billions of debit card transactions that take place every year. Interchange fees also support innovations in mobile and other payment systems, including faster check processing, more secure online banking services and easier-to-use prepaid cards.