Search in Videos, Members, Events, Audio Files, Photos and Blogs Search
michael bedwell

michaelbedwell|United States

My Blog


Understanding Credit Card Interchange Fees

Feb 04, 2021

     (0 Rating)

Interchange, which is often an abbreviation of “interchange reimbursement fees,” means a set of categories used for determining rates for transactions for individual cards. There are eligibility requirements in each category as well as an associated rate. 

What Are Interchange Fees?

These are fees that are paid to the issuing bank of the cardholder, at any time that a purchase is done with the help of a debit or a credit card. Such kinds of fees get subtracted from the whole purchase amount and reflect the transaction processing costs, as well as the risk level related to a specific type of transaction.  

At anytime that there is processing of a debit or credit card transaction, there is transfer of funds to the acquiring bank (referred to as the merchant bank) from the issuing bank. The process is facilitated by MasterCard, Visa and other card associations. Due to the service that they render, a fee is collected by associations from the acquiring bank. This is referred to as an “Interchange Fee”. 

The interchange fee generally includes a percentage of the entire transaction, along with any fixed amount. While the fees are assessed and determined by the card associations, these are paid to the bank that is issuing the card. A separate fee, referred to as the network fee, is collected instead by the card associations - although it is not regarded as a portion of the interchange. Generally, the network fee happens to be much smaller – which averages anywhere about 0.05%.

How Are Interchange Fees Changing In 2021?

Generally, interchange fee schedules are updated by MasterCard and Visa for two times every year – once in April and then again in October. The updates for such fee schedules generally include increasing a few rates whereas reducing others. In October 2020, Visa was scheduled for the introduction of the most significant alterations to its own interchange fees. As a consequence of the ongoing COVID-19 pandemic, however, such changes were postponed by Visa until April 2021. MasterCard, similarly, has postponed any update to the fee schedule until sometime in 2021.

These changes were postponed due to the fact that the fee schedule changes proposed would have reduced various retail interchange rates. These would also have raised rates a lot for most of the Ecommerce transactions. In the last few years, online credit card fraud has turned into a growing issue. The higher levels of risks that the issuing banks took on were reflected by the higher rates proposed. 

MasterCard and Visa are also attempting to encourage merchants to make use of tokenization measures, for counteracting such kind of fraud. Lower rates for transactions would have been included in the rates proposed. 

Interchange Rates – How are these affected by Transactional Factors?

The real interchange rates for credit cards for specific transactions happen to be based on different factors, which typically correlate to the risk level that are assumed by the issuing bank for the approval of the same. Know about some of the most vital factors that have an impact on the interchange rate of your transaction:

Debit Vs Credit Cards

Generally, the interchange rates for credit cards happen to be 6 times more than for debit cards. Transactions for debit cards are significantly safer and easier to approve. As funds directly come from the linked bank account of the customer, approval to transaction is an easy confirmation process – given that there is enough money in the account for covering the transaction costs. 

Credit card transactions, on the other hand, need card-issuing banks to have credits extended to customers. Then, the banks themselves cover the transaction costs. The customer happens to be person responsible to pay back the transaction cost to the bank in the future. Credit card transactions, in most cases, would be approved generally as long as these do not surpass the credit limit of the credit card account. But with fraudulent activities related to credit cards becoming increasingly common, additional security measures are now being taken by lots of banks for stopping possibly fraudulent transactions, which can make the approval process even more complex. 

Transaction Category

Interchange fees are broken down further by Credit card associations as per business categories, such as general merchandise, gas stations, restaurants etc. It can be good to be aware of the underlying interchange fees that are related to the category of your business. This is, sadly, a factor that can affect your interchange rates; but you cannot control it. Or you might have very little control on it. 

Rewards Cards

In the last few years, rewards cards have been offered by issuing banks. These cards come with various advantages – such as cash back on purchases or frequent flier miles. You are the one who would have to pay for all such perks. 

In case your customer prefers to pay with the help of such a card, your interchange fees can be expected to go up even more. The usage of these cards can especially affect your processing costs in case you happen to be on a tiered pricing package. In such plans, these types of transactions are often downgraded to nonqualified. The rates for such transactions are often 2 – 3 times more than in case of what happens for qualified transactions.

Card Owner

There are even separate rate categories of Credit card associations. These differ on the basis of whether or not the owner of the card is a government agency, a corporation, a business or an individual consumer. Differences in such rates are based mostly on the capacity of the card owner to repay the purchase cost. You might understand that purchases made by some private business or government agency are actually fraught with less risk as compared to those of regular customers. The interchange fees will be the lowest in this way. 

Credit Card Brand

Interchange fees tend to vary according to the credit card company that you go for. One card agency might be cheaper as compared to another. It is important to compare various agencies in order to choose a more affordable one for your needs.