Interchange Fee Definition

An interchange fee is a fee that is charged by a card-issuing bank (the bank that issued the credit card or debit card) to a merchant's acquiring bank (the bank that provides the merchant with the ability to accept card payments) for each card transaction that takes place. The interchange fee is a fundamental component of the overall payment processing fee structure and is established by card networks such as Visa, Mastercard, Discover, or American Express.

When a customer makes a purchase using a credit card or debit card, the payment transaction involves multiple parties:

1. Cardholder: The customer who owns and uses the credit card or debit card.

2. Merchant: The business or seller that accepts card payments for goods or services.

3. Card-issuing Bank: The bank that issued the credit card or debit card to the cardholder.

4. Acquiring Bank: The bank that provides the merchant with a merchant account to accept card payments.

5. Card Network: The payment network (e.g., Visa, Mastercard) that facilitates the transaction between the issuing bank and the acquiring bank.

The interchange fee is paid by the acquiring bank to the card-issuing bank as compensation for the risk, costs, and administrative overhead involved in processing card transactions. The fee helps cover the card-issuing bank's expenses, including fraud protection, cardholder rewards programs, customer service, and infrastructure maintenance.

Interchange fees are not directly visible to consumers but are part of the costs that merchants pay to accept card payments. These fees can vary depending on factors such as the type of card (credit or debit), the type of transaction (e.g., in-person, online), the merchant's industry, and the card network's specific fee structure.

Interchange fees are set by the card networks and are subject to change over time. The fee amounts and rules are typically outlined in the network's interchange fee schedules and are applied uniformly to all card-accepting merchants.

For businesses, understanding interchange fees is essential for evaluating the costs associated with accepting card payments and for negotiating favorable payment processing agreements with acquiring banks or payment service providers.