Interchange fee Definition

What is an interchange fee?

An interchange fee is the fee charged by banks to the merchant who processes a credit card or debit card payment. The purpose of the fee is to cover the costs associated with accepting, processing and authorizing card transactions. These fees average between 20 cents and 65 cents, depending on the type of card used and whether the transaction is covered by the interchange fee standard.

Deeper definition

When a consumer pays for a purchase using a credit card or debit card, a number of things happen in a very short space of time, including requesting and receiving authorization and processing the payment. The cost of this processing is covered by the interchange fee.

Although the structure of the fee, as incurred by the merchant, is based on a small fixed fee plus a percentage of the sale, the interchange fee incorporates numerous individual fees incurred as the transaction is processed.

On average, the value of the interchange fee is between 1 percent and 3 percent of the transaction. The size of the fee is affected by several factors. First, credit transactions generate a higher fee than debit transactions. And online processing is cheaper than off-line processing

The amount charged for interchange fees has come under scrutiny by regulators who have forced credit card companies to reduce the fees because of the belief that their profits were excessive.

Interchange fees are higher on credit cards than on debit cards because credit card transactions are better protected against fraud than debit card transactions.

Interchange fee example

John has opened up a small restaurant offering fast food and take-out. Initially, he refuses to accept credit cards and debit cards because his margins are tight and he feels he cannot afford the interchange fees.

After some research, he realizes he is losing customers because they don’t carry cash and prefer to pay by card.

He signs up for credit card transactions with his bank, and within a few months he notices his turnover and profits have increased because he is getting more business, even though he is now paying interchange fees.