Interchange is a fee paid between banks for the acceptance of card-based transactions. They are usually paid by the merchant’s payment processor (“acquirier”) to the cardholder’s bank (“issuer”). They are separate from merchant fees, processing fees, dispute charges and from the fees issuers charge their cardholders.
Examples of interchange fees
Interchange rates are set by the card schemes (such as Visa and Mastercard) within limits determined by the Reserve Bank of Australia. They help to cover the cost of facilitating electronic payments and cover some of the risks associated with issuing payment cards. Interchange rates are influenced by different products (such as premium cards) and the security of the transaction (an in-person payment vs an online one).
Debit cards typically have low interchange rates and can be set at a flat charge rather than a percentage because debit-card transactions are considered lower risk.
Credit-card interchange tends to be higher because the issuer is lending the customer money and taking more risk. Credit interchange rates also vary according to the type of credit card used – for example, premium credit cards have higher rates. Business & commercial debit and credit cards also usually attract higher rates of interchange.
Interchange costs also reflect the security of a transaction. For example, face-to-face transaction fees tend to be lower than transaction fees for e-commerce transactions. In Australia interchange is heavily regulated by the Reserve Bank who place limits on the amount of interchange that can be charged for different product types such as debit, credit and commercial cards. To help businesses understand what they will pay, Square charges a single rate across all card brands and types. This is sometimes called a ‘simple’ or ‘blended’ rate and means you’ll pay the same regardless of which card types you process.
Interchange fees vs processing fees
Interchange fees are paid by acquirers to issuers. Processing fees are paid by acquirers and issuers to payment processors. They are charged on all transactions processed through the network regardless of their type.
For example, if a merchant processed a transaction then refunded it, the issuer would also refund the interchange fee to the acquirer. By contrast, both the purchase transaction and the refund transaction would incur processing fees.
Processing fees tend to be set at a flat rate for all card types because processors are not taking a risk by processing the transactions. The risk lies with the acquirer and issuer – the processor is simply facilitating communication between those two parties.
Interchange fees vs merchant fees
Merchant fees will include interchange fees, but will usually include other fees, too. Essentially, merchant fees reflect the work their acquirer and/or merchant service provider (MSP) does on their behalf. They may also reflect the costs of any equipment the acquirer/MSP provides (such as credit card readers).
For example, acquirers and MSPs will often give merchants help with security. In particular, they will make sure their merchants stay in compliance with all relevant regulations and laws such as PCI. They may also help their merchants with fraud prevention and dispute management (avoiding and representing chargebacks).
This article is for informational purposes only and does not constitute legal, employment, tax or professional advice. For specific advice applicable to your business, please contact a professional.