Interchange fees are paid by merchant acquirers to payment card issuers every time one of their merchants processes a card payment transaction. They are separate from processing fees, cash-advance fees and merchant fees, and from the fees issuers charge their cardholders (such as balance transfer fees and foreign transaction fees).
Examples of interchange fees
Interchange rates are set to reflect the issuer’s risk and costs in facilitating a transaction. They are generally influenced by two main factors: product type and the security of the transaction.
Debit cards typically have low interchange costs. They also tend to be set at a flat charge rather than a percentage because debit-card-issuing banks can check if the customer has funds available before authorising a transaction. They can also ring-fence funds immediately to stop a customer from spending money they don’t have.
Credit-card charges tend to be higher and set at a percentage rather than a flat fee because the issuer is lending the customer money and taking more of a risk. In addition, credit interchange costs may vary according to the type of credit card used – for example, consumer versus business.
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. Interchange fee regulation can also influence interchange rates – although its impact can vary widely between one jurisdiction and another.
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 cash-advance fees
When a customer withdraws cash (or a cash equivalent such as foreign currency), the burden of risk sits with the merchant because the merchant has to assume all the risk of keeping cash on their premises. They also have to deal with the practicalities of transferring it to the customer. In this scenario, therefore, the issuer pays the acquirer cash-advance fees.
Even though the flow of funds is reversed, the principle behind cash-advance fees remains the same. In other words, cash-advance fees are still set on the basis of product type (such as debit or credit card) and risk.
For example, ATM transactions are charged at a lower rate than manual cash advances, due to ATMs’ high security and low cost (they are essentially safe and unattended acceptance terminals combined).
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 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 and GDPR. They may also help their merchants with fraud prevention and dispute management (avoiding and representing chargebacks).