What are interchange fees?
An interchange fee is paid by a merchant acquirer to the payment-card issuer every time one of their merchants processes a card payment transaction. It is separate from a processing fee, cash-advance fee, and merchant fee. It is also separate from the fee an issuer charges their cardholder, for example, balance transfer fee and foreign transaction fee.
Examples of interchange fees
The interchange rate is set to reflect the issuer’s risk and costs in facilitating a transaction. It is generally influenced by two main factors: type of product and security of the transaction.
A debit card typically has a low interchange cost. It also tends to be set at a flat charge rather than a percentage. This is because a debit card-issuing bank can check if a customer has funds available before authorizing a transaction. The bank can also ring-fence those funds immediately to stop a customer from spending money they don’t have.
A credit card charge tends to be higher and is set at a percentage rather than a flat fee. This is because the issuer is lending money to the customer and hence taking more of a risk. It’s also worth noting that credit interchange costs may vary according to the type of credit card used, for example, consumer versus business.
The interchange cost also reflects the security of a transaction. For example, a face-to-face transaction fee tends to be lower than a transaction fee for e-commerce. Interchange fee regulation can also influence the interchange rate, with its impact varying widely between one jurisdiction and another.
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Interchange fee vs processing fee
An interchange fee is paid by the acquirer to the issuer. A processing fee is paid by the acquirer and issuer to the payment processor. It is charged on a transaction processed through the network, regardless of its type.
For example, if a merchant processes a transaction and then refunds it, the issuer also refunds the interchange fee to the acquirer. By contrast, both the purchase transaction and the refund transaction incur processing fees.
A processing fee tends to be set at a flat rate for all card types. This is because a processor does not take a risk by processing the transaction. The risk lies with the acquirer and the issuer. The processor simply provides the facilities for the acquirer and issuer to communicate with each other.
Interchange fee vs cash-advance fee
When a customer withdraws cash or cash equivalent such as foreign currency, the risk is flipped. 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 cash-advance fees to the acquirer.
Even though the flow of funds is reversed, the principle remains the same. In other words, a cash-advance fee is still set on the basis of product type, that is, debit or credit card, and risk.
For example, an ATM transaction is charged at a lower rate than a manual cash advance. This is because an ATMs has very high security and relatively low costs, being essentially a hybrid of a safe and unattended acceptance terminal.
Interchange fee vs merchant fee
A merchant fee includes an interchange fee and also usually includes other fees. Essentially, a merchant fee reflects the work its acquirer or merchant service provider (MSP) do on its behalf. It may also reflect the cost of any equipment the acquirer or MSP provide, for example, a card reader.
For example, an acquirer and an MSP often help a merchant with security. In particular, they make sure that their merchant stays in compliance with all relevant regulations and laws such as PCI. They may also help their merchant with fraud prevention and dispute management, that is, avoiding and representing chargebacks.
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