What Are Interchange Fees and How Are They Calculated?

As a merchant, you probably know that you pay interchange fees after every credit and debit card transaction. While these charges typically come as a part of your business’s card processing fees, it’s still critical to understand what exactly they are to ensure you’re dealing with fair pricing. Read ahead to find out the definition of interchange fees and learn how they are calculated.

Interchange Fees Definition

Interchange fees are transaction charges that a merchant's bank account must cover every time a consumer uses a credit or debit card to purchase something from their store.

These fees are paid by the acquirer to the issuing bank during settlement to cover the following aspects:

• Customer service-related expenses
• Handling costs
• Fraud and bad debt costs
• Risks involved in transaction approval

Interchange fees make up the biggest share of the total credit card processing commission a business has to pay. Other charges usually include assessment fees and acquirer markup.

What Affects Interchange Rates?

An interchange rate is determined separately by every card scheme. It is non-negotiable, yet it does change over time. For instance, Visa and Mastercard update their rates in April and October every year. Other industry giants, such as American Express and Discover, choose not to publish interchange rates online, as they work differently from other networks.

Transactional Factors Affecting Credit Card Fees

There is a variety of factors that can influence the amount of money a business may get to end up paying in interchange fees, aside from the card scheme, including:

Transaction Type

POS (point-of-sale) transactions typically have lower interchange fees than CNP (card-not-present) transactions. This is due to the fact that the risk of fraud is significantly lower when the customer’s card is accepted physically rather than online.

Payment Method

Note that the use of credit and deferred debit cards results in higher interchange fees than immediate debit and prepaid cards. Yet again, the risk level plays a role, with the former payment methods considered to be less secure than the latter.

Merchant Category Code (MCC)

The MCC also has the power to affect the interchange rate. For instance, in the US and Australia, Mastercard and Visa set lower rates for organizations, such as travel agents, streaming services, charities, and utilities.

Transaction Regionality

Cross-border transactions typically get higher interchange fees compared to their domestic counterparts, in which the issuing bank is located in the same country as the merchant.

Consumer Vs. Commercial

Commercial cards usually exèerience higher interchange rates than those issued to individuals.

While some of the factors mentioned above don’t get to be influenced, like your MCC, you have some control over the others. For example, you can encourage your customers to make more in-store sales than online transactions.

However, reducing your fees does not guarantee increased profits from product sales, as limiting your consumers’ options may make them feel discouraged about purchasing from your business.

Regulatory Overview Throughout the Years

Over the past years, the process of interchange fee calculation has not always been transparent or fair. What’s more, large businesses with high transaction volumes had the option to negotiate lower fees, while smaller businesses still had to pay the full amount.

The markets that were dominated by big international credit card schemes were the most vulnerable, as businesses couldn’t deny their clients the use of the most widely accepted payment methods for purchasing products.

However, in recent years, much has changed, and the rates have become more standardized. There were stricter rules introduced, fee caps set, and the overall transparency of these charges increased. This is related to the release of such regulations as:

• The Durbin Amendment (US) - This amendment that came into force in 2010 is a fee cap applicable to debit and prepaid card transactions and depends on the size of the issuing bank’s assets. If the issuer possesses assets of $10 billion or more, its debit and prepaid cards will need to pay regulated rates of 0.05% + $0.21 or 0.05% + $0.22, depending on the fraud prevention policies.
• The European Interchange Fee Regulation (EEA) - This interchange fee regulation came into force in 2015 and led to increased control over the rates. This made EEA’s fee cap one of the lowest in the world.

The introduction of these regulations has created a much fairer system for credit card charges compared to the previously accepted practices.

International Standards: Domestic Vs. Regional Charges

As you probably know, businesses in different countries bear varying credit card transaction costs. Here’s a breakdown of the interchange fee caps across different areas:

• US: Credit - unregulated; Debit - 0.22 USD + 0.05% (applies to regulated banks only)
• EEA: Credit - 0.3%; Debit - 0.2%
• Malaysia: Credit -0.675%; Debit - 0.21% or 0.01% + 0.70 MYR (depending on what’s lower)
• Mexico: Credit - 1.53%; Debit - 1.15%
• Australia: Credit - 0.88%; Debit - 0.22% or 0.165 AUD

In the US and EEA, fee caps only apply to consumer cards. In comparison, in Mexico, they mainly depend on the industry and may sometimes be negotiable.

Interchange fees for consumer cards in all EEA regions are capped, making it a place of choice for many businesses to set up an entity dealing with cross-border transactions. The regionality fee caps are as follows:

• Domestic: Debit - 0.20%; Credit - 0.30%
• Intra-regional: Debit - 0.20%; Credit - 0.30%
• Interregional card-present: Debit - 0.20%; Credit - 0.30%
• Interregional card-not-present: Debit - 1.15%; Credit - 1.50%

While many businesses advocate for standardized charges to simplify cross-border transactions and financial management, such factors as regulatory differences, distinct economic landscapes, and varying competition dynamics across jurisdictions make this goal unachievable in the foreseeable future.

The Impact of Interchange Rates on Small Businesses Vs. Big Corporations

What’s more, when talking about interchange rates, it is also crucial to mention their impact on small businesses Vs. bigger companies.

In comparison to large corporations, small businesses often lack money to spare for additional expenses, which makes these rates a much more substantial burden on their financial stability. As a result, interchange rates may come hand-in-hand with the following challenges:

• Increased operating costs
• Reduced profit margins from product or service sales
• Increased pricing to compensate for the fee amount
• Reluctance to accept credit cards, which leads to limited payment options for customers
• Complex budgeting and additional administrative work to ensure compliance
• Increasing business debt

To address these issues, businesses can consider the following strategies:

• Getting into negotiations with payment processors about much more favorable terms
• Seeking processors that offer transparent pricing models compared to others to manage finances better
• Investing in financial systems that help filter transactions and optimize fee management
• Offering clients a mix of alternative payment methods in addition to credit cards

Some SMBs may also choose to join business associations to advocate for their rights for fair and transparent credit card transaction rates at the regulatory level.

How Can Payneteasy Help Your Business?

Tracking the fluctuating rates and updating regulations can get overwhelming when you have to take care of product sales and other business processes of critical importance. Fortunately, Payneteasy can get all the hard work done for you!

We are a leading payment platform provider offering the best custom solutions to banks, PSPs, financial institutions, and other businesses. One of our main focal points is transparency, so you will have all the information regarding the charges you have to cover. Besides, when opting for our services, you can also rest assured you’ll be getting all the technical support you need.

Reach out now with the details about your business to get started. Our team is happy to help you explore the products and services we offer and find the solution that matches your needs best!