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What Are Interchange Fees and How Are They Calculated?

Boaz Gam

Boaz Gam

CEO

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25.05.2022
5 min

Interchange Fees: Definition, Charge Limits, and More

Article content
  1. Interchange Fees Definition
  2. What Affects Interchange Rates?
  3. Transactional Factors Affecting Interchange Fees
  4. Interchange Fee Regulations
  5. How Can Payneteasy Help?

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 to the issuing bank to cover the following aspects:

  • 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 merchant has to pay. Other charges usually include assessment fees and acquirer markup.

What Affects Interchange Rates?

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

As of the first quarter of 2022, the average credit card interchange rates globally range from 1.15% to 3.25%.

Transactional Factors Affecting Interchange Fees

Interchange Fees: Definition, Charge Limits, and More

There is a variety of factors that can influence the amount of interchange fees a merchant would be paying, 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 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 receive 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 can’t be influenced, like your MCC, you have some control over the others. For example, you can encourage more in-store sales than online transactions. However, reducing your interchange fees doesn’t guarantee increased profits, as limiting your consumers’ options could deter them from purchasing from your business.

Interchange Fee Regulations

Interchange Fees: Definition, Charge Limits, and More

In the past, the process of interchange fee calculation was not very transparent. What’s more, large companies 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 card schemes were the most vulnerable, as merchants couldn’t deny their clients the use of the most widely accepted payment methods.

However, with time the interchange rates became 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 have 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.

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, while in Mexico, they mainly depend on the industry and sometimes are 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%

How Can Payneteasy Help?

Interchange Fees: Definition, Charge Limits, and More

Tracking the fluctuating interchange rates and updating regulations can be overwhelming when you have to take care of other business processes as well. Fortunately, Payneteasy can do all the hard work for you!

We are a leading payment platform provider offering custom solutions to banks, PSPs, financial institutions, and other organizations. 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 rest assured you’ll be getting all the technical support you need.

Reach out now with the details of your project for more information!

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