What are interchange fees and how do they work?

When you use a credit card or debit card to purchase something from a merchant, you may not realize everything that happens behind the scenes to complete the transaction. Processing fees, like interchange fees, help make transactions happen. 

Interchange fees are critical to the card payment system. They allow customers to safely and securely make purchases with credit or debit cards. And the ability to accept credit and debit cards can benefit retailers and consumers everywhere.

Read on to learn more about how interchange fees work and how they’re determined.

Key takeaways

• Merchants pay interchange fees, which cover the cost to process and authorize credit or debit card transactions. 
• While interchange fees occur as the result of a consumer’s credit or debit card transaction, consumers don’t pay the fees.
• Card payment networks like Visa®, Mastercard®, Discover® and American Express® determine the rates for interchange fees.
• Card issuers generally use the money from interchange fees toward things like fraud prevention and rewards for cardholders.

An interchange fee is one of the transaction fees a merchant pays a card issuer, card payment network and others for a credit or debit card transaction. For example, if you use your credit card to buy groceries at your local supermarket or online, the store will pay the interchange fee for that transaction.

The interchange fee covers the costs to process and authorize card payments and the related credit risk. Credit risk is the risk that a bank takes on when lending money—in this case via a credit card—recognizing that it may not be repaid for that loan. Interchange fees help cover that risk and generally consist of a set fee and a percentage of the transaction.

Merchants or businesses that accept credit and debit card payments pay the interchange fees for each card transaction. Consumers don’t pay interchange fees. However, merchants might add a surcharge for transactions under a certain amount, for example.

When you, the cardholder, pay for something with your credit or debit card, the following occurs:

1. The merchant’s bank requests an authorization from your card issuer. 
2. Your card issuer authorizes or declines the transaction. 
3. If your card issuer authorizes the transaction, they post the charge to your account. 
4. The merchant’s bank account is credited—minus fees that include the interchange fee.

The card payment network coordinates all of this, which can happen in a matter of seconds.

Card payment networks like Visa, Mastercard, Discover and American Express set the rates for interchange fees, typically once or twice a year. 

The rate is based on things like:

• Whether the purchase was made online or in person
• The amount of the transaction
• The type of card
• The size of the business
• The type of transaction

So the rate could vary for purchases made at a restaurant versus ones made through an airline, for example. And the rate is typically lower for point-of-sale transactions made in person than card-not-present transactions, like when you’re shopping online. That’s because the risk of fraud is higher.

Interchange fees cover the cost for processing and authorizing credit and debit card transactions. But card issuers typically also use the money from interchange fees to fund important things like fraud protection, increasing access to credit, and rewards and benefits for cardholders.

Consumers don’t pay interchange fees. Merchants who pay them for credit or debit card transactions might be able to negotiate the rate they pay with card payment networks. But the fees are essential for things like keeping card payments secure.

When you make purchases using your credit or debit card, merchants pay interchange fees. The fee goes to the card network, the card issuer and others. It plays an important role in funding things like fraud protection and rewards for consumers. 

Still curious about what happens behind the scenes when you use your credit card? Learn more about credit cards and how they work.