Interchange Fee
IntermediateAn interchange fee is a fee paid by a merchant's bank to a cardholder's bank each time a card payment is made, set by the card network and usually calculated as a percentage of the transaction plus a small fixed amount.
When a customer pays by card, several parties are involved: the customer, the merchant, the customer's bank that issued the card, the merchant's bank that processes card payments, and the card network, such as Visa or Mastercard. The interchange fee is paid by the merchant's bank to the card issuer.
The merchant's bank passes this cost on to the merchant, as part of the total fee the merchant pays for accepting cards. This total is often called the merchant service charge or merchant discount rate.
For example, on a 100 purchase with an interchange fee of 1.5%, the card issuer receives 1.50. The merchant pays this plus other processing and network fees.
Interchange fees help pay for card issuers' costs, fraud protection, interest-free periods and rewards programmes such as cashback and air miles. However, merchants often pass the costs on to all customers through higher prices. Because of concerns about high fees, several regions have capped interchange fees. For example, the European Union limits them to 0.2% for consumer debit cards and 0.3% for consumer credit cards.
For worked examples and full lessons, visit notesbysara.org.