Interchange fees are also known as interchange rates, interchange earnings or card association fees. They are levied for each transaction made with a payment card (credit/debit cards, prepaid cards, smart cards). The issuer (a bank) pays the acquirer (the company that processes the transactions) an “interchange fee” to cover costs and earn a margin.
Interchange fees and other card associations’ revenues and costs are defined in the card association’s agreement with its members, which is freely available to the public on their websites (MasterCard International Incorporated, Visa International Service Association). These fees usually range between 0.5% and 1.0%. The fee for each transaction will depend on factors such as:
- The type of card (credit, debit),
- Merchants’ sales volume and type of business (brick and mortar or e-commerce) and its geographical area,
- Transaction currency.
Interchange fees vary significantly from one card association to another (and sometimes between types of cards). For example in the US, the interchange fee for a debit card is typically significantly higher than that of a credit card (1.55% vs 0.95%). Some transactions are exempt from interchange fees (typically ATM cash withdrawals and payments at electric utilities). Interchange fees can be applied to purchase transactions, cash advances or balance transfers.
How do interchange fees impact merchants and their customers?
Merchants pay interchange fees to issuers for card transactions. The merchant’s bank (the acquirer) passes these costs to the merchant, who often tries to recover them by increasing prices – a practice known as “interchange fee escalation”. As a result, consumers also pay higher prices.
For example, consumers in the US have been paying higher prices since merchants passed on the fees they pay for accepting American Express credit cards to their customers – a practice known as “American Express Tax”. In Australia, merchants have also been passing on Visa and MasterCard interchange fees to their customers through so-called “service” or “checkout” fees.
Can merchants refuse to accept payment cards?
In some countries merchants can apply a surcharge to a card transaction if a consumer chooses to pay with a card. In others this is not allowed and merchant fees cannot be passed on to customers. Card associations and merchants need to agree on business rules and card acceptance fees before a merchant can start accepting cards. Merchants who refuse specific cards risk losing their right to accept them.
How do interchange fees impact consumers?
Interchange fees are an additional cost of paying with a credit or debit card for consumers. They are paid for by the merchant and ultimately passed on to all consumers through higher prices of goods and services, including those who pay with cash.
Interchange fees cost consumers in two ways:
- by increasing merchants’ prices for goods and services;
- and through the funding of rewards programs.
Merchants decide to include or not a rewards program in their offers, but providing them comes with an additional cost. Thus, free or cheap loans, travel insurance or car hire discounts offered as incentives to use a card come at a cost for consumers.