Merchant Statement Education

Interchange Fees Explained

Interchange fees make up a large portion of credit card processing costs, but most businesses are never clearly shown how they work, how transactions qualify, or when avoidable costs may be occurring.

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Customer Pays

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Transaction Is Processed

Interchange Category Is Assigned

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Issuing Bank Receives the Fee

What Are Interchange Fees?

Interchange fees are the wholesale transaction fees paid to the bank that issued the customer’s credit or debit card.

Visa and Mastercard publish interchange categories and rates. When a transaction is processed, it is assigned to a category based on the card type, transaction method, merchant type, information submitted with the sale, and other qualification requirements.

Important: Interchange is not the same thing as your processor’s markup. Interchange is one part of the total amount shown on a merchant processing statement.

How Interchange Works

A single credit card sale involves several different parties.

The Customer Pays

A customer uses a credit or debit card to make a purchase from your business.

The Transaction Is Evaluated

The transaction is evaluated based on the card, how it was accepted, the merchant category, and the data submitted.

A Category Is Assigned

The transaction settles into an interchange category with its own percentage rate and, in many cases, a per-transaction charge.

What Determines the Interchange Rate?

Two transactions for the same dollar amount can settle at different interchange rates. Factors that can affect the category include:

Credit card versus debit card
Consumer, business, corporate, or purchasing card
Basic card versus rewards card
Card-present versus card-not-present transaction
In-person, online, keyed, recurring, or mobile payment
The merchant’s industry and merchant category code
Whether required transaction data was submitted
How quickly the transaction was authorized and settled
Whether Level II or Level III data was included

Simple Example

An interchange category may include both a percentage and a fixed transaction charge.

Percentage of the sale + transaction fee

The actual amount depends on the specific category assigned to the transaction. This is why reviewing only an average processing rate does not always reveal what is happening underneath.

Common Interchange Categories

Merchant statements may show many different interchange names, abbreviations, and qualification levels.

Consumer Credit Consumer Debit Rewards Cards Business Cards Corporate Cards Purchasing Cards Card Present Card Not Present E-Commerce Recurring Payments Level II Level III

A Category Name Does Not Tell the Whole Story

The important question is not only which interchange fees appear on the statement. It is also whether the transactions are settling into the correct categories based on the way the business accepts payments.

Can Interchange Fees Be Negotiated?

A merchant generally cannot negotiate the interchange schedules established by the card networks.

However, that does not mean every business is automatically paying the correct amount or qualifying transactions as efficiently as possible.

What Can Be Reviewed?

Whether transactions are qualifying correctly
Whether avoidable downgrades are occurring
Whether Level II or Level III data is being transmitted
Whether the merchant category code is appropriate
Whether transactions are being settled properly
Whether processor markups are being confused with interchange
Whether rates or fees have increased without being noticed

What Is an Interchange Downgrade?

A downgrade happens when a transaction does not meet the requirements for a more favorable interchange category and settles into a more expensive category.

Downgrades may be caused by missing information, incorrect transaction handling, settlement delays, configuration issues, or a payment system that is not submitting the available data correctly.

Repeated downgrades can quietly increase processing costs month after month. They may appear as normal interchange categories unless someone knows what to look for.

Frequently Asked Questions

What is an interchange fee?

An interchange fee is a wholesale transaction fee paid to the bank that issued the customer’s card. It is one component of the total credit card processing cost paid by a merchant.

Who receives interchange fees?

Interchange fees are generally paid to the financial institution that issued the customer’s credit or debit card.

Are interchange fees the processor’s profit?

No. Interchange and processor markup are separate components. A merchant statement may also include card-network fees, authorization charges, gateway fees, PCI fees, and other processor charges.

Can a business negotiate interchange rates?

Merchants generally cannot negotiate the interchange schedules set by the card networks. They can, however, review how transactions are qualifying and negotiate many processor-controlled rates and fees.

Why do interchange fees vary?

Interchange varies based on factors such as card type, transaction method, merchant category, transaction data, authorization, and settlement timing.

What is an interchange downgrade?

A downgrade occurs when a transaction fails to meet the requirements for a more favorable interchange category and settles at a more expensive rate.

How can Level II and Level III data help?

Qualifying commercial-card transactions may receive more favorable treatment when the required enhanced transaction information is submitted correctly. Eligibility depends on the card, transaction, payment system, and current network requirements.

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