Interchange Fee

The interchange rate is a fee for merchants for every credit and debit card transaction. Payment card issuing companies set these rates as compensation for assuming the credit risk and handling charges involved in such transactions. Interchange rates are established by financial companies and are subject to periodic revisions. They vary depending on the card network used and are typically calculated as a percentage of the transaction amount, a flat fee, or a combination of both. The specific transaction type also influences the rate, with supermarket purchases often incurring lower rates than airline transactions.

Fees are crucial to banks’ and financial service companies’ revenue streams. These fees encompass various charges, including administration and account fees, which can be applied to clients and non-clients. Moreover, some financial institutions levy interchange or swipe fees on merchants to process credit or debit card purchases.

The amount of the interchange fee is determined by the interchange rate and can be a flat fee, a percentage of the transaction amount, or a combination of both. The rate is influenced by factors such as the type of merchant and the specific transaction being conducted. Additionally, the type of card used also affects the interchange rate, resulting in different rates for debit, credit, and prepaid cards. The money collected from the merchant is divided between the merchant services company (also known as the payment processor) and the customer’s card issuer.

The calculation of the interchange rate considers various factors, including authorization costs, losses due to fraud and credit issues, and the average cost of funds for banks. In the case of credit card transactions, this rate is also referred to as the issuer’s reimbursement fee. Typically, the fee is paid by the merchant bank that accepts the transaction to the bank that issued the card, and eventually, the cost is passed on to the cardholder.