The Interchange Fee: What it is and Who Pays it

October 9, 2015

All payment card transactions include a charge called an interchange fee. Maybe you’ve heard the term but aren’t quite clear about what it is and why it is charged. Here is a basic explanation:

Q: What is interchange?
A: It is the process in which money involved in a credit or debit card transaction moves between the customer, the merchant, the financial institution that issued the card, and the card payment processor.

Q: What is an interchange fee?
A: It is the fee charged by the card-issuing bank to the payment processor (or "acquirer") for each transaction. The interchange fee is bundled into the total fees that merchants pay for transaction processing.

Q: How much is it?
A: The interchange amount is the same for all payment processors, but it varies according to the type of transaction and for other reasons, like whether the card was swiped or the number was manually keyed in by the merchant. It usually consists of a small flat charge plus a percentage of the value of the transaction.

Q: Who sets the fee?
A: Usually the credit card associations like Visa®, Discover®, or MasterCard®.

Q: Who pays it?
A: Initially, the payment processor (e.g. Vanco Payment Solutions).

Q: What does it pay for?
A: The cost to the card issuer of performing the transaction, providing security, and other services.

Q: How does it work?
A: Here’s the basic process:

  1. The customer presents a card for payment to the merchant.
  2. The card details are transmitted to the card issuer for authorization.
  3. The issuer approves the transaction.
  4. The issuer pays the money to the card processor, minus the interchange fee.
  5. The processor pays the merchant, minus a fee for the transaction. The transaction charge (sometimes called the "discount fee") recoups the interchange fee the processor already paid to the issuer, plus a processing fee.

The interchange fee usually accounts for the bulk of the transaction fee that a merchant pays a payment processor.

Contributed by Vanco Payment Solutions. Through the Michigan Chamber’s partnership with Vanco, you have the opportunity to accept credit, debit and other electronically based transactions at just 0.2% above cost. Email Vanco Payment Solutions or call them at 866-944-0055 to learn more.