What Is Interchange? A Small Business Guide to Credit Card Processing Fees
If you’ve ever looked at your merchant statement and wondered why a card transaction costs more than the amount printed on the receipt, interchange is a big part of the answer. Interchange is one of the fundamental costs built into card payments. It can account for a significant portion of what a business pays to accept credit and debit cards, but it isn’t the same thing as your payment processor’s markup. Understanding that distinction is important.
When you know what interchange is, what determines the rate, and which parts of your processing costs your provider actually controls, you can make a much more informed decision about your payment processing and identify where there may be opportunities to lower your overall costs. That’s exactly the kind of analysis Harlow Payments provides.
What Is an Interchange Fee?
An interchange fee is a fee associated with a card transaction that is generally paid by the merchant’s acquiring side to the bank that issued the customer’s card.
Here’s the simple version: Your customer pays with a card → the transaction moves through the payment network → the card-issuing bank receives interchange.
The interchange cost is ultimately reflected in the fees your business pays to accept that card.
The payment card networks establish interchange rates, which vary depending on the card, transaction, merchant, and other factors. Mastercard, for example, explains that interchange is one component of the overall merchant discount rate and that rates can depend on criteria such as merchant category, transaction timing, card product, and transaction details.
So when you see interchange on your merchant statement, it’s important to understand that this isn’t simply a fee your processor invented. It is part of the underlying economics of card acceptance.
Who Gets the Interchange Fee?
One of the easiest ways to understand interchange is to look at the different players involved in a card transaction. There are generally four key parties:
- The cardholder: Your customer who uses a credit or debit card.
- The merchant: Your business, which accepts the card payment.
- The issuing bank: The financial institution that issued your customer’s card.
- The acquiring bank or processor: The financial institution and payment-processing company that enables your business to accept the transaction.
The card network (such as Visa or Mastercard) connects the participants and establishes network rules and interchange programs. When a customer makes a purchase, the acquiring side sends the transaction through the network to the issuing bank for authorization. When the transaction settles, interchange is paid to the issuing bank as part of the process.
For a small business owner, the important takeaway is this: Your total processing cost isn’t one single fee. Interchange is one component. Your processor’s markup and other fees can make up additional parts of the bill.
What Determines an Interchange Rate?
There isn’t one universal interchange rate that applies to every card transaction. The rate can vary based on several characteristics of the transaction.
- The Type of Card
Credit, debit, prepaid, business, premium, and rewards cards can fall into different interchange categories. Rewards and premium cards, for example, can have different interchange costs from standard cards. This is one reason your customer mix matters when evaluating your processing expenses.
- How the Transaction Is Accepted
A card-present transaction at a physical point of sale is different from a card-not-present transaction, such as an online or manually entered payment. The way the payment is authenticated and the data submitted with the transaction can affect which interchange category applies.
- Your Business Category
Your business is assigned a Merchant Category Code (MCC) that identifies the type of business you operate. Interchange programs can vary based on merchant category, which means two businesses processing the same dollar amount aren’t necessarily going to have identical interchange costs.
- The Card Network
Different card networks have their own interchange programs and qualification criteria. Visa and Mastercard, for example, publish their own interchange schedules and requirements.
- Transaction Details
Details such as how quickly a transaction is submitted for settlement, whether required data is included, and how the card is processed can influence which interchange category applies. Mastercard specifically notes that its qualification criteria can include merchant category, time between authorization and clearing, transaction data, card product, and other factors.
This is why reviewing your actual transaction activity can be more useful than looking at a single advertised processing rate.
Why Are Rewards Cards More Expensive?
This is a common question from small business owners. Rewards cards can carry higher interchange costs because the economics of card programs can help support benefits offered to cardholders, including rewards. That doesn’t mean every rewards card has the same cost. Different card products and transaction circumstances can fall into different interchange categories. But if a large percentage of your customers pay with rewards or premium cards, that transaction mix can impact your overall processing expense. This is particularly important when comparing payment processors. A provider may advertise a low rate for certain transactions, but what matters is how the pricing performs across your actual customer card mix. At Harlow Payments, we don’t believe you should have to accept unnecessarily high processing costs simply because your customers use rewards cards. We work to offer the lowest rates possible, even on rewards cards.
Can You Negotiate Interchange?
Here’s an important distinction: You generally can’t negotiate the interchange rate itself with your payment processor. Interchange rates are established through the card networks’ interchange programs, and the applicable rate depends on the transaction and qualification criteria. But that doesn’t mean your entire processing bill is fixed. Your processor may add its own markup on top of the underlying costs associated with processing the transaction. Depending on your agreement, that can include percentage markups, per-transaction fees, monthly fees, and other charges. That’s where reviewing your processing agreement and merchant statement becomes especially valuable. You may not be able to change the underlying interchange category, but you may be able to reduce the amount you’re paying around it.
Interchange vs. Processor Markup
This is one of the most important distinctions for any business owner to understand.
Imagine your merchant statement contains $2,000 in total processing costs. That $2,000 isn’t necessarily all interchange. Your total may include:
- Interchange
- Card network assessments
- Processor markup
- Per-transaction fees
- Monthly account fees
- Gateway or technology fees
- Other service charges
The first group represents costs associated with the underlying card transaction and networks. The second group represents costs associated with your particular processing arrangement. Understanding the difference helps you identify where a processor may have room to offer more competitive pricing. That’s where Harlow Payments focuses its attention.
How Interchange Affects Your Bottom Line
Interchange is charged across card transactions, so even relatively small differences can add up as your sales volume grows. Consider a business processing $50,000 in card payments every month. A small difference in overall processing costs can translate into hundreds or thousands of dollars over the course of a year. And that’s why looking at your processing costs as a whole matters. You don’t necessarily need to eliminate interchange. That’s not realistic. Instead, the goal is to understand the unavoidable costs, identify the costs that may be negotiable, and make sure you’re not paying more processor markup than necessary.
Can Businesses Lower Their Interchange Costs?
There are circumstances where transaction practices can help a payment qualify for a more favorable interchange category. For example, businesses can pay attention to:
- Using secure payment technology.
- Properly capturing transaction information.
- Settling transactions promptly.
- Minimizing unnecessary manual entry.
- Using appropriate payment methods for the transaction type.
- Keeping customer and transaction data accurate.
The exact requirements vary by card network and interchange program, so there isn’t one universal checklist that guarantees a lower interchange category.
Mastercard, for example, publishes qualification criteria for its interchange programs and notes that merchants and acquirers should meet the applicable requirements for the rates for which transactions qualify.
But even when you optimize how transactions are processed, there is another important question: Are you paying a competitive processor markup on top of those underlying costs? That’s something worth reviewing.
What About Debit Card Interchange?
Debit card interchange is subject to different rules in the United States. Under Regulation II, certain debit card issuers are subject to an interchange fee standard. For covered issuers, the current base standard is 21 cents plus 5 basis points of the transaction value, with a possible additional 1-cent fraud-prevention adjustment for eligible issuers. The regulation does not apply to every debit card issuer; certain smaller issuers are exempt. This is an important example of why you shouldn’t assume every card transaction follows the same pricing rules. Your merchant statement can contain a mixture of transaction types, card products, and applicable costs.
Why Interchange Matters When Comparing Processors
Suppose two payment processors give you different quotes. Processor A says: “Our rate is 2.5%,” and processor B says: “We charge interchange plus a fixed markup.” Which one is cheaper?
You can’t necessarily answer that from the advertised rates alone. You need to know how the pricing applies to your actual transaction mix and what additional fees are included. A business processing mostly standard card-present transactions may have a very different cost profile from an online business processing a large percentage of rewards and card-not-present transactions. That’s why Harlow Payments takes a statement-first approach. Rather than asking you to make a decision based on a generic rate, we look at what you’re actually paying today.
How Harlow Payments Can Help
Interchange may be a necessary part of accepting card payments, but that doesn’t mean every dollar on your processing statement is out of your control. At Harlow Payments, we review your current merchant statement to separate the different pieces of your processing costs. We look at your:
- Current processing rates
- Transaction fees
- Processor markups
- Transaction mix
- Card types
- Recurring charges
- Overall effective processing rate
Then we look for opportunities to reduce the costs that may be negotiable. The goal isn’t to promise that interchange will disappear. It’s to make sure you’re not paying more than necessary to process the payments your customers are already making. And because your transaction mix matters, we work to offer the lowest rates possible.
Understand Interchange. Understand Your Processing Costs.
Interchange can seem complicated, but the basic idea is straightforward: it’s one of the underlying costs associated with moving card payments from your customer to your business. What matters for your business is understanding how interchange fits into your total processing cost.
If you haven’t reviewed your processing costs recently, send Harlow Payments your latest merchant statement. We’ll review your current rates and fees, break down where your processing dollars are going, and identify potential opportunities to lower your costs.
Transparent pricing starts with understanding what you’re paying.