What is an interchange fee?

Every time a retailer processes a credit card or debit card payment, the merchant pays an interchange fee. This fee, often called a “swipe fee,” is designed to cover the costs associated with accepting, processing and authorizing card transactions.

In most cases, an interchange fee will include a small fixed fee plus a percentage of the total sale. These fees and percentages can vary based on the type of card used by the consumer (Visa vs. Mastercard, for example), the merchant category code associated with the business making the transaction and the credit card processing service that keeps the whole system running.

Small-business owners who want to lower the cost of interchange fees may want to compare merchant service providers and look for a pricing model that could save them money over time.

How do interchange fees work?

When a consumer makes a purchase using a credit card or debit card, a number of things have to happen in a very short period of time — including requesting and receiving authorization, checking for fraud and processing the payment. The cost of this processing is covered by the interchange fee.

A small portion of the interchange fee goes toward the credit card processing service, and the rest goes to the bank or credit card company associated with the card that was used to make the purchase.

The amount charged for interchange fees has recently come under scrutiny by regulators, who argue that credit card companies are making too much profit off these everyday transactions. However, it’s unlikely that interchange fees will go away any time soon.

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Interchange fee example

John has opened up a small restaurant offering fast food and takeout. At first, he only accepts cash payments — that way, he won’t have to deal with interchange fees. However, he quickly realizes that he is losing customers who prefer to pay by credit or debit. John signs up with a merchant service provider that offers credit card processing, and within a few months his turnover and profits have increased. Even though John is now paying interchange fees, he’s getting much more business — and many more satisfied customers.

What affects interchange fees?

The average interchange fee is between 1.5 percent and 3.5 percent of the total transaction. That said, the amount a merchant pays every time a customer swipes a card is determined by several factors.

Certain credit card issuers may charge slightly different interchange fee rates, for example, which is why some retailers choose to accept Visa or Mastercard but not American Express. In some cases, interchange fees are higher when a consumer makes a purchase online and lower when a consumer makes a purchase in a brick-and-mortar retailer.

Some retailers pay higher interchange fees than others, based on the merchant category code associated with the business — and many credit card processing services offer different pricing models that may save retailers money on interchange fees depending on the amount and variety of transactions processed.

The bottom line

Interchange fees help businesses cover the cost of quickly processing debit and credit card transactions. In most cases, interchange fees are a part of doing business. But if you are a small-business owner who wants to lower the amount of money you pay in interchange fees, look for a credit card processing service offering a pricing model that could reduce your total swipe fee costs.