American consumers make more than 60% of their payments by credit or debit cards, and they spend significantly more than if they’re paying with cash. While that may seem like a boon for retail and ecommerce business owners, these spending habits ultimately come with a hidden cost.
Every time a customer uses a credit card or debit card, merchants pay what’s known as interchange fees or swipe fees, which don’t apply to cash payments. The exact amount is variable, factoring in the card brand (e.g., Visa, Mastercard, etc.) and whether the payment was made in store or online. If you run a business that relies on card payments, those fees can start to add up quickly.
Understanding how interchange fees work—and how each pricing model affects what you pay—can help you anticipate expenses and choose the setup that makes the most sense for your business. Let’s explore why these fees exist and how you’ll likely have to deal with them as a business owner.
Table of contents
What are interchange fees?
An interchange fee is a charge your bank pays to the customer’s bank each time a card purchase is made. These fees are set by the major card networks, such as Visa and Mastercard, and apply to every transaction processed through their systems.
Credit card companies set these fees and publish detailed rate sheets on their websites, which outline different rates depending on the type of card used (credit versus debit, premium versus standard) and the merchant category code (MCC) tied to your business. For most businesses, these companies charge rates that typically range from about 1% to 3% of each transaction.
For you as a business owner, that means the cost of accepting cards can vary widely depending on what you sell and how customers pay. For example, a local coffee shop may pay a lower rate on a debit card transaction than a luxury goods retailer pays when someone swipes an airline rewards credit card.
Interchange rates also shift based on regulations. In the US, the Durbin Amendment caps interchange fees for debit card transactions, but credit card fees have no such limit, which leaves merchants absorbing higher costs when customers choose those cards.
Why do interchange fees exist?
Every time a customer initiates a transaction, their card issuer takes on fraud and credit risk. Interchange fees are a way to cover the costs and risks involved. These fees also help cover operational expenses for banks that process transactions across the world every day.
Some payment providers, such as Shopify Payments, remove the complexity of interchange fees by charging businesses a bundled rate. This means business owners don’t need to worry about fluctuating costs and instead receive predictable payment fees.
Factors that affect interchange fees
- Card brand
- Transaction method
- Merchant category code (MCC)
- Payment processors
- Transaction volume
- International sales
By understanding how each of these factors might affect how much you have to pay on each customer transaction, you can better anticipate your costs, compare pricing models, and seek out lower interchange fees:
Card brand
Different card brands set their own interchange rates, which can vary significantly. For instance, Visa and Mastercard charge less than American Express. Premium rewards cards also often carry higher interchange rates because a portion of the fees subsidizes cashback or loyalty perks. Basic debit cards often carry lower fees.
Transaction method
How the transaction takes place, whether in store or online, has a major impact on interchange fees. In-store sales (i.e., card-present transactions) are lower risk and have lower interchange fees, while online purchases (i.e., card-not-present transactions) usually carry higher interchange fees because there might be greater risk involved for fraud or identity theft.
Merchant category code (MCC)
Each type of business has its own merchant category code (MCC), which signals its industry to the card networks. Not all industries receive equal treatment.
Businesses in low-risk categories—like grocery stores, where fraud is uncommon and purchase behavior is steady—tend to pay lower interchange fees. On the other hand, higher-risk industries, such as travel, face higher fees because of factors like frequent cancellations, chargebacks, or a greater chance of fraud. Your MCC signals these risk factors to the networks, which is why the same $100 sale could cost one merchant more in fees than another, depending on the industries they’re in.
Payment processors
While card networks (e.g., Visa or Mastercard) determine interchange rates, your payment processor determines how to pass these costs along to you. A card network sets the interchange rates and moves funds between banks, while a payment processor (e.g., Stripe or Square) handles the technical side of accepting payments and decides how those network fees are passed along to your business.
Some payment processors apply a flat fee plus a percentage, which means small purchases may carry disproportionately higher transaction fees overall compared to larger sales. For example, a $3 purchase could end up costing you almost as much in fees as a $30 order, simply because the company applies a flat fee to every transaction instead of taking a percentage.
Transaction volume
Larger merchants can often negotiate lower rates. If you are processing thousands or millions of card transactions, this makes you an attractive client for a payment processor, which may offer you custom pricing models or discounted merchant services to secure your business. Smaller companies often don’t have this opportunity.
For smaller merchants, the practical takeaway is to pay attention to your pricing model. If most of your sales are small-ticket items (say, under $10), a flat-fee-plus-percentage model can eat into your margins faster than if you sell larger items. In that case, it may be worth talking with your payment processor about alternative fee structures, or even considering a provider that offers plans tailored to businesses with many small transactions.
International sales
Cross-border transactions—or transactions across international lines—introduce other fees and adjustments. Different rules in different regions, such as the European Union, mean that you may face different interchange rates globally compared to the ones you face on domestic sales.
How interchange fees work
Every card transaction goes through a series of steps before money reaches the business owner’s account. This process involves multiple players, from the card issuer or card-issuing bank to the card networks, the payment processor, and finally to the acquiring bank. This is what the steps normally look like:
1. A customer makes a purchase. A customer buys something from you either online or in person using a credit card or debit card.
2. Your processor routes the transaction. Your payment processor captures the card transaction details and sends them for approval, making sure the payment card information is encrypted and the transaction is secure.
3. Networks send a request. Your payment processor forwards the transaction details to the relevant card network, such as Visa, Mastercard, Discover, or American Express.
4. The issuing bank verifies and approves it. The card-issuing bank receives the request and checks the transaction amount and available balance. This step confirms whether the customer can cover the payment. If everything looks good, the card issuer evaluates the risk involved based on the transaction method and approves or declines the payment.
5. The bank sends funds with fees taken out. Once approved, the cardholder’s bank deducts the interchange fees and sends the rest to your bank.
6. The acquiring bank deposits your money. Your bank, the acquiring bank, accepts the transfer and deposits the remaining funds into your account. This is when you officially receive the payment.
7. You pay any additional fees. You are also responsible for covering merchant service fees, which may include transaction fees, a flat fee, and other fees charged by the payment processor. Unlike the interchange fees that are automatically deducted in step 6, these are additional processor charges that go to your payment processor or your acquiring bank.
Interchange fees FAQ
Who gets paid the interchange fee?
The cardholder’s bank (also known as the issuing bank) collects interchange fees. When a customer makes a credit card or debit card purchase, the issuing bank takes on the risk involved in approving the transaction, and the fees help cover the costs of taking this risk.
Who makes money on interchange fees?
The main beneficiary of interchange fees is the issuing bank, but other financial players earn a profit from credit card transactions, too. Card networks such as Visa and Mastercard charge separate assessment fees for operating costs, and the payment processor makes money through transaction fees.
Why are interchange fees a thing?
Interchange fees exist to balance the costs and risk involved in processing secure card transactions. The revenue from interchange rates also helps fund rewards cards that benefit customers, while keeping global payment networks like Visa and Mastercard running smoothly.
