What Are Interchange Fees? What They Are, Who Pays Them and How They Work

• Author: Jesus Garcia
• June 2, 2026
• 10 Min Read

Every time a customer pays with a credit card or debit card, multiple parties work together to process the transaction. One of the largest costs involved is the interchange fee, a fee paid to the issuing bank for facilitating the payment and helping manage risks such as fraud, credit exposure, and transaction processing. While interchange fees are a standard part of accepting card payments, many business owners are unsure who pays them, who receives them, how they are calculated, and what they can do to reduce their impact.

In this article, we'll explain what interchange fees are, how they work, who pays and receives them, the factors that influence interchange rates, and how interchange fees differ from other payment processing costs. We'll also walk through a real-world transaction example, discuss interchange fee regulations, explore how these fees affect small businesses, and share practical strategies for reducing payment acceptance costs.

Table of Contents

• What Are Interchage Fees?
• How Do Interchange Fees Work?
• Who Pays Interchange Fees?
• Why Do Interchange Fees Exist?
• How Are Interchange Fees Calculated?
• Interchange Fees vs Processing Fees
• Example of an Interchange Fee on a $100 Credit Card Transaction
• Regulation on Interchange Fees
• How Interchange Fees Affect Small Businesses
• How to Reduce Interchange Costs
• Frequently Asked Questions About Interchange Fees

What Are Interchange Fees?

Interchange fees are transaction fees that merchants pay whenever a customer uses a credit card or debit card to make a purchase.

The interchange fee is the portion of the transaction cost that is allocated to the issuing bank, helping cover expenses such as fraud prevention, transaction processing, account management, credit risk, and cardholder rewards programs.

Although merchants do not typically see interchange fees listed separately on customer receipts, these fees are one of the largest costs associated with accepting card payments. Understanding how interchange fees work can help businesses better evaluate their payment processing expenses and identify opportunities to reduce costs.

How Do Interchange Fees Work?

Interchange fees are automatically applied behind the scenes whenever a customer pays with a credit card or debit card. While the process only takes a few seconds, several parties work together to authorize, process, and settle the transaction.

A typical card transaction involves four primary participants:

• Cardholder – The customer making the purchase.
• Merchant – The business accepting the payment.
• Issuing Bank – The bank that issued the customer's credit or debit card.
• Card Network – The payment network, such as Visa or Mastercard, that facilitates communication between the parties.

When a customer makes a purchase, the payment information is sent through the card network to the issuing bank for approval. The issuing bank verifies that the card is valid, confirms sufficient funds or available credit, and either approves or declines the transaction.

Once approved, the transaction is completed and the merchant receives the payment amount minus applicable processing fees. A portion of those fees is allocated to the issuing bank as the interchange fee.

Because interchange fees are built into the overall processing cost, merchants typically do not pay them separately. Instead, they are deducted from the transaction proceeds before funds are deposited into the merchant's bank account.

Who Pays Interchange Fees?

Interchange fees are paid by merchants that accept credit card and debit card payments. Although customers do not see interchange fees listed as a separate charge on their receipt, the fees are deducted from the transaction amount before the merchant receives the funds from the sale.

While merchants are responsible for paying interchange fees, the cost is often considered part of the overall expense of accepting card payments. As card usage continues to grow, interchange fees have become one of the largest ongoing payment processing expenses for many businesses.

Why Do Interchange Fees Exist?

Interchange fees exist to compensate issuing banks for the costs and risks associated with providing and supporting credit card and debit card payment services. Every time a card transaction is processed, the issuing bank plays a critical role in authorizing the payment, verifying the cardholder's account, and ensuring funds are available to complete the transaction.

One of the primary reasons interchange fees exist is to help cover fraud prevention and security costs. Issuing banks invest heavily in fraud detection systems, transaction monitoring, account security, and technologies designed to protect cardholders and merchants from unauthorized transactions.

Interchange fees also help offset credit risk. When a customer uses a credit card, the issuing bank is effectively lending money until the cardholder repays the balance. If the cardholder fails to repay the debt, the issuing bank assumes the financial loss. Interchange revenue helps support this lending model.

In addition, interchange fees help fund many of the rewards and benefits that consumers receive from their payment cards. Cash-back programs, airline miles, travel rewards, purchase protection, and other cardholder perks are often partially supported by interchange revenue. This is one reason why rewards credit cards typically have higher interchange rates than standard credit cards.

Beyond risk and rewards, interchange fees help cover the operational costs of maintaining card programs, including:

• Transaction authorization systems
• Customer service and account management
• Card issuance and replacement
• Dispute and chargeback handling
• Payment infrastructure and technology investments

From a broader perspective, interchange fees help support the electronic payments ecosystem by ensuring that issuing banks have an incentive to offer payment cards, invest in security, and maintain reliable payment services for consumers and businesses.

While merchants often view interchange fees as a cost of accepting card payments, card networks and issuing banks view them as a mechanism that helps keep the payment system secure, efficient, and widely available.

How Are Interchange Fees Calculated?

Interchange fees are not a single flat rate applied to every card transaction. Instead, they are calculated based on a combination of factors related to the card being used, the type of transaction, and the business accepting the payment.

Type of Card Used

The type of card used is one of the biggest factors affecting interchange fees.

• Credit cards generally have higher interchange fees than debit cards.
• Rewards credit cards often have higher interchange fees than standard credit cards.
• Business and commercial cards may carry higher rates due to additional features and benefits.

Issuing banks often use interchange revenue to help fund rewards programs, cash-back offers, travel points, and other cardholder benefits, which is why premium cards typically cost merchants more to accept.

Debit vs Credit Card Transactions

Debit card transactions generally have lower interchange fees than credit card transactions because they involve less risk for the issuing bank. Instead of extending credit, the bank is withdrawing funds directly from the cardholder's bank account.

In the United States, some debit card interchange fees are also subject to federal regulations, which can further reduce interchange costs for certain transactions.

Card-Present vs Card-Not-Present Transactions

How a transaction is processed can also affect the interchange rate.

Card-present transactions, such as in-store purchases where a card is tapped, dipped, or swiped, typically qualify for lower interchange fees because they present a lower fraud risk.

Card-not-present transactions, including online, phone, and manually entered payments, generally have higher interchange fees because they carry a greater risk of fraud, chargebacks, and data-entry errors.

Merchant Category Code (MCC)

Every business is assigned a Merchant Category Code (MCC) that identifies the type of products or services it sells.

Interchange rates can vary based on the merchant's industry because different industries present different levels of risk, average transaction sizes, and chargeback rates. For example, a grocery store, restaurant, and online retailer may all qualify for different interchange categories.

Transaction Amount

Because interchange fees include a percentage-based component, larger transactions generally result in higher interchange fees in dollar terms.

For example, a 2% interchange fee on a $500 transaction will cost more than the same 2% fee on a $50 transaction. Conversely, smaller transactions may feel the impact of the fixed transaction fee more significantly.

Additional Transaction Data

Certain transactions, particularly those involving corporate, purchasing, or commercial cards, may qualify for lower interchange rates when merchants provide additional transaction details.

This enhanced information, often referred to as Level 2 or Level 3 data, gives card issuers more insight into the transaction and can help businesses reduce interchange costs on eligible payments.

Because interchange fees are influenced by so many variables, there is no universal interchange rate. Instead, each transaction is evaluated based on its specific characteristics, resulting in the interchange fee that applies to that particular payment.

Interchange Fees vs Processing Fees

Interchange fees and processing fees are often used interchangeably, but they are not the same thing. Interchange fees are only one component of the total amount a business pays to accept credit card and debit card payments.

A processing fee is the total fee charged to process a card transaction. This fee is typically made up of several components, including interchange fees, card network fees, and payment processor fees.

An interchange fee is specifically the portion of the processing fee that is paid to the issuing bank that provided the customer's credit card or debit card.

The relationship can be summarized as follows:

For example, if a merchant pays a total processing fee of 2.90% + $0.30 on a transaction, that fee is typically divided among multiple parties. A portion may go to the issuing bank as the interchange fee, another portion may go to the card network as an assessment fee, and the remaining amount may be retained by the payment processor as its markup.

Because interchange fees often represent the largest component of processing costs, many business owners mistakenly assume that interchange fees and processing fees are identical. In reality, interchange fees are only one part of the overall cost of accepting card payments.

Understanding the difference between interchange fees and processing fees can help businesses better evaluate merchant service providers, compare pricing models, and identify opportunities to reduce payment acceptance costs.

Example of an Interchange Fee on a $100 Credit Card Transaction

Understanding interchange fees becomes easier when looking at a real-world example. While actual rates vary based on the card type, merchant category, transaction method, and other factors, the following example illustrates how a $100 credit card purchase may be distributed among the parties involved in the payment process.

Assume a customer makes a $100 purchase using a credit card and the total processing cost for the transaction is 2.20%.

In this example, the issuing bank receives the largest share of the processing fee through the interchange fee. The card network receives a smaller assessment fee for operating the payment network, while the payment processor earns a fee for securely routing and processing the transaction.

Regulation on Interchange Fees

Interchange fees are largely governed by card network rules established by companies such as Visa and Mastercard. However, in certain situations, government regulations can impact how much issuing banks are allowed to charge merchants for processing specific types of card transactions.

In the United States, one of the most significant regulations affecting interchange fees is the Durbin Amendment, a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act that was enacted in 2010.

The Durbin Amendment

The Durbin Amendment was designed to reduce debit card processing costs for merchants by limiting the interchange fees that certain large financial institutions can charge on debit card transactions.

Under the regulation, banks and credit unions with assets exceeding a specified threshold are subject to interchange fee caps on many debit card transactions. These regulated debit cards generally carry lower interchange rates than debit cards issued by smaller financial institutions that are exempt from the regulation.

As a result, merchants may see different interchange costs depending on which bank issued the customer's debit card, even when the transaction amount is identical.

Regulated vs. Unregulated Debit Cards

The Durbin Amendment created two broad categories of debit card interchange fees:

Because unregulated debit cards are not subject to the same fee caps, they often carry higher interchange rates than regulated debit cards.

Credit Card Interchange Fees

Unlike many debit card transactions, most credit card interchange fees are not directly capped under federal law in the United States. Instead, credit card interchange rates are generally established by the card networks and vary based on factors such as card type, rewards programs, transaction method, and merchant category.

Ongoing Regulatory Discussions

Interchange fees remain a topic of ongoing debate among merchants, financial institutions, card networks, and policymakers. Merchant advocacy groups often argue that interchange fees increase the cost of doing business, while banks and card networks maintain that interchange revenue supports fraud prevention, payment security, credit availability, and consumer rewards programs.

As electronic payments continue to evolve, interchange fee regulations may change over time, making it important for businesses to stay informed about developments that could affect payment processing costs.

Understanding how interchange fees are regulated can help merchants better interpret their processing statements and understand why seemingly similar card transactions may result in different processing costs.

How Interchange Fees Affect Small Businesses

Interchange fees can have a significant impact on a small business's profitability because they are one of the largest components of credit card processing costs. While a single transaction fee may seem small, the cumulative effect across hundreds or thousands of transactions each month can add up to a substantial operating expense.

For businesses that accept a high volume of card payments, interchange fees directly reduce the amount of revenue retained from each sale. As card usage continues to increase and consumers increasingly favor rewards credit cards and contactless payments, many small businesses find themselves paying higher overall processing costs than they did in the past.

Reduced Profit Margins

Every time a customer pays with a credit card or debit card, a portion of the sale is deducted before the merchant receives the funds. For businesses operating on thin profit margins, these fees can represent a meaningful percentage of net profit.

For example, a business with a 10% profit margin that pays 2.5% in total payment processing costs is effectively giving up a significant portion of its profit on every card transaction.

Higher Costs for Certain Transactions

Not all transactions carry the same interchange fee. Small businesses may encounter higher processing costs when customers use:

• Rewards credit card
• Premium travel vards
• Commercial or corporate cards
• Card-not-present payment methods
• Cross-border payment cards

As a result, two customers making the same purchase amount may generate different processing costs for the merchant.

Pricing and Cash Flow Considerations

Interchange fees are often built into a business's overall cost structure. Many businesses account for payment acceptance costs when determining pricing, profit margins, and budgeting decisions.

For merchants with large transaction volumes, interchange fees can represent thousands or even tens of thousands of dollars in annual expenses. Understanding these costs allows business owners to make more informed decisions regarding pricing strategies and payment acceptance policies.

A Necessary Cost of Accepting Card Payments

Despite the expense, accepting card payments remains essential for most businesses. Consumers increasingly expect the convenience, security, and flexibility that credit cards and debit cards provide. For many merchants, the increased sales opportunities and improved customer experience associated with card acceptance outweigh the costs of interchange fees.

By understanding how interchange fees affect profitability, small business owners can better evaluate their payment processing expenses and identify opportunities to improve their overall payment acceptance strategy.

How to Reduce Interchange Costs

While interchange fees cannot be completely eliminated when accepting credit card and debit card payments, businesses can take steps to reduce their overall payment processing expenses. Understanding how interchange fees work and implementing cost-saving strategies can help improve profitability over time.

Optimize Transaction Processing

Many interchange rates are influenced by the quality of transaction data submitted during the payment process. Ensuring transactions are processed correctly and settled promptly can help businesses qualify for more favorable interchange categories.

Best practices include:

• Settling transactions promptly
• Using EMV chip-enabled terminals
• Collecting complete transaction information
• Reducing manual card entry when possible
• Following card network acceptance guidelines

Proper transaction processing can help minimize unnecessary processing costs and reduce the risk of downgraded interchange rates.

Reduce Card-Not-Present Risk

Online, phone, and manually keyed transactions often carry higher interchange rates because they present greater fraud risk than in-person transactions.

Businesses can help reduce risk by utilizing:

• Address Verification Service (AVS)
• CVV verification
• Fraud detection tools
• Tokenization technologies
• Secure payment gateways

Improving transaction security may help reduce chargebacks and improve overall payment acceptance efficiency.

Implement a Cash Discount Program

Some businesses choose to implement a cash discount program, which provides customers with a discount when paying with cash. By encouraging cash payments, businesses can reduce the number of card transactions subject to interchange fees.

Because fewer card payments are processed, overall payment acceptance costs may decrease. Cash discount programs are commonly used in industries with high transaction volume or narrow profit margins.

Consider a Dual Pricing Program

Dual pricing programs display both a cash price and a card price, allowing customers to choose their preferred payment method. Businesses that successfully encourage more cash transactions may reduce the total interchange fees paid over time.

Many merchants use dual pricing as a way to offset rising payment acceptance costs while maintaining payment flexibility for customers.

Review Your Payment Processing Agreement

Interchange fees are generally established by the card networks, but processor markups and service fees can vary significantly between providers.

Businesses should periodically review:

• Processing rates
• Monthly fees
• Gateway fees
• Equipment costs
• Contract terms

Comparing providers and understanding the breakdown of processing costs can help identify opportunities for savings beyond interchange fees alone.

Monitor Your Processing Statements

Regularly reviewing merchant statements can help businesses better understand where payment acceptance costs originate. Tracking interchange fees, processor markups, and other transaction-related charges allows merchants to identify trends and evaluate whether their current processing setup is cost-effective.

Focus on Total Payment Acceptance Costs

While interchange fees often represent the largest component of card processing expenses, they are only one part of the equation. The most effective strategy is to focus on reducing total payment acceptance costs through a combination of operational improvements, payment optimization, and thoughtful pricing strategies.

By understanding the factors that influence interchange fees and implementing cost-reduction strategies where appropriate, small businesses can better manage processing expenses while continuing to offer customers the convenience of card payments.

Frequently Asked Questions About Interchange Fees

Can merchants negotiate interchange fees?

Generally, no. Interchange fees are established by card networks such as Visa and Mastercard and apply across participating issuing banks. However, merchants may be able to negotiate processor markups and other fees that contribute to their total processing costs.

Are interchange fees different for debit and credit cards?

Yes. Debit card transactions often have lower interchange fees because they typically involve less risk than credit card transactions. In some cases, debit card interchange fees may also be subject to regulatory limits.

How can businesses reduce interchange costs?

Businesses may reduce overall payment acceptance costs by:

• Processing transactions correctly and promptly
• Using secure payment methods
• Implementing cash discount programs
• Considering dual pricing programs
• Reviewing processor fees and contract terms

Do online transactions have higher interchange fees?

In many cases, yes. Online and other card-not-present transactions generally carry higher interchange rates because they present a greater risk of fraud and chargebacks than in-person transactions.

Are interchange fees regulated?

Certain debit card interchange fees in the United States are subject to regulation under the Durbin Amendment. However, most credit card interchange fees are established by the card networks and are not directly capped by federal law.

Can businesses avoid interchange fees completely?

Businesses that accept credit card or debit card payments generally cannot avoid interchange fees entirely. However, businesses may reduce the impact of these costs through payment optimization strategies, cash discount programs, dual pricing programs, or by encouraging alternative payment methods.