While Visa and MasterCard interchange fees typically represent 65 to 90 percent of a merchant’s payment processing costs, they are often not clearly explained. This overview is designed to help you understand interchange fees so that you can find the best credit card processing solutions and reduce payment processing costs.

Interchange is the fee charged by the Visa and MasterCard Associations for every credit card or debit card transaction. When you accept credit card payments, your merchant processor pays interchange fees, made up of a percentage of the transaction plus a per-item fee, on your behalf. The fees cover the costs of moving funds into your bank (the Merchant Bank) and sending the billing information to the cardholder’s bank (the Issuing Bank).  

Simple enough so far, right?

Where interchange becomes complicated is that there are hundreds of different fee categories for different kinds of transactions and different card types. Many of these interchange fee categories have to do with the risk a transaction presents to the Issuing Bank. After all, when you process a credit card payment, you receive the funds for the transaction within days, but the bank that issued the customer’s credit card won’t get paid for 30 days or longer. For this reason, credit card interchange fees are higher than debit card fees – since the funds for debit card transactions are drawn from the customer’s bank account immediately, they pose little risk. Rewards cards present higher risks than standard credit cards, since they tend to have higher credit limits and the Issuing Bank incurs the cost of rewards, such as giving a customer a percentage of their spending back to them. Sales that are conducted over the phone or internet represent a higher risk of fraud and therefore typically have higher interchange fees than sales conducted in person.

Twice a year, usually in April and October, Visa and MasterCard review their interchange rates and decide whether or not to revise their fee structures. Until recently, Visa and MasterCard’s interchange fees were closely guarded secrets. Now they are posted on the Visa and MasterCard websites.

Next: Frequently Asked Questions about Interchange