Credit Card Interchange Fees: A Complete Overview and Assessment

Although consumers typically don’t notice them, credit card interchange fees (also known as interchange reimbursement fees) are a well-known reality for virtually every business. These charges are often the second largest cost for businesses, behind labor.

Interchange fees are used to mitigate risk and help fund credit card rewards programs—but they’ve become historically expensive and have even been shown to impact the price of goods and services.

So what does this processing cost or “cost of doing business” really include? Are interchange fees a fair and reasonable part of the complex payments landscape or are they getting out of control as payment processors and banks seek higher returns?
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What is a credit card interchange fee? 
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Credit card interchange fees or “swipe fees” are a 1-3% charge of each transaction amount that businesses must pay to accept credit cards. Essentially, every time a credit card is swiped, the acquirer (bank that processes the payment or “card issuer”) pays the cardholder’s bank an interchange fee. The business then pays the interchange fee back as part of the total credit card transaction processing fees.

Several parties get a cut of this fee, including the bank that issued that credit card used for payment, as well the card brand, like Visa, MasterCard, Discover, or American Express.

Interchange fees are calculated as a flat rate plus a percentage of the sales total (including taxes). This means at a 3% rate, a merchant is paying a $3 interchange fee for every $100 sale. 
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Why do merchants have to pay these fees?
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Credit card processing comes with three fees:

• Acquirer markup: Charged by the acquirer for acquiring the funds from shoppers
• Card scheme fees: Charged by the card scheme for using its credit card network
• Interchange fee: Charged by the cardholder’s bank (this is the largest portion of total fees)
  
  

Businesses pay interchange fees to mitigate the risk that the card-issuing banks take on. 

When a customer uses a credit card, the bank is essentially lending money for the purchase with the expectation that the customer will pay back the amount. 

For “higher risk” transactions in industries deemed riskier (like iGaming or cannabis), there can be higher interchange fees as banks and credit card companies adjust their pricing model based on factors like risk. Fees can also be higher based on the type of card used and the type of transaction.

This is especially the case for card-not-present transactions, or purchases made without being physically present at the point of sale (such as ecommerce payments). These fees are typically higher than in person payments.

Interchange fees also help to fund rewards programs like cash back or points. Without these programs, a large number of credit card users would likely move away from the payment option altogether.
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How are interchange rates determined? 
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Card schemes (central payment networks that use credit and debit cards to process payments) determine interchange fees. They are also regularly adjusted and Visa and MasterCard publish new rates semiannually, typically in April and October.

However, a recent press release from the Merchants Payments Coalition challenges the business ethics behind Visa and MasterCard’s rates. They state concern around the fact the Visa and MasterCard duopoly sits at 80% control of the credit card payments market, allowing the two processors to centrally price-fix the swipe fees charged by banks issuing cards under their brands. 

Visa and MasterCard also block competition by restricting processing to their own networks even though most competing networks often charge lower fees and, according to the Federal Reserve, have less risk of fraud.
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How much are merchants paying for interchange fees? 
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In 2023, U.S. merchants paid $101 billion in Visa and MasterCard credit card processing fees, including $72 billion in interchange fees (according to research from the Nilson Report). This was the first time in history that Visa and MasterCard credit card swipe fees surpassed the $100 billion mark.

The increasing costs of interchange fees tends to drive up operating costs for merchants, particularly for small businesses that are unable to negotiate lower interchange fees. This is why many merchants offer incentives for cash payments over cards. It’s simply too expensive to accept them. 

High interchange fees also likely inflate the cost of goods and services as businesses try to recoup some fee-related costs. 

So to answer the question; most merchants are paying a hefty 2-5% fee for each credit card transaction, but that number has been increasing.

Note: Debit card transactions have lower rates but are still subject to similar card processing fees.
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Are credit cards worth the fees? 
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There are two ways to think about card transaction fees; as an unavoidable cost of doing business or as a worrisome burden levied by all-powerful corporate entities.

The answer is a mix of both of the above. Credit cards are a service and they offer benefits to businesses, such as higher spending and enhanced customer convenience. In exchange for this service, fees are inevitable and necessary as a cost of business.

However, the concern for modern card processing is the looming duopoly of Visa and MasterCard. These two are boxing out competitors and steadily increasing fees. They even recently announced a major settlement with U.S. merchants to lower and put a cap on their fees—although it’s only a reduction of a few cents per $100 transaction.

The Visa/MasterCard problem has even gathered government attention and intervention as the Credit Card Competition Act (CCCA) of 2023 has been presented to combat the duopoly and lower swipe fees. 

Learn more about the drama surrounding credit card fees. 
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Takeaway: Credit card interchange fees are inevitable, but they’re getting out of hand and costing businesses far too much, especially when better payment options are emerging for considerably lower prices. 
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See why A2A payments are a better alternative
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Alternative payment methods like account-to-account (A2A) payments or “pay by bank” enable businesses to offer fast and simple payments via secure bank account transfer. This method is both an enhanced user experience for customers as well as a lower cost for businesses.

See why businesses nationwide choose Aeropay bank-to-bank transfers to power their payment processing by scheduling a 15-minute demo.