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Interchange (Card Payments)
Reference entry · last updated 20260911
Interchange (interchange reimbursement fee) is a fee paid between the merchant’s acquirer and the cardholder’s issuer for card-based transactions. Card networks establish default interchange fee schedules.[1]
1. First principles: the four-party fee flow
In a four-party card payment, the cardholder pays the merchant. To settle this transaction across institutions, the acquirer collects funds from the card issuer through the network switch. The issuer deducts the interchange fee from the transaction value before transferring the net settlement amount to the acquirer.[1]
Interchange compensates the issuing bank for the cost of credit risk, operating capital, fraud loss exposure, and card product maintenance.[1][2]
2. Merchant processing fee components
The total Merchant Discount Rate (MDR) paid by a merchant consists of three separate fees:
- Interchange fee: Collected by the issuing bank; typically the largest cost component.[2]
- Scheme / assessment fee: Collected by the card network (Visa, Mastercard) for routing and network operations.[2]
- Acquirer markup: Collected by the acquiring bank or PSP for merchant onboarding, risk underwriting, and software processing.[2]
3. Pricing models: Interchange++ versus blended
Providers bill merchants using two common pricing structures:[2]
- Interchange++ (Cost-Plus): The provider itemizes and passes through the exact interchange rate, the network scheme fee (first “+”), and the acquirer markup (second “+”). Merchants capture cost savings when transactions qualify for lower regulatory or regional interchange rates.[2]
- Blended pricing (Flat rate): The provider charges a uniform rate (such as 2.9% + $0.30) regardless of the underlying card type. The provider absorbs variations in interchange fees and retains higher margins on low-cost cards (like domestic consumer debit).[2]
4. Key interchange determinants
Network rate tables categorize interchange using specific transaction properties:
- Card type: Consumer debit cards typically carry lower capped rates, while rewards credit and corporate commercial cards carry substantially higher fees.[1][3]
- Processing channel: Card-not-present (CNP) e-commerce transactions face higher interchange rates than card-present (in-person EMV chip/PIN) payments due to elevated fraud risk.[3]
- Security protocol: Authenticating transactions via EMV 3-D Secure or using network tokenization can qualify transactions for favorable interchange tiers or fraud liability shifts.[4]
- Geography: Domestic transactions settle under domestic interchange rules (such as European Union interchange caps), whereas cross-border transactions incur higher international interchange and cross-border assessment fees.[1][2]
5. See also
- Online Payments
- Card Authorization and Capture
- Payment Service Providers (Merchant Payments)
- EMV 3-D Secure (Online Card Authentication)
- Settlement (Payments)
- Clearing (Payments)