A fee paid by the merchant's bank (acquirer) to the customer's bank (issuer) each time a card transaction is processed. Typically the largest component of credit card processing costs.
Understanding Interchange Fee
An interchange fee is the fee paid by the merchant's acquiring bank to the cardholder's issuing bank each time a credit or debit card transaction is processed. It is the largest component of credit card processing costs and is set by the card networks (Visa and Mastercard), not by the merchant's payment processor.
Interchange rates vary based on card type (credit vs. debit, rewards vs. basic), transaction type (card-present vs. card-not-present), merchant category code (MCC), and transaction size. Ecommerce transactions (card-not-present) typically have higher interchange rates than in-store transactions because of increased fraud risk.
Payment processors mark up the interchange fee to cover their own costs and profit margin. The total processing fee a merchant pays is: interchange fee + card network assessment fee + processor markup. Some processors offer "interchange-plus" pricing (transparent markup) while others offer flat-rate pricing (simpler but often more expensive).
Why It Matters for Ecommerce
Interchange fees are largely non-negotiable — they're set by Visa and Mastercard. However, understanding interchange helps you evaluate your payment processor's markup. If your processor offers "interchange-plus" pricing at IC + 0.3% + $0.10, you can verify the interchange portion against published rates to ensure you're getting a fair deal.
Practical Example
A customer pays $100 with a Visa Signature rewards card (interchange rate ~2.10% + $0.10 = $2.20). Visa assesses a $0.13 network fee. Your processor adds a 0.3% + $0.10 markup = $0.40. Total processing cost: $2.20 + $0.13 + $0.40 = $2.73. If you were on flat-rate pricing at 2.9% + $0.30, you'd pay $3.20 — $0.47 more for this transaction.
Related Terms
Payment Processor
A company that handles the technical execution of credit card and debit card transactions between the customer, the merchant, and the issuing/acquiring banks. Examples include Stripe and Square.
EcommercePayment Gateway
A service that authorizes and processes credit card and digital payments for online transactions. Acts as the intermediary between the customer's bank and the merchant's bank.
EcommerceMarketplace Fee
A general term for any fee charged by an ecommerce platform for facilitating a sale, including referral fees, closing fees, and payment processing fees. Directly reduces a seller's net payout.
Put This Knowledge Into Practice
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