page_title: Interchange fee
section_title: Overview
hierarchical_section_title: Interchange fee / Overview
caption_attribution_description: English: GAO report image explaining interchange fees.
context_page_description: Interchange fee is a term used in the payment card industry to describe a fee paid between banks for the acceptance of card-based transactions. Usually for sales/services transactions it is a fee that a merchant's bank pays a customer's bank; and for cash transactions the interchange fee is paid from the issuer to acquirer, often called reverse interchange.
  In a credit card or debit card transaction, the card-issuing bank in a payment transaction deducts the interchange fee from the amount it pays the acquiring bank that handles a credit or debit card transaction for a merchant. The acquiring bank then pays the merchant the amount of the transaction minus both the interchange fee and an additional, usually smaller, fee for the acquiring bank or independent sales organization, which is often referred to as a discount rate, an add-on rate, or passthru. For cash withdrawal transactions at ATMs, however, the fees are paid by the card-issuing bank to the acquiring bank. Thus, the Interchange Fee is understood to be mainly the compensation for the Issuing Bank for the statement accumulation period and the post-statement 'Grace Period'.
context_section_description: Interchange fees are set by the payment networks such as Visa and MasterCard.
  In the US, card issuers now make over $30 billion annually from interchange fees. Interchange fees collected by Visa and MasterCard totaled $26 billion in 2004. In 2005 the number was $30.7 billion, and the increase totals 85 percent compared to 2001.
  The origins of the interchange fee are a matter of some controversy.  Often they are assumed to have been developed to maintain and attract a proper mix of issuers and acquirers to bank networks.  Research by Professor Adam Levitin of Georgetown University Law Center, however, indicates that interchange fees were originally designed as a method for banks to avoid usury and Truth-in-Lending laws.  Typically, the bulk of the fee goes to the issuing bank. Issuing banks’ interchange fees are extracted from the amount collected by the merchants when they submit credit or debit transactions for payment through their acquiring banks. Banks do not expect to make a significant amount of money from late fees and interest charges from creditworthy customers (who pay in full every month), and instead make their profits on the interchange fee charged to merchants.
  Interchange rates are established at differing levels for a variety of reasons. For example, a premium credit card that offers rewards generally will have a higher interchange rate than do standard cards. Transactions made with credit cards generally have higher rates than those with signature debit cards, whose rates are in turn typically higher than PIN debit card transactions. Sales that are not conducted in person (also known as card-not-present transactions) such as by phone or on the Internet, generally are subject to higher interchange rates, than are transactions on cards presented in person. This is due to the increasing risk and rates of fraudulent transactions. It is important to note that interchange is an industry standard that all merchants are subject to. It is set to encourage issuance and to attract issuing banks to issue a particular brand. Higher interchange is often a tool for schemes to encourage issuance of their particular brand.
  For one example of how interchange functions, imagine a consumer making a $100 purchase with a credit card. For that $100 item, the retailer would get approximately $98.  The remaining $2, known as the merchant discount and fees, gets divided up.  About $1.75 would go to the card issuing bank (defined as interchange), $0.18 would go to Visa or MasterCard association (defined as assessments), and the remaining $0.07 would go to the retailer's merchant account provider.  If a credit card displays a Visa logo, Visa will get the $0.18, likewise with MasterCard. Visa's and MasterCard's assessments are fixed at 0.1100% of the transaction value, with MasterCard's assessment increased to 0.1300% of the transaction value for consumer and business credit volume on transactions of $1,000 or greater. On average the interchange rates in the US are 179 basis points (1.79%, 1 basis point is 1/100th of a percentage) and vary widely across countries.  In April 2007 Visa announced it would raise its rate .6% to
  1.77%.
  According to a January 2007 poll by Harris interactive, only about a third of the public had heard of interchange fees; once explained to them, 90% said that the United States Congress "should compel credit card companies to better inform consumers" about the fee.
caption: Image from a GAO report explaining how the interchange fee works.