By Saumi March 5, 2025
Interchange fees are the transaction costs businesses pay when accepting credit and debit cards. Set by card networks like Visa and Mastercard, these fees cover processing, fraud prevention, and financial risks. While they can’t be avoided, they vary based on factors like card type, transaction method, and industry. Since they make up a significant portion of payment processing costs, understanding how they work can help businesses find ways to reduce expenses and improve profitability.
A Closer Look at Interchange Fees
Interchange fees are the costs that businesses pay when customers use credit or debit cards for purchases. These fees make up the largest portion of the Merchant Discount Rate (MDR)—the total cost merchants incur to accept card payments. While payment processors facilitate transactions, interchange fees primarily go to the bank that issued the customer’s card. These charges help cover transaction processing, fraud prevention, and financial risks.
Since interchange fees account for 70% to 90% of total card processing costs, understanding how they work is essential for businesses looking to manage expenses efficiently. While large retailers or businesses with high transaction volumes may negotiate better rates, smaller merchants often struggle with higher costs.
Interchange rates vary based on several factors, including transaction type, industry, and the location of the businesses and financial institutions involved. This variation makes managing payment costs a challenge, but gaining insight into interchange fees can help businesses optimize pricing strategies and improve profitability.
Key Factors That Influence Interchange Fees
Interchange fees aren’t set at random—they’re influenced by several factors that impact how much a merchant pays for processing card transactions. While card networks establish the baseline rates, various elements such as card type, transaction method, and merchant classification play a role in determining the final cost.
1. Card Network Differences
The four major card networks—Visa, Mastercard, American Express, and Discover—each have their own interchange rate structures. Visa and Mastercard typically update and publicly share their interchange rates twice a year, in April and October. In contrast, American Express and Discover do not publish their rates, making them less transparent.
Generally, American Express tends to have higher interchange fees compared to Visa and Mastercard. Here’s a rough estimate of average interchange rates across different networks:
- American Express: 1.80% – 3.25%
- Discover: 1.55% – 2.45%
- Mastercard: 1.45% – 2.90%
- Visa: 1.30% – 2.60%
2. Credit vs. Debit Cards
The type of card used has a major impact on interchange fees. Debit cards usually come with lower interchange fees than credit cards, as they pose less risk for banks. Since debit transactions require the bank to verify available funds before approving a purchase, the likelihood of chargebacks or unpaid balances is minimal.
On the other hand, credit card transactions carry higher fees because the bank covers the cost upfront, expecting the cardholder to repay later. Since there’s always a risk of non-payment or late payment, banks offset this by charging higher interchange rates.
3. Transaction Method: Card-Present vs. Card-Not-Present
How a transaction is processed also plays a role in interchange fees. Payments where the card is physically present—such as tap, swipe, or chip transactions at a point-of-sale (POS) terminal—are considered lower risk and therefore have lower interchange fees.
However, in card-not-present (CNP) transactions, such as online purchases, phone orders, or manually entered payments, fees are higher. This is because CNP transactions are more susceptible to fraud and chargebacks. Since the risk of unauthorized use is greater when a card is not physically verified, networks charge a premium to cover potential losses.
4. Merchant Category Code (MCC)
Every business is assigned a Merchant Category Code (MCC) that identifies its industry. This four-digit code helps determine interchange rates based on the level of risk associated with that industry. For example:
- Low-risk businesses (like supermarkets or utilities) may have lower interchange rates.
- High-risk industries (such as travel, gambling, or digital goods) often face higher interchange fees due to increased fraud potential and refund requests.
- Some businesses operating in multiple sectors can opt for different MCCs to optimize interchange costs, ensuring their transactions are classified at the most favorable rates.
5. Type of Card Program
Not all credit cards have the same interchange costs. Premium, business, and rewards cards (such as those offering cash back, airline miles, or luxury perks) usually come with higher fees. This is because the issuing bank funds those rewards programs through higher interchange charges.
If a business processes a large number of premium or corporate card transactions, they may see higher overall processing costs compared to those primarily handling standard debit or credit cards.
6. Domestic vs. International Transactions
The location of the issuing bank relative to the merchant also affects interchange fees. Cross-border transactions, where the cardholder’s bank and the merchant’s acquiring bank are in different countries, usually incur higher fees.
This is because international transactions involve currency conversion, regulatory compliance, and additional processing complexities. As a result, businesses with a high volume of international customers should consider strategies to optimize cross-border payment processing to reduce costs.
7. Security Measures and Fraud Prevention
Card networks incentivize businesses that adopt enhanced security measures by offering lower interchange fees. One of the most effective ways to reduce costs is by implementing tokenization, where sensitive card data is replaced with a secure digital token, reducing fraud risk.
Additionally, tools like Address Verification Services (AVS), 3D Secure authentication, and EMV chip technology can help lower interchange rates by demonstrating compliance with fraud prevention best practices. Businesses that don’t invest in these security features may see higher interchange fees due to the increased risk of fraudulent transactions.
How Interchange Fees Are Calculated
Interchange fees aren’t a fixed cost—they vary depending on multiple factors, including the type of card used, the industry of the merchant, and how the transaction is processed. For example, merchant-initiated transactions (MIT) tend to have lower fees compared to customer-initiated transactions (CIT).
Additionally, premium credit cards—such as corporate or rewards cards—carry higher fees because they help fund cardholder perks like cash-back programs and travel benefits.
Card networks like Visa and Mastercard set interchange rates, reviewing and adjusting them twice a year. The pricing model a business chooses—such as Interchange Plus, blended, or tiered pricing—also affects how interchange fees are applied.
Payment method matters, too. Card-present transactions (where the card is physically used) generally have the lowest fees, while online payments cost slightly more. Mail-order and telephone transactions (MOTO) tend to have the highest fees due to their higher fraud risk. Since every transaction type comes with a different cost structure, interchange fees can be difficult to predict, making it crucial for businesses to understand how these factors influence their processing costs.
How Often Do Interchange Fees Change?
Card networks review and adjust interchange fees twice a year, typically in April and October. These changes reflect market trends, regulatory updates, and fraud risk levels. In some regions, such as the European Union, interchange fees for consumer cards are capped at 0.2% for debit and 0.3% for credit transactions.
Although the formula for interchange fees is complex, understanding these key factors can help businesses better navigate card processing costs and optimize their payment strategies.
How to Lower Your Interchange Fees
While interchange fees are largely determined by card networks, businesses can take strategic steps to minimize these costs and improve their bottom line. Here are some effective ways to reduce interchange fees:
1. Verify Your Merchant Category Code (MCC)
Your business is assigned a Merchant Category Code (MCC) based on the products or services you offer. Ensuring that your MCC is correctly classified can help you avoid overpaying on fees. Some industries, like charities, benefit from lower interchange rates. If your business operates in multiple categories—such as a gym that also sells meal subscriptions—you may be able to split transactions into different MCCs to optimize costs.
2. Be Selective About the Cards You Accept
Not all payment cards come with the same interchange fees. Premium rewards and corporate cards generally have higher processing costs. While offering multiple payment options is essential for customer convenience, businesses should be mindful of which cards they accept and how transactions are processed.
Additionally, card-present transactions—where customers tap, swipe, or insert their cards—are cheaper to process than card-not-present (CNP) transactions, like online payments. If a card number is manually entered rather than swiped, fees can be even higher. Encouraging customers to use lower-fee payment methods can help reduce costs.
3. Use Address Verification Services (AVS)
For online and phone transactions, using Address Verification Services (AVS) can help fight fraud and lower interchange fees. AVS checks whether the billing address entered by the customer matches the one on file with the card issuer. Visa and Mastercard offer incentives, like lower rates, to businesses that use AVS in their payment processing.
4. Settle Transactions Daily
To qualify for the lowest interchange rates, settle transactions within 24 hours of authorization. If settlement is delayed, the transaction may be downgraded to a higher-fee category. Automating daily batch settlements can help businesses avoid unnecessary costs.
5. Provide Level 2 and Level 3 Data for Business Transactions
Businesses processing corporate or government card transactions can lower fees by including Level 2 or Level 3 data in their payments. This means providing additional details, such as invoice numbers, tax amounts, and purchase order information.
These extra data points reduce fraud risk and qualify the transaction for lower interchange rates.
By implementing these strategies, businesses can optimize payment processing costs while maintaining a seamless checkout experience for customers.
How Interchange Fees Affect Merchants
Interchange fees make up a major portion of the costs businesses pay to accept credit and debit cards—often between 70% and 90% of total processing fees. These fees are included in the Merchant Discount Rate (MDR), the overall charge merchants pay to their payment processor. Since interchange fees are unavoidable, they directly impact a business’s operating expenses.
To offset these costs, some merchants adjust their pricing, embedding fees into product prices. Others set minimum purchase amounts for card transactions or even restrict certain high-fee credit cards. Businesses in high-risk industries often face even steeper interchange rates, making it more expensive for them to accept card payments. Generally, Visa and Mastercard have lower interchange fees than American Express, which is known for its premium pricing structure.
Conclusion
Interchange fees are an unavoidable cost for businesses that accept card payments, but understanding how they work can help merchants manage expenses more effectively. Factors like card type, transaction method, and merchant category all influence the fees, making it essential to optimize payment processing strategies.
While merchants can’t eliminate interchange fees, they can take steps to reduce costs—such as settling transactions quickly, using fraud prevention tools, and choosing the right pricing model. By staying informed and making strategic decisions, businesses can keep processing costs under control while still offering customers the convenience of card payments.