Interchange Fees make up the largest portion of a merchant’s payment processing costs. But here’s the catch: most merchants don’t really know what they are, how they work, or where that money’s going. And to make things trickier, some processors take advantage of this confusion to make their pricing look better than it actually is.
What Are Interchange Fees?
Interchange fees (also known as Interchange Reimbursement Fees or simply “IC”) are transaction fees set by the major card brands—Visa, Mastercard, Discover, and American Express.
Here’s how it works:
- When a customer makes a purchase using their card, your payment processor (also called the “acquirer”) pays a fee to the card brand’s bank.
- This fee covers things like fraud protection, handling costs, and the use of their transaction networks.
- That cost gets passed on to you, the merchant, and shows up in your monthly processing statement.
Sometimes these fees are bundled into tiered or flat-rate pricing. Other times, they’re listed individually, giving you a clearer picture. But either way, they’re unavoidable—and important to understand.
How Are Interchange Fees Set?
Interchange fees are determined based on interchange rates which are set by the card brand companies (i.e., Visa, MasterCard, Discover, and American Express) and are updated twice a year, typically in April and October.
The fee structure looks like this:
Percentage of the transaction + a flat fee
For example, if the interchange rate is 1.5% + $0.10, a $10 transaction would cost you $0.25.
What Affects the Cost of Interchange Fees?
There’s no one-size-fits-all rate. Interchange fees vary based on a few key factors:
Merchant Type (MCC Code): Each business is assigned a Merchant Category Code (MCC). Some industries—like retail or supermarkets—qualify for lower rates, while riskier sectors like travel or gambling may pay more.
Card Type: Not all cards are created equal. Debit cards generally cost less than credit cards, and rewards cards tend to cost more because of the perks they offer. Business, government, and corporate cards often fall into their own rate categories.
Transaction Method: In-person (card-present) transactions are considered safer and come with lower fees. Online or phone (card-not-present) transactions carry more risk, so they’re usually more expensive.
Interchange Optimization: Certain business-to-business and government-to-business payments may qualify for lower rates under an interchange optimization program if additional information, such as a purchase order number, can be provided with the transaction record.
Real-World Examples
- Lowest-Cost Transaction: Grocery store purchase using a debit card, in person.
- Highest-Cost Transaction: Booking future travel over the phone using a high-limit corporate rewards card.
Why? Grocery purchases are low-risk, while travel plans often change or get canceled, and corporate cards come with premium perks and protections.
Watch Out for Red Flags
Here’s where things get tricky. While interchange rates are fixed and non-negotiable (set by the card brands), some processors will claim they can offer lower rates. That’s simply not true. The only way to reduce interchange costs is by changing how you accept payments—not by negotiating the rates themselves.
Even worse, some processors may disguise extra fees by padding the interchange rate. For example, they might quote you 1.65% + $0.10 instead of the actual 1.5% + $0.10—sneaking in their mark-up as if it’s part of the interchange fee. This shady practice is called padding, and it’s something you should definitely look out for.
Also beware of “mis-coding,” where processors incorrectly categorize your business or the way payments are taken to get lower rates. This can lead to downgrading where additional fees are added to each transaction, fines or even the termination of your merchant account.
Why Payscout?
At Payscout, we don’t believe in smoke and mirrors. We’re committed to helping our partners and merchants fully understand where their money is going. That means honest quotes, clear statements, and expert support every step of the way.
Have questions or want us to take a look at your current processing setup? Reach out anytime at sales@payscout.com.