What is Interchange?
Table of Contents
- What is Interchange?
- How Does Interchange Work?
- Card Types
- Card-Present vs. Card-Not-Present
- Transaction Size
- Merchant Category Code (MCC)
- VISA’s CEDP Program
- April & October Updates
- Interchange Impact on Businesses
- Final Thoughts
Have you heard of the term “interchange” while discussing payment processing or merchant services? And no, we are not referring to a junction between highways.
Interchange includes the rates and fees charged by the major card brands (like Visa, Mastercard, Discover and American Express) when a business accepts a credit or debit card payment. The card brands set these rates, but 100% of interchange revenue goes directly to the bank that issued the credit or debit card to cover their risk and rewards. The card brands make their money separately by charging their own network assessment fees which help cover fraud protection, payment security, and card network operations.
Interchange will only be reviewable if a payment processor sets up a business with a pricing model called “Interchange Plus.” In short, the business will pay the base interchange plus other fees added by the payment processor. There are other pricing models that businesses can choose from when accepting card payments, but Interchange Plus is the most transparent option.
In this article, we will discuss the impact of interchange while using the “Interchange Plus” pricing model because understanding the details of interchange can help businesses lower their overall processing costs.
How Does Interchange Work?
Interchange is assessed to every credit or debit card transaction, and consists of a percentage fee on the total dollar amount of a transaction AND a flat fee amount (i.e. 2.30% + $0.10).
Here’s a simple breakdown of how interchange works:
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- A customer pays a business using a credit or debit card
- The transaction is sent to the bank for authorization
- Once authorized, the payment processes
- The business is charged interchange rates and fees
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Depending on a few different factors, interchange can vary. Those factors include (1) the card type, (2) card-present vs card-not-present transaction, (3) the size of the transaction, (4) the merchant category code (MCC), and (5) the pricing model.
Card Types
There are dozens of different card types and each one has a specific interchange rate associated with it. Below are the general details of each card type and an example:
Credit Cards
Standard Consumer Cards
These are basic credit cards. Issuing banks usually assume less risk with these cards, and they incur fewer overhead costs making these cards the cheapest to process.
Examples: A basic bank starter credit card, a traditional non-rewards Visa Classic, or a secured credit card used to build credit.
Premium and Rewards Cards
Premium and Rewards cards offer perks like travel miles, cash back, or extensive protection on transactions. These cards carry extra fees that are used by the issuing bank to fund the customers' reward points.
Examples: Visa Signature, World Elite Mastercard, and Amex Platinum
Business and Corporate Cards
These are credit cards issued to businesses, which often have higher spending limits and specialized accounting features. These cards carry a higher credit risk and come with advanced liability protections, which raises their interchange rate.
Examples: American Express Business Gold, Capital One Spark Cash Select, and Amex Corporate Card
Purchasing Cards
Purchasing cards are issued to businesses to streamline the procure-to-pay process and are typically used for pre-authorized, high-frequency purchases. These cards operate on tiered pricing for interchange that can be reduced by providing additional transaction data to qualify the sale. Interchange will vary based on the quality and amount of data submitted for each transaction.
Examples: Cards connected to one account and designated to different employees. Ramp, Nava, and J.P. Morgan offer customizable purchasing cards.
International Cards
International cards are issued by a bank outside of the merchant’s country. Interchange rates can vary because of complex routing and compliance checks that need to occur when being used internationally.
Examples: An HSBC credit card issued in London, or a tourist using a Banco Santander card at a domestic U.S. business.
Debit Cards
Debit cards are typically much cheaper to accept than credit cards because they carry less risk and are heavily regulated by federal caps for large banks. They also process over different payment networks from credit cards.
Pin-Debit
When a customer enters a PIN, the transaction routes through an EFT network. Because it is highly secure, it typically carries a low rate and low flat fee, making it the most cost-effective choice for larger transaction amounts.
Signature Debit
When a customer processes a debit card without a PIN (via signature or standard tap), it routes through the major card networks. These carry a slightly higher percentage-based interchange rate than PIN debit, but remain significantly cheaper than credit cards.
Card Present vs. Card Not Present
One major factor that affects interchange is whether the transaction is card-present or card-not-present.
Card-Present Transactions
Card-present means the physical card is used in person with the chip or contactless tap feature on the point-of-sale solution. These transactions have lower interchange fees because they carry less fraud risk.
Business examples include:
• Grocery stores
• Restaurants
• Retail stores
Card-Not-Present Transactions
Card-not-present (CNP) means the card is not physically available during the transaction. These transactions usually cost anywhere from 0.25% to 0.50% more because they carry a higher risk of fraud.
CNP examples include:
• Online purchases
• Phone orders
• Subscription payments
Transaction Size
Interchange usually consists of 2 fees: (1) a percentage rate of the total sale amount, plus (2) a flat fee (i.e. 2.30% + $0.10). Consequently, larger transaction amounts typically incur higher overall fees.
With that being said, this fee structure behaves differently when viewed as a percentage of the total transaction amount. Since the flat fee stays constant regardless of the transaction size, it causes a much higher overall interchange rate for a small transaction versus a large one. For example, a $0.10 flat fee amounts to 1.00% of a $10 transaction, but becomes a negligible 0.01% on a $1,000 transaction.
To account for this, card networks often adjust the actual interchange rates based on transaction size. For example, on 'credit small-ticket' items (like a $5 drink), the flat fee is often lowered or removed so it doesn’t significantly impact the overall interchange. On the other hand, for 'large-ticket' B2B or luxury purchases, card networks may cap the fee or lower the percentage rate.
Merchant Category Code (MCC)
Another factor that affects the transaction interchange is the MCC. This stands for Merchant Category Code, and is the code assigned to each business based on their industry type. For example, the MCC for a restaurant is 5812 which has different interchange rates and fees from a barber shop with MCC 7230.
Different types of businesses have various levels of risk associated with them, and thus the card brands charge each one different interchange.
VISA’s CEDP Program
Visa’s Commercial Enhanced Data Program (CEDP) gives merchants another way to save money on interchange. CEDP helps businesses improve the quality of the transaction data they submit for business and corporate credit card purchases, which in turn lowers the interchange fees those businesses incur. Following Visa's transition from traditional Level 2 & 3 discounts, B2B merchants must now provide comprehensive “Product 3” data to qualify for optimal interchange rates on CEDP.
“Product 3” data includes detailed product descriptions, PO numbers, SKUs, product quantities, and tax information, plus more. This data is verified by Visa in real-time, meaning missing or 'dummy' data will trigger automatic rate downgrades (i.e. higher rates). If the data is successfully verified, the merchant can receive lower interchange rates for those qualified transactions.
April & October Updates
Something else to keep in mind is that the major card brands will audit, adjust, and publish updated interchange rates and fees twice every year in April and October. These are legitimate changes that can affect all businesses, but on most occasions the adjustments are not very impactful to overall interchange totals.
On a related note, PolyPay has recognized that many of our competitors use the timing of the April and October interchange rate adjustments to add in new, unrelated fees to merchants’ monthly processing statements. And if you continue to use the processing account after those fees are added, it constitutes as your agreement to those new fees. PolyPay is proud to never participate in these types of “shady” pricing strategies. Rather, we provide a “Rate Lock Guarantee” to ensure your rates and fees remain consistent.
These semi-annual interchange adjustments mean that regular processing rate audits are a crucial aspect of a business’s cost management operations.
Interchange Impact on Businesses
Interchange can significantly affect profits, especially for businesses with lower margins.
Businesses that process more online payments or higher end credit cards, like rewards and business cards, usually pay higher interchange costs.
To help reduce interchange, businesses will often:
• Encourage debit card usage
• Prioritize card-present / in-person payments
• Avoid manually entering card transactions
• Use fraud prevention tools
• Use cover-the-cost programs like surcharging or cash discounting
Final Thoughts
Interchange is one of the largest costs involved in accepting card payments, and can have a direct and meaningful impact on a business’s overall profitability. Because these rates and fees vary based on card type, transaction method, MCC and risk level, they can add up quickly if they are not properly understood or managed.
Having a clear understanding of how interchange works gives business owners the ability to identify where costs are coming from, reduce unnecessary expenses, and choose pricing models that best fit their operations. Over time, this knowledge supports more informed payment processing decisions that improve efficiency and help protect margins.
