Understanding interchange fees

Understanding Interchange Fees

Interchange fees are charged by card-issuing banks to merchants who process credit card or debit card payments. For example, if you sell t-shirts online and decide to accept credit card and debit card payments from customers, you’ll be responsible for these fees.

As an ecommerce business owner, you won’t pay the interchange fee directly as the card-issuing bank will take care of it and you’ll repay them. You accept a credit or debit card payment from a customer and your bank will then deposit the funds into your account. Next, the card-issuing bank will withdraw the money from the customer’s account, deducting the interchange fees and distributing the remainder to your bank.

Sometimes, you have to spend a bit of money to meet — or exceed — your revenue goals. Offering a variety of payment methods creates a frictionless checkout process that can lead to satisfied, loyal customers. This is because many customers prefer to pay via credit card or debit card over other payment methods. Accepting credit and debit card payments can also increase profits significantly.

Why do interchange fees exist?

The purpose of interchange fees is to cover the costs associated with accepting, processing, and authorizing card transactions. Interchange fees guarantee you receive payment, help cover the cost of fraud protection, and provide a convenient buying experience for your customers.

Interchange fees — also known as discount rates or swipe fees — were introduced by Bank of America in the 1970s, with Mastercard quickly following. The banks said the fees were intended to pay for the risk of providing credit to customers. In time, other credit card companies such as Visa and Discover began to charge interchange fees as well. Eventually, these fees became the norm and were accepted by many merchants because they contributed to the success of their businesses.

How are interchange fees calculated

Credit card companies set their own interchange fees. Most of them are calculated as a percentage of the sales price plus a flat fee. On average, these fees range between 1 and 3% of the total value of a transaction. Each year, US merchants pay out billions of dollars in interchange fees.

Since interest rates and market conditions change often, interchange fees are adjusted on a regular basis. For instance, card issuers like Visa and Mastercard change their rates in April and October every year. Other credit card companies may set their fees annually. So, the interchange fee you may pay this month may be different than the fee you’re responsible for next year.

Factors that affect interchange fees

There are a number of factors that affect interchange fees including:

In a perfect world, you would be able to accept credit card and debit card payments without paying a dime. Since this isn’t the case, you can think of interchange fees as the cost of doing business and keeping your customers happy.

If you’d like to keep track of your interchange fees, save money on payment processing, and grow your revenue potential, Adobe Commerce can help. Schedule your free demo today.