How do interchange rates differ between credit and debit cards?

It’s important for merchants to have a good understanding of how card transactions work so that they can minimise the costs involved, which may not always be clear upfront. 

One of the main costs associated with card payments is the interchange fee. Interchange fees are set by the card network (e.g. Visa, Mastercard, American Express) and paid to the customer’s bank or credit card company (the card issuer). The merchant acquirer pays the interchange fee to the customer’s card issuer, then passes this cost onto the merchant. The acquirer and card network also charge a fee for their part in processing the transaction.  

Interchange rates vary depending on several factors, such as whether the card used by the customer was international or domestic, what industry the merchant is operating within, and whether the card being used by the customer is a credit or debit card. This article will compare typical rates involved with credit and debit card transactions and look at how merchants can optimise their payment systems to reduce these fees.

Why does the type of card affect the interchange rate?

One of the main reasons that financial institutions charge interchange fees is to counterbalance the financial risk they take on by backing the transaction. For this reason, the lower the risk involved, the lower the interchange rate tends to be. That’s why businesses in the travel or online gaming industries, for example, pay higher interchange rates than those offering healthcare, groceries or education. 

Credit card transactions are riskier than debit card transactions because the customer is paying with borrowed money, rather than their own funds. There is a chance that the customer won’t repay these funds in a timely manner, so this risk is counterbalanced by charging higher fees to the merchant.

How interchange rates work: credit versus debit cards

Interchange fees are typically calculated as a percentage of the transaction amount, plus a fixed fee. Rates for credit cards are usually higher than those for debit cards: some merchants may charge an additional fee to buyers who use credit cards to offset this, or introduce a minimum purchase amount.

Interchange fees also vary widely from country to country. The average interchange rate for Visa credit cards in the US is 1.91%. That goes down to 1.58% in Canada according to WalletHub. 

For debit cards in the United States, a typical interchange rate is more likely to be around 0.5%. This is because of the Durbin Amendment to the Dodd-Frank Act, which limits the amount of interchange fees that can be charged on debit cards issued by larger banks to $0.21, plus 0.05% of the transactions. Under this legislation, card issuers are also allowed to charge an additional $0.01 for fraud detection.

In most European nations, the interchange fee is set at 0.30% of the transaction amount for credit card transactions, and 0.20% for both debit and prepaid cards. This is because of European Commission regulations capping interchange fees.

China and Australia are also among the countries that have implemented regulations capping interchange fees. China’s rates are 0.35% for debit cards and 0.45% for credit cards, while Australia’s are 0.20% and 0.50% respectively.

Impact of interchange rates on merchants

High interchange rates can be passed onto the consumer by raising the price of goods or charging add-on fees. However, to keep businesses competitive, it’s preferable to find ways to reduce the cost of processing card payments. Cost-effective payment processors and acquirers can help reduce your interchange rates and other fees in several ways.

Better security measures can help reduce interchange rates

Because risk is a key factor in determining interchange rates for merchants who accept both credit and debit cards, using payment technology with robust security features can be a way to lower fees.

Tokenization, encryption, two-factor authentication and biometric verification are all measures that can be implemented by your payment processor to reduce the risk of fraud and chargebacks, and even potentially lower interchange fees. Advanced fraud prevention tools using machine learning and artificial intelligence can also make a difference, and compliance with the Payment Card Industry Data Security Standard (PCI DSS) is essential.

To give an example, Visa Canada has a “performance program” whereby businesses that process $2 billion or more in sales in Canada, and meet certain qualification criteria for fraud and risk management are able to gain access to different interchange rates than other businesses.

Avoid hidden FX costs with a multi-currency settlement

In order to lower the costs of international transactions, it can be worthwhile to look for an acquirer that specialises in global payment acceptance. Airwallex is an acquirer that allows merchants to collect and settle customer payments 'like-for-like' in multiple currencies. Merchants can then use those funds to pay global employees, contractors and suppliers all over the world, all whilst avoiding costly foreign exchange (FX) fees. 

Save money by bundling services with a single provider

Merchants can use separate entities to provide acquiring, payment processing and payment gateway services. However, it may be possible to save on fees by bundling all these services into a single package from one provider. 

Contact Airwallex to learn more about reducing payment fees

Airwallex is a modern, global payments platform offering end-to-end money management including acquiring, processing and payment gateway services. Payments can be accepted in 180+ countries and currencies, via 160+ payment methods. Airwallex also offers advanced security methods like network tokenisation and 3DS2 to reduce the risk of fraud.

While interchange fees are a necessary cost for any business that accepts credit and debit card payments, with Airwallex you can ensure your payment processing is cost-effective, secure, and global. To find out more, sign up to Airwallex today.