Every time a customer makes a transaction with your business using a debit card or credit card, the bank processing the payment for you (known as the ‘acquirer’) takes a small percentage of that transaction and pays it to the cardholder’s bank as an ‘interchange fee’. Your business then pays this interchange fee back to the acquirer as part of its card processing fees. 

Interchange fees cover things for credit card companies like handling costs, coverage in the risk of fraudulent activity, the costs that come with bad debts and the risk that comes with approving payments. Interchange rates are subject to fluctuation and are regularly updated by card networks, which will affect how much you pay for your customers’debit card and credit card transactions. 

The portion of a transaction that’s taken by an issuing bank for interchange depends on the category that the transaction falls under, as dictated by the card network. The process of categorising a transaction and determining its fee is called interchange qualification, and it happens on a per-transaction basis. Interchange rates also indirectly affect your consumers, as businesses may need to pass on higher interchange fees in one way or another, often leading to higher prices for goods and services.

So, what factors impact how interchange rates fluctuate over time? Let’s take a closer look. 

Card schemes and brands

Credit card networks like Visa, Mastercard, and American Express all have unique interchange rate structures that influence the costs for merchants accepting their cards. Visa and Mastercard calculate their interchange rates based on factors like transaction type, card type, merchant category, and the level of risk they’re taking on as part of the transaction.

On the other hand, American Express has historically had higher interchange rates compared to Visa and Mastercard. This difference has stemmed from American Express' closed-loop model, which primarily focuses on premium cards with enhanced rewards for cardholders.

These variations in interchange rates come from different business strategies, target demographics, and card offerings among the networks. While Visa and Mastercard are similar in their fee structures and American Express is usually higher, American Express has been adjusting its fee structures in recent years to enhance its competitiveness with Visa and Mastercard.

Type of card: credit vs debit cards

Interchange fees differ between credit cards and debit cards, due to the varying risk factors and processing costs associated with each type of transaction. Credit card transactions often carry higher interchange rates compared to debit cards, as they involve extending credit to consumers, which means there’s a higher risk that the customer won’t be able to pay the bill. Because the issuing bank bears this risk, the interchange rates are elevated. 

On the other hand, debit card transactions usually have lower interchange rates, as they draw funds directly from a cardholder's bank account. For example, the current standard Visa interchange rate for credit card transactions is 0.231%, whereas the debit card transaction rate is 0.220%. This represents lower risk for issuers with overdraft or default, as the transactions are funded by existing account balances - it’s money that’s already there. 

Also, processing costs for credit cards (in comparison to debit cards) can be higher due to the additional layers of risk management, billing, and credit assessment processes they come with. For those wanting to keep their business’s interchange rate down (and improve their bottom line) while still providing payment convenience to their customers, encouraging debit card transactions is a good option.

Transaction type: card present vs card not present

Interchange fees for card-present and card-not-present transactions vary due to the differences in fraud risk and processing costs. Card-present transactions, also known as ‘electronic data capture’ (where the physical card is used for payment) generally carry lower interchange rates. This includes swiping a magnetic stripe card, inserting an EMV chip card, or tapping a contactless payment method, such as an Apple Pay-enabled smartphone. The presence of the card reduces the risk of fraud, contributing to lower fees.

Conversely, card-not-present transactions, such as online or over-the-phone payments where the card information is manually entered, often incur higher interchange fees due to elevated fraud risk. The absence of the physical card increases the chance of fraudulent transactions, meaning that additional security measures need to be put in place to cover potential losses.

For example, with Mastercard, the consumer premium interchange rate with a card present is 0.44%, whereas with the card not present, it’s 0.495%. 

Merchant Category Codes (MCCs)

What Merchant Category Code (MCCs) your business is in will also affect the interchange rate you’ll receive. Different MCCs classify merchants into specific categories, and interchange rates differ based on these classifications. 

Higher-risk sectors often attract higher interchange fees due to increased potential for fraud or chargebacks. For instance, brick-and-mortar retail businesses may have lower interchange rates compared to sectors like travel or luxury goods. 

Transaction regionality: domestic vs cross-border transactions

Interchange fees for domestic and cross-border transactions can differ significantly. Domestic transactions, conducted within the same country, typically have lower interchange fees, as they involve less complexity, lower processing costs, and reduced risk compared to cross-border transactions, where the cardholder and the merchant are in different countries.

Cross-border transactions often incur higher interchange fees because of the increased complexities in currency conversion, cross-border regulations, and elevated processing costs associated with international transactions.

Foreign exchange (FX) fees can also affect cross-border transactions, making them costly and cumbersome to complete. Using a payment processor that offers like-for-like settlements in multiple currencies, like Airwallex, can help you to eliminate FX fees and improve your business’s bottom line. 

Rewards cards and special programs

Rewards cards, offering perks for customers like cashback or travel points, often result in higher interchange fees for merchants. The added incentives for cardholders raise processing costs for merchants, as credit card companies try to cover the costs needed to run the rewards programs. 

The use of rewards cards particularly increases your processing costs if you’re on a ‘tiered’ pricing plan. Tiered plans often downgrade these transactions to ‘nonqualified’, with rates for these transactions sometimes being two or even three times higher than those for ‘qualified’ transactions.

Consumer vs commercial cards

Interchange fees for cards issued to individuals and those issued to commercial businesses can also differ. Cards issued to consumers that are being used for personal transactions will generally have lower interchange rates compared to cards issued to commercial entities.

Interchange rates for consumer cards are structured to accommodate personal spending patterns and consumer-focused transactions, resulting in comparatively lower fees. Commercial cards that are being utilised for business expenses, on the other hand, tend to have higher interchange rates. These rates are tailored to accommodate business-oriented spending habits like larger transactions, as well as offering features and rewards specific to commercial needs. These inclusions can result in higher interchange fees for your business if you choose to accept commercial cards. 

Use of security features and tokenisation

The use of tokenisation and other security features can lower interchange rates for merchants, as they decrease the risk of card fraud and chargebacks. 

Tokenisation reduces fraud related to digital payments by by including a dynamic component with each transaction, which makes the purchase more secure. It takes the security of a physical EMV (Europay, Mastercard and Visa) chip (the one usually located on the front of cards) and applies it to card-not-present environments, such as mobile and internet payments. It’s also built into Apple Pay and Google Pay. 

Other security features implemented by your payment processor that may lower your interchange fees include encryption, two-factor authentication and biometric verification. Advanced fraud prevention tools using machine learning and artificial intelligence can also have an impact.

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.

The payment processor’s role

Payment processors play a big role in influencing interchange rates through their negotiations, policies, and relationships with card networks and financial institutions. Processors will often utilise their relationships with financial institutions to negotiate interchange rates with card networks on behalf of merchants, sometimers achieving better rates or custom interchange fee structures based on transaction volume, industry, or other factors.

Payment processors also establish policies and guidelines that may influence whether you qualify for a certain interchange rate, as well as providing tools or technologies that encourage compliance with card network rules. 

Understanding what influences interchange rates

All up, there are a number of factors that influence the interchange rates your business will be subject to for debit card and credit card transactions. From the different card schemes, to merchant category codes, domestic transactions and cross-border transactions, rewards cards, fraud risk and security features; there are many scenarios in which your interchange rates may shift. Understanding these factors is crucial for optimising payments and ensuring your business is conducting effective financial management. 

Accepting credit and debit card payments is part and parcel of running a modern online business. Businesses of all shapes and sizes - from eCommerce stores and subscription businesses to online marketplaces and platforms - use Airwallex to reach new global customers, eliminate unnecessary currency fees, and protect against fraud. 

Airwallex is a global payments platform offering end-to-end money management. Open multi-currency accounts, make payments to 150+ countries at interbank rates, accept payments from 180+ countries, and issue multi-currency corporate cards from a single platform. With a more integrated payment solution, you can streamline end-to-end cash management by accepting payments directly into your Airwallex multi-currency wallet, convert proceeds at interbank rates when needed, and easily make high-speed transfers to your suppliers around the world. Learn more about Airwallex’s payment acceptance capabilities here.