What Are Interchange Fees?

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What Are Interchange Fees?

An interchange fee is a small amount of money that a merchant pays when you make a purchase with a credit or debit card. This fee goes mostly to the credit card issuer and is set by the card payment networks, like MasterCard, Visa, and others. It is usually calculated as a percentage of your transaction plus a fixed fee and covers the costs related to providing cards to consumers, bearing the credit risk, and approving transactions.

Some merchants, like grocery stores, gas stations, and restaurants, may raise their prices to cover interchange fees. These fees, also called swipe fees or processing fees, cost the average U.S. family more than $1,000 a year in the form of higher prices and credit card surcharges, according to National Retail Federation estimates. However, you may also see benefits in the form of credit card rewards that credit card issuers pay for with the fee funds.

Learn more about how interchange fees work and how they can affect your finances.

Key Takeaways

  • Interchange fees, or swipe fees, are fees that a merchant’s bank pays a credit card issuer’s bank when a customer uses a credit card to make a purchase.
  • These fees are designed to cover the costs of processing and authorizing credit or debit card transactions.
  • Payment networks like Visa and Mastercard determine interchange fee rates.
  • Credit card rewards programs are often funded with interchange fees that the issuer collects.
  • Merchants and financial institutions have different views on reducing interchange fees.

Interchange fees are the fees that credit card issuers charge to merchants when consumers use their credit cards, although many consumers are unaware of this charge. The fees are designed to cover the costs credit card companies incur related to providing cards and processing transactions. They also may help pay for fraud prevention and credit card rewards for customers. 

Sometimes, merchants will increase the cost of their products or services to recoup the expense of interchange fees. For example, you may see a gas station charging more for gas paid with a credit card. Or, a merchant may set a minimum purchase amount for credit card purchases.

How Do Interchange Fees Work?

In a credit or debit card transaction, the acquiring bank—a financial institution that processes card payments for a merchant—funnels the fee amount to a card network like Mastercard or Visa. Most of the money from the fee then lands with the card issuer, although a small percentage kicks back from the issuer to the network.

These fees may cover the costs of issuing credit and debit cards and expenses related to card usage. They may also fund rewards or fraud prevention programs.

Example of How Interchange Fees Work

Say you use a credit card to buy a jacket that costs $100 at a boutique. Data about the purchase goes to the boutique’s bank. The store pays a fee for this service, including the interchange fee. If the interchange rate is 2% of the purchase price, the merchant would pay $2. 

Of that amount, $0.25 might go to the store’s bank, $0.15 to the credit card network, and $1.60 to the card issuer. After all that, the store would keep $98 from the $100 sale. You will likely not see these charges on your bill as you simply pay the merchant’s price for the jacket along with any sales tax.

How Are Interchange Fees Determined?

In the U.S., the Visa, Mastercard, Discover, and American Express networks set interchange fees. An interchange fee typically consists of a percentage of the transaction amount coupled with a flat fee. The fee might be based only on a percentage or might be a flat amount.

Factors that can affect interchange fees include:

  • Type of card (debit or credit)
  • Payment method (such as a chip-equipped, PIN-enabled, or tap-and-pay card)
  • Type of transaction (online or in person)
  • Merchant’s industry

Credit Card Interchange Fees

The world’s two biggest payment networks, Mastercard and Visa, account for the majority of interchange fees. Discover and American Express charge the same type of fees. Credit cards generally have higher interchange fees than debit cards. In particular, higher-end credit cards like cash-back and travel rewards cards charge high fees.

The table below provides examples of credit card interchange fees for Mastercard (as of April 14, 2023) and Visa (as of October 14, 2023).

Card Transaction Type Interchange Rate
Mastercard World Elite Restaurant 2.00% + $0.10
Mastercard World, World High Value, World Elite Supermarket Tier 1, 2 1.25% + $0.05
Mastercard (all cards) Charities 2.00% + $0.10
Mastercard (World High Value and World Elite) Airline 2.55% + $0.10
Visa Signature Preferred/Infinite Tier 0, 1: Supermarket 1.65% + $0.05
Visa (traditional rewards) Insurance 1.43% + $0.05 
Visa (all cards)  Fuel (all cards) 1.15% + $0.25
Visa (traditional rewards) Travel 1.95% + $0.10

Debit Card Interchange Fees

Debit cards also come with interchange fees. But these fees typically are lower than those for credit cards. Debit card transactions are less risky for card issuers because the transactions take money from a cardholder’s bank account immediately. And debit interchange fees are limited by law to 21 cents plus 0.05% of the transaction cost, plus a 1-cent fraud-prevention adjustment in some cases. 

The table below shows debit card interchange fees for 2022 at Discover, Mastercard, and Visa, as reported by the Federal Reserve. It excludes prepaid and government benefit cards.

Card Company Avg. Interchange Fee per Transaction Interchange Fee as % of Avg. Transaction Value 
Discover $0.24 0.47%
Mastercard $0.24 0.48%
Visa $0.22 0.45%

How Are Cardholders Affected by Interchange Fees?

Cardholders may be charged more for goods or services when a merchant raises their prices to help cover interchange fees. The National Retail Federation estimates that credit and debit card interchange fees cost merchants and their customers more than $160 billion a year.

“Although interchange fees are a cost not directly paid by consumers, they can have an impact on how much consumers pay for goods and services,” Bruce McClary, senior vice president of membership and media relations for the National Foundation for Credit Counseling, told Investopedia via email.

Another potential effect on cardholders: Merchants can set a minimum transaction amount of up to $10 for a credit card transaction to offset interchange fees for credit cards. The law does not address minimums for debit cards, but issuers’ merchant agreements can forbid them.

Note

Financial institutions like networks and issuers point out that interchange fees are paid by merchants, not consumers.

Merchants vs. Financial Institutions

Merchants and financial institutions have different perspectives on whether the swipe fees are burdensome to merchants or save consumers money. The National Retail Federation says interchange fees are the second highest operational cost for most merchants, particularly small businesses, with labor being the largest expense. In general, small businesses pay higher interchange rates than large merchants and may not be equipped to negotiate these fees. Merchants also say they believe that credit card companies would continue to offer rewards even with reduced interchange fee income.

However, financial institution groups say interchange fees are necessary and have minimal impact on merchants. America’s Credit Unions (formerly the Credit Union National Association) says that credit card interchange costs represent just 1% of small business expenses. It argues that without interchange fee income, consumers would face a reduction in credit card rewards.

Legal Controversy Around Interchange Fees

For years, merchants have been fuming over interchange fees. The National Retail Federation and the Merchants Payments Coalition say that the fees are a burdensome operating expense for merchants and that the fees are unfairly higher for online purchases that require a card than in-store purchases that allow for a cash option. Meanwhile, financial institutions say the fees are necessary, fair, and have little impact on consumers.

In recent years, the topic of interchange fees has stirred up controversy and spawned lawsuits, regulations, and legislation. U.S. Senator Dick Durbin, a chief critic of these fees, has complained that they inflate prices paid by consumers and that Mastercard and Visa have a stranglehold on the credit card payment system. The Durbin Amendment, which took effect in 2011 as part of the Dodd-Frank financial reform package, capped debit card interchange fees at 21 cents per transaction plus 0.05% of the transaction amount. Debit card issuers who meet fraud-prevention standards may also charge a 1-cent fee for those efforts.

Credit Card Competition Act

The Credit Card Competition Act (CCCA), a proposed bill, seeks to lower interchange fees for credit cards. The legislation would direct the Federal Reserve to ensure that the biggest card-issuing banks offer a choice of at least two payment networks—with one being a network other than Visa or Mastercard—for processing electronic credit transactions. Supporters claim the measure would save merchants and consumers $15 billion per year.

Others disagree. “While lower fees mean significant savings for small businesses, it's unlikely that consumers will see these savings passed on to them,” Eric Croak, a certified financial planner, told Investopedia via email.

Merchants and financial institutions are also divided on how the Credit Card Competition Act (CCCA) would affect credit card rewards.

Groups opposing the act, like the Electronic Payments Coalition, believe revenue cuts resulting from lower interchange fees would negatively impact credit card rewards such as cash back.

However, the Merchants Payments Coalition says the CCCA would not have an impact on credit card rewards because the bill affects payment networks, which don’t determine rewards. The group says credit card issuers rely on credit card rewards as a marketing tool, and that issuers will see some savings from the bill that they can use to fund these programs. Finally, they say that rewards programs have not been significantly affected by stricter interchange fee regulations in other countries, like Australia.

Note

The Durbin Amendment is widely seen as killing most debit card rewards programs in the U.S.

Mastercard and Visa Settlement

Aside from the CCCA, a proposed Mastercard-Visa fee settlement might reduce the availability of credit card rewards, as interchange fees that support these rewards would decrease, Phillip Parker, founder of CardPaymentOptions.com, told Investopedia via email. CardPaymentOptions.com bills itself as a credit card processing watchdog group.

In March 2024, the Mastercard and Visa payment networks announced a $30 billion court agreement with U.S. merchants to lower and cap swipe fees. The settlement, which was pending approval by the court as of April 2024, also lets small businesses negotiate fees with payment processors like large merchants currently can.

It’s worth noting, though, that the Mastercard-Visa settlement, if approved, would lower these companies' interchange fees by just 0.04% over the course of three years. Not everyone believes this will have a major impact on rewards.

“The actual reduction in swipe fees of 0.04% is not a game-changer for issuers, and that won’t likely cause noticeable changes,” Dave Grossman, founder of the MilesTalk and Your Best Credit Cards websites, told Investopedia via email.

Frequently Asked Questions (FAQs)

Do Consumers Pay Swipe Fees on Card Transactions?

Merchants such as clothing stores and restaurants pay swipe fees on card transactions. However, critics say merchants sometimes pass along these costs to customers in the form of higher prices or minimum credit card transactions.

What Is the Average Swipe Fee?

The average swipe fee for a credit card transaction is around 2% of the transaction value, but it can be as high as 4% according to the National Retail Federation. That percentage applies to in-person transactions. An online interchange fee might be higher because internet transactions are deemed to have more security risks. In 2022, the typical swipe fee for a debit card transaction was 0.45% of the transaction value, according to the Federal Reserve.

Can Interchange Fees Be Negotiated?

As a result of a recent credit card antitrust settlement, smaller merchants may now more easily negotiate interchange fees. Previously, most smaller merchants weren’t able to easily negotiate interchange fees. However, large businesses have had more success negotiating them because of the amount of their transactions.

The Bottom Line

Interchange fees can affect merchants, credit card companies, banks, and consumers. While you might not readily notice how these credit card and debit card fees impact you, they may be causing you to pay more for goods or services if you rely on these payment methods when you’re shopping. Or, they may affect your credit card rewards program. Understanding how interchange fees work can help you understand one reason why a merchant may adjust the price of their products.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. National Retail Federation. “Consumers Don’t Want to Pay the Price for Swipe Fees.”

  2. Kellogg School of Management at Northwestern University. “Who Pays for All Those Generous Credit Card Rewards?

  3. Federal Reserve Board. "Regulation II (Debit Card Interchange Fees and Routing).”

  4. Visa. “Visa USA Interchange Reimbursement Fees.”

  5. Mastercard. “Mastercard 2023 - 2024. U.S. Region Interchange Program.”

  6. Federal Reserve. “Regulation II, Debit Card Interchange Fees and Routing.”

  7. National Retail Federation. “Swipe Fees.”

  8. Visa. "Minimum Transaction Amount on a Visa Credit Card." Page 1.

  9. Mastercard. “Interchange: Myths and Facts.”

  10. America’s Credit Unions/Credit Union National Association. “CUNA Rebuts Merchant Interchange Bill.”

  11. Dick Durbin, United State Senator, Illinois. “Durbin, Marshall Introduce Bipartisan Credit Card Competition Act.”

  12. Board of Governors of the Federal Reserve System. “Proposed Revisions to Regulation II’s Interchange Fee Cap.”

  13. Dick Durbin, United States Senator, Illinois. “Growing Support for Credit Card Competition Act.”

  14. Electronic Payments Coalition. “Hands Off My Rewards.”

  15. National Federation of Independent Businesses. “Credit Card Anti-Trust Settlement.”

  16. Federal Reserve. “Average Debit Card Interchange Fee by Payment Card Network.”

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