Interchange Fees and How Money Moves

Interchange is the fee that the acquirer pays to the issuer on every card transaction, and it is the largest component of the cost a merchant pays to accept cards. When a customer spends one hundred, the issuer might receive an interchange fee of one and a half, the scheme might receive a scheme fee of a fraction, and the acquirer keeps the remainder of the merchant service charge as its margin. The interchange fee compensates the issuer for the cost of providing the card, for the credit risk where the card is a credit card, for fraud losses and for the interest free period the cardholder enjoys. Interchange rates are set by the schemes and vary by many factors, including the type of card, the type of transaction, the merchant category and the country. A premium rewards credit card used online typically carries a higher interchange rate than a basic debit card used in person, because the costs and risks are higher. Regulators in many regions have capped interchange, notably the European Union, which caps consumer debit interchange at zero point two percent and consumer credit interchange at zero point three percent. These caps have shaped the economics of card acceptance in Europe and are a frequent topic in policy discussions elsewhere. For merchants, interchange is largely invisible, because they pay a single merchant service charge to their acquirer, which bundles interchange, scheme fees and the acquirer margin together. For business analysts, interchange matters because it drives pricing, product design and negotiations. An acquirer that can route transactions efficiently, qualify them for lower interchange categories, or negotiate better terms can offer more competitive pricing to merchants. Understanding interchange is therefore essential for anyone working on card acquiring, merchant pricing or the business case for a new card product. Work the caps with real numbers. A customer pays EUR 100 with a consumer debit card in Europe. Interchange is capped at 0.2 percent, so the issuer receives EUR 0.20. The same EUR 100 paid with a consumer credit card carries interchange capped at 0.3 percent, so the issuer receives EUR 0.30. Now the same EUR 100 is paid with a commercial card, which the caps do not cover. The interchange could be EUR 1.50 or more, which is why merchants notice that business customers cost more to serve than consumers. The merchant does not see these numbers separately. They pay one merchant service charge to their acquirer, say 1.75 percent, which is EUR 1.75 on a EUR 100 sale. Out of that EUR 1.75, the interchange goes to the issuer, a small scheme fee goes to the card scheme, and the rest is the acquirer's margin. When a merchant complains that card acceptance is expensive, the analyst should be able to show this split, because the acquirer only controls its own margin, not the interchange or the scheme fee. Interchange matters to an analyst in three places. First, in the business case for a new card product, where the interchange income is often the largest revenue line and a small change in the assumed card mix changes the whole case. Second, in merchant pricing, where the acquirer needs to know which transactions qualify for lower interchange, for example a chip transaction in person qualifies for a lower rate than a keyed entry online, so routing and qualification become a pricing lever. Third, in negotiations, where an acquirer that can prove it qualifies more transactions for lower interchange categories can offer a merchant a better rate and still keep its margin. The requirements for an acquiring system should therefore capture the interchange qualification data at the point of the transaction, because data that is not captured then cannot be reconstructed later.