Interchange modelling: how the fee is built and who earns what

Interchange is the fee that the acquirer pays to the issuer on every card transaction, and it is the largest single component of the merchant discount rate. It exists because the issuer provides the credit or the debit account, bears the fraud risk, and funds the interest-free period on credit cards, and the interchange fee compensates the issuer for those costs. The fee is set by the card scheme, not by the issuer or the acquirer, and it varies by card type, by transaction type, and by jurisdiction. Understanding interchange is essential to understanding card economics, because it determines who earns what on every transaction and it is the fee that regulators have capped in many markets. Why interchange matters is that it is the main revenue for the issuer and the main cost for the acquirer, and it is the fee that merchants complain about most. In the European Union, Regulation (EU) 2015/751 caps interchange at 0.2 percent for consumer debit cards and 0.3 percent for consumer credit cards, and the United Kingdom retained the same caps after leaving the European Union. In the United States there is no equivalent cap for credit cards, and interchange rates are higher, which is why the same transaction earns the issuer more in the United States than in Europe. The cap is a political decision about who should pay for the card system, and it has been reviewed and debated ever since it was introduced. The parties are the cardholder, the merchant, the acquirer, the scheme, and the issuer. The cardholder pays the merchant the transaction amount. The merchant pays the acquirer the merchant discount rate, which is the total fee. The acquirer keeps its margin, pays the scheme fee to the scheme, and pays the interchange fee to the issuer. The issuer receives the interchange fee and bears the cost of the account, the fraud, and the funding. The scheme sets the interchange rate and the scheme fee, and publishes them in its interchange tables, which are updated regularly and are publicly available in summary form. In practice the merchant discount rate is built from three components. First, interchange, which is the largest and is set by the scheme. Second, the scheme fee, which is what the scheme charges for operating the network, typically a small fixed amount per transaction plus a percentage. Third, the acquirer margin, which is what the acquirer keeps for its service, including the terminal, the processing, the risk, and the support. A merchant on an interchange-plus pricing model sees all three components separately on its statement, while a merchant on a blended pricing model pays a single rate that hides the components. The blended model is simpler but the merchant cannot see what it is paying for interchange. A worked example shows the split. A customer pays GBP 100 with a consumer debit card in the United Kingdom. The interchange is capped at 0.2 percent, so it is GBP 0.20. The scheme fee is GBP 0.05. The acquirer margin is GBP 0.15. The total merchant discount rate is GBP 0.40, which is 0.40 percent of the transaction. The merchant receives GBP 99.60. Now the same GBP 100 paid with a consumer credit card: the interchange is capped at 0.3 percent, so it is GBP 0.30, the scheme fee is GBP 0.05, the acquirer margin is GBP 0.15, and the total is GBP 0.50. The merchant receives GBP 99.50. The difference is entirely the interchange cap, which is why the card type matters to the merchant. What happens when interchange is modelled incorrectly is a pricing error that can cost the acquirer money or lose it merchants. If the acquirer prices a merchant at a blended rate that is below the interchange cost for the card types that merchant actually takes, the acquirer loses money on every transaction. If the acquirer prices too high, the merchant will go to a competitor. The most common error is to assume the average interchange rate when the merchant mix is skewed: a merchant that takes mostly premium credit cards will have a much higher interchange cost than a merchant that takes mostly debit cards, and the pricing must reflect that. The finance team must model the interchange cost by card type, not by average, and must update the model when the scheme changes its rates. The operational and accounting implications are that the finance team must reconcile the interchange paid to the issuer against the interchange tables, the operations team must ensure the correct card type is identified at the point of sale, and the pricing team must update the merchant rates when the scheme changes. On the ledger, interchange is a cost to the acquirer and revenue to the issuer, and it must be booked on the settlement date, not the transaction date, because the interchange is only final when the transaction clears. The accounting team must also track the scheme fees separately, because they are a different cost with different tax treatment in some jurisdictions. For a business analyst, interchange modelling is a calculation and reporting subject. You must specify the interchange tables, the card type identification logic, the pricing model, the merchant statement format, and the reconciliation process. You must also specify how the system handles a scheme rate change: the effective date, the notification to merchants, and the re-pricing. A common gap is failing to specify the fallback when the card type cannot be determined, because the system must then apply a default rate and the finance team must know what that default is. Takeaway: interchange is the issuer revenue and the acquirer cost, and the cap is a political decision that reshapes the whole card economy. Further reading: Regulation (EU) 2015/751 on interchange fees for the caps; the Visa interchange tables; the Mastercard interchange tables. Last reviewed 7 November 2026. A scheme that raises interchange earns more for issuers and charges more to merchants, and the regulator watches that balance.