In the credit card industry the interchange fee defines a fee that a merchant’s bank pays a customer’s bank in a credit card or debit card transaction. The interchange fee is charged to the acquiring bank (merchant’s bank) and paid to the card’s issuing bank (Customer’s bank) in order to cover the money transfer costs. The acquiring bank then credits the merchant account the amount of the transaction less any interchange fee and additional fees referred to as a discount rate that is a rate charged by the payment provider to cover transaction costs and POS terminals and any networking communication costs . The interchange fee a merchant must pay on credit and debit card transactions. This fee is intended to cover transaction costs that are made up mostly of the interchange rate that can vary in relation to the transactions security risks, which are based on many factors including:
- Card type: Debit cards have the lowest risk and therefore have the lowest interchange fees, on the other hand a high-limit signature validated rewards cards have the highest.
- Payment method: Online Purchases where the card is not presented have high fees, while PIN validated transactions have the lowest fees.
- Merchant Type: Small businesses, gas stations, restaurants pay the highest fees because most fraud cases have involved these kinds of business and their handling cards leave opportunity to copy card information, while big box retailers are rarely involved in any frauds so combined with the volume they process and the lower risk they represent they are able to negotiate lower prices.
Every transaction involving a credit or debit card will have and interchange fee that is applied to cover the cost estimated from the risks of fraud, the data transactional costs, and other overhead that must be absorbed by the transaction or merchant. The merchant must pay the interchange fee along with other transaction fees but due to the lack negotiating power on the merchant side, it’s now a major source of profit at every bank.