Interchange Fees

The Basics of Interchange Fees – What They Are, What They Cover, and How They’re Calculated

Merchants are all painfully aware of the fact they’re charged fees on the card transaction they put through, but many don’t understand what those fees are made up of. While those fees contain a number of different components, the largest portion is made up of the interchange fee. Interchange fees are charged on every single credit card transaction regardless of who a merchant partners with for their payment processing, so it’s important to understand at least the basics of what they are and how they’re calculated. 

What are interchange fees?

Interchange fees are fees charged by the card-issuing bank whenever a credit card is used to make a transaction. The fees are charged to the merchant, whose bank account pays them to the card issuer to cover the costs associated with processing the payment. The fee covers more than just the cost of actually handling the transaction, and card-issuing banks consider a number of factors when setting their rates, including the risk involved in processing the transaction. 

Interchange fees average roughly 2% in the United States. While relatively small as a percentage, in a world where plastic has become king, interchange fees add up quickly and represent a major chunk of a card issuer’s revenue stream. 

What determines the interchange rates?

The actual calculation of interchange fee rates is very complex and takes an enormous number of factors into account. The cost of transferring money and current interest rates are two big considerations that go into the calculation, and as such, they are updated a couple of times each year to ensure they’re in line with current financial conditions. 

The type of card, merchant size and industry, and transaction type also all factor into the equation. For instance, a card with a chip and PIN will generally have lower interchange fees than one that doesn’t because it carries less risk. Rewards cards also carry higher fees, which the issuers use to cover the cost of the rewards program. 

A merchant’s size and industry can impact their fees, as card issuers provide more favorable rates to certain industries and are willing to negotiate rates with larger businesses. Walmart, for instance – with over 6,000 stores across the United States – can access lower interchange rates than small local businesses

Finally, the type of transaction impacts the rates in order to offset the costs of accepting extra risk. An in-person transaction, for example, will carry a lower fee than a “card-not-present” transaction due to the lower risk of fraud. 


Interchange fees are an unavoidable reality of accepting card payments, so it’s important that merchants have at least an idea of what goes into them. But while fees can’t be avoided, they may go down in the not-too-distant future. The European Union has already capped credit card interchange fees at 0.3%, and recent anti-trust suits and congressional inquiries have brought them under scrutiny in the U.S. as well. Until then, merchants looking to lower their interchange fees need to look no further than BAMS.

At BAMS, we specialize in getting our customers set up with the best merchant accounts for their needs, with the lowest possible fees, so call us today to find out how we can help you save money on payment processing!