How Interchange Fees Work and How You Can Avoid Them

Table of Contents

1. What Are Interchange Fees?
2. How Do Interchange Fees Work?
3. How Are Interchange Fees Calculated?
4. How Do Different Industries Handle Interchange Fees?
5. Examples of Interchange Fees in Action
6. What Role Do Interchange Fees Play in Credit Card Transactions?
7. Common Misconceptions About Interchange Fees
8. Is It Possible to Accept Payments Without Paying Interchange Fees?

Key Takeaways

• Interchange fees (or "swipe fees") are charges paid by merchants every time a debit or credit card transaction is processed.
• These fees compensate payment networks and card issuers for facilitating the transaction process, fraud prevention, and authorization.
• Fees are calculated based on card type, payment method, business size, and location.
• Interchange rates continue to rise unchecked, costing merchants nearly $100 billion annually.
• Businesses can avoid interchange fees by adopting alternative payment networks like Paystand’s fee-free model.

What Are Interchange Fees?

Interchange fees, often referred to as “swipe fees” or “merchant fees,” are charges that merchants must pay every time they accept a debit card or credit card to make a purchase. These fees are set by payment networks such as Visa, Mastercard, Discover, and American Express and are designed to compensate the card-issuing banks for the risks and costs associated with processing and authorizing transactions.

Each time a customer swipes, taps, or inserts their card at a point of sale or online checkout, a series of steps occur behind the scenes to authorize and complete the transaction. Interchange fees help fund critical parts of this transaction process, including:

• Verifying sufficient funds
• Authorizing the purchase
• Preventing fraud
• Covering risk and administrative costs

A portion of the interchange fee also compensates the credit card processing service that enables the entire payment infrastructure.

How Do Interchange Fees Work?

Interchange fees typically cost merchants between 1.3% and 1.5% of a sale. Here's how it works:

1. When a customer initiates a payment, the merchant’s acquiring bank (or payment processor) sends a payment request through the payment network to the issuing bank (the customer's bank).
2. The issuing bank verifies two things:
   • The transaction is not fraudulent.
   • The customer has sufficient funds or credit.
3. Once verified, the funds are transferred from the issuing bank to the merchant’s account.
4. In return for facilitating this process, the issuing bank collects an interchange fee, which the merchant must pay.

Most merchants receive a bundled bill from their payment processor that combines multiple interchange fees into a single line item. However, 48% of merchants have no visibility into the breakdown, despite there being over 300 distinct interchange rates depending on factors like card type, transaction size, and merchant category.

How Are Interchange Fees Calculated?

Interchange fees are set by the payment networks and are made up of:

• A fixed fee (e.g., $0.10 per transaction)
• A percentage of the total sale (e.g., 1.8%)

Several factors influence the final amount:

1. Card Type

Different types of cards have different fees:

• Debit cards often have lower interchange rates because they are considered lower risk (protected by PINs).
• Reward cards or premium credit cards typically have higher interchange fees because of the rewards and incentives they offer customers.

2. Payment Type

• Point-of-sale (POS) transactions (card present) are considered lower risk, thus may have slightly lower fees.
• Card-not-present transactions (e.g., online payments) carry higher fees because of increased fraud risk.

3. Business Type

• Larger merchants, like big-box retailers, can often negotiate lower interchange rates.
• Smaller businesses (SMBs) usually pay standard, non-negotiated rates.

4. Location Type

• Cross-border transactions between banks in different countries are subject to higher interchange fees to account for additional payment verification steps and regulatory compliance.

Ultimately, interchange fees amount to almost $100 billion a year across U.S. merchants — a number expected to keep climbing without regulation on credit card rates.

How Do Different Industries Handle Interchange Fees?

Interchange fees affect industries differently:

• Retailers may absorb fees into product pricing.
• Healthcare providers often pass on costs through administrative fees.
• SaaS and subscription businesses factor interchange fees into monthly service charges.
• Manufacturers and distributors may attempt to offset fees by offering discounts for ACH or other non-card payments.

Understanding your industry's norms can help you better negotiate or avoid fees wherever possible.

Examples of Interchange Fees in Action

• A grocery store accepts a $100 credit card payment. If the interchange fee is 1.5%, the store pays $1.50 for the transaction.
• A SaaS company bills a customer $500 online. If using a premium reward card with a 2.5% interchange fee, the company loses $12.50 on that transaction.
• A manufacturer processes a $5,000 B2B order via card. Even with a “lower” 1.7% interchange rate, they still lose $85 to the card network.

The bigger the ticket size, the more painful these hidden costs become.

What Role Do Interchange Fees Play in Credit Card Transactions?

Interchange fees underpin the entire card payment system. They:

• Incentivize banks to issue cards and offer consumer protections.
• Provide a revenue stream for card networks.
• Cover the risk of fraudulent transactions.
• Fund consumer perks like cash-back rewards and travel points (hence the high fees on reward cards).

While interchange was originally designed to support card infrastructure, today critics argue that unchecked fee hikes primarily benefit card companies at the expense of businesses.

Common Misconceptions About Interchange Fees

• “Interchange fees are unavoidable.”

  False. Alternative networks exist that bypass card rails entirely.

• “All businesses pay the same interchange fees.”

  False. Fees vary dramatically depending on your industry, transaction type, and negotiation power.

• “Interchange fees are fixed.”

  False. Card networks update interchange schedules twice a year — usually increasing them.

• “Higher fees mean better service and payment security.”

  False. Rising fees often have little correlation with added value for merchants.

Is It Possible to Accept Payments Without Paying Interchange Fees?

Yes. Although deeply entrenched, interchange fees aren't inevitable.

Paystand offers an alternative to the traditional card payment system by operating its own payment network and providing payments as a service. With Paystand:

• Businesses pay a flat monthly fee instead of a percentage per transaction.
• B2B Payments are cashless, fee-less, and instant, improving cash flow.
• Zero Fees: No interchange charges, no card processing fees.
• Zero Touch: Full automation of AR and payment processes.
• Zero Time: Real-time fund settlement eliminates banking delays.

On average, Paystand customers save 50% on receivables over three years and see substantial increases in ROI.

Ready to Break Up With Interchange Fees?

Learn more about how much you can save by leveraging fees and incentives on a payment network built for the future of B2B finance.