How Are Credit Card Interchange Fees Calculated?

credit card interchange fees

There are plenty of different credit cards out there for consumers to choose from. Each type of credit card will likely feature different rewards and fees compared to the next one. In fact, as far as your card-carrying customers are concerned, there are probably no two credit cards alike. Although this is true for consumers, merchants and business owners know that there is one thing all credit cards have in common. They all charge interchange fees.

A credit card interchange fee is the fee that is paid by the merchant on every credit transaction completed with a customer. This fee covers the cost of the money transfer from the customer’s bank account to your merchant account, as well as the cost of fraud protection and the risk the bank takes in approving the payment. Recipients of this fee include all parties involved in any given credit or debit transaction. This includes your customer’s bank who issued the credit card, the credit card company itself, your own payment processor and finally the bank with whom you’ve set up your merchant account.

Although there are numerous parties that take a portion of the credit card interchange fee, it is usually represented as a single lump fee on your payment processing bill. While this keeps things simple for the merchant calculating expenses and staying on budget, you may find yourself wondering how exactly this lump interchange fee sum is calculated.

Since so many variables go into calculating an interchange fee, it is important to learn which of these factors most affect the final calculation of the fee. Before a transaction even takes place, the credit card interchange fee is already converted into a flat rate by the credit card company. This will simplify the calculation process going forward. An additional percentage is added to this flat rate based on the cost of the individual transaction. Although each fee is slightly varied based on the cost of individual transactions, interchange fees usually include an average rate that is about 2% of the purchase amount.

Other common variables that usually affect the final total of any given interchange fee include the following:

Transaction Type

Credit and debit technology make it possible for merchants to receive payments from customers in and out of a store. In recent years, point of sale, or in-store purchases, have declined in popularity due to the growth of e-commerce. Despite this fact, PoS purchases carry the least amount of risk for both banks and merchants. Because of the reduced risk, in-store purchases cost merchants a lower interchange fee. Online purchases, as well as mail and telephone orders, are known as Card Not Present (CNP) transactions. Since there is no card present in a CNP transaction, the amount of risk goes up, and a higher interchange fee will be applied.

Card Type

This article is primarily focused on credit card interchange fees. However, there are interchange fees for all types of electronic transactions, including debit purchases. Even different types of credit cards have different interchange rates which depend on things like rewards programs attached to a card. Certain credit cards with rewards programs charge a higher fee to a merchant. This increase is justified by the fact that rewards programs will entice a customer to spend more at your store. Debit cards, on the other hand, will come with a lower fee, since there are fewer parties involved with a direct debit purchase made using a secure pin number.

Business Type and Size

There is one final factor that affects the calculation of interchange fees for your business. This has to do with the scale of your business, and the industry in which you work. For instance, larger companies will be able to negotiate a smaller percentage fee from the banks and credit card companies. This is entirely due to the higher volume of transactions that company will process in a given billing cycle.

If you would like to learn more about how credit card interchange fees are calculated for your business, or if you have any questions about setting up a credit card merchant services with Millennium Bankcard, contact us online by sending an email to

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