Interchange fees are per-transaction fees paid by the merchant's bank (acquiring bank) to the cardholder's bank (issuing bank) every time a credit or debit card is used. Set by card networks (Visa, Mastercard), they range from approximately 1.5% to 3.5% of the transaction amount and are embedded in the merchant processing rate.
When a customer swipes a credit card at your business, three parties take a cut: (1) The issuing bank (cardholder's bank): collects interchange — the largest single fee component, typically 1.5-2.5% for credit, 0.05-1.5% for debit, varying by card type and industry. (2) The card network (Visa, Mastercard): collects a network assessment fee (~0.13-0.15%). (3) The payment processor or acquiring bank: collects a markup above interchange (the processor's margin). Interchange rates vary significantly by card type and merchant category code (MCC). Rewards cards (cash-back, travel) carry higher interchange because the issuing bank funds those rewards from interchange revenue. Debit cards carry lower interchange than credit cards. Healthcare MCCs carry different rates than restaurants or gas stations. The full interchange table for Visa and Mastercard runs hundreds of line items. Merchant pricing for card acceptance comes in three structures: (1) Flat rate — processor charges one rate (e.g., 2.6% + $0.10) regardless of card type; simple but sometimes expensive for card mix with many low-interchange cards. (2) Interchange-plus — processor charges actual interchange + fixed markup (e.g., interchange + 0.30% + $0.10); more transparent, often lower cost for high-volume merchants. (3) Tiered pricing — processor buckets transactions into 'qualified,' 'mid-qualified,' 'non-qualified' tiers at different rates; least transparent. For lending: payment processors that fund MCAs analyze historical card volume and processing statements during underwriting. A business with stable or growing card volume is a stronger MCA candidate. Interchange structure affects the total volume number processors see. The Federal Reserve's triennial Payments Study (https://www.federalreserve.gov/paymentsystems/fr-payments-study.htm) tracks credit and debit card transaction volumes and interchange economics across U.S. payment networks. The CFPB's credit card market report (https://www.consumerfinance.gov/data-research/research-reports/the-consumer-credit-card-market/) provides regulatory context for interchange fee structures and their impact on consumers and merchants.
Interchange rates are set by Visa and Mastercard — merchants cannot negotiate them directly. What merchants can negotiate is the processor markup above interchange. Interchange-plus pricing exposes the markup explicitly, making it negotiable. At $1M+ annual card volume, large merchants can negotiate meaningfully on the markup component. Below $500K, most processors use standard published rates.
Rewards card issuers fund cash-back, miles, and points programs from interchange revenue. A card that pays 2% cash-back to the cardholder needs to collect at least 2% interchange from the merchant's side of the transaction. Merchants effectively subsidize consumer reward programs through higher interchange on premium cards.
Interchange-plus (also called 'cost-plus' or 'pass-through') pricing charges the merchant the actual interchange rate for each transaction plus a fixed markup (e.g., 0.30% + $0.10 per transaction). This is the most transparent pricing model — you see exactly what the card network charges and exactly what your processor charges on top. Typically better for businesses with high volume or card mixes heavy in debit and basic credit cards.