By OliviaMorgan April 1, 2025
For small business owners, credit and debit card payments are essential. They’re fast, convenient, and expected by most customers. But there’s one part of card payments that often feels like a black box: interchange fees.
You might see these fees listed on your statement or bundled into your total processing cost, but many business owners don’t fully understand what they are—or why they cost so much. This lack of clarity can lead to overpaying, making it harder to manage your margins and forecast profits.
In this guide, we’ll break down what interchange fees are, who sets them, why they vary, and most importantly—why you might be paying more than you think.
What Are Interchange Fees?
At the heart of every card transaction is a small but significant cost known as the interchange fee. This fee is paid by your business (the merchant) to the issuing bank—the bank that issued your customer’s credit or debit card.
The fee compensates the bank for taking on the risk of the transaction, handling authorization, and transferring funds. Interchange fees are usually charged as a percentage of the transaction amount plus a flat fee. For example, you might see something like 1.80% + $0.10 per transaction.
Although it may seem small, interchange fees make up the largest portion of your total credit card processing expenses.
Who Sets Interchange Fees?
Interchange fees are not set by your payment processor. They’re determined by the card networks—such as Visa, Mastercard, American Express, and Discover.
Each card network publishes its own fee structure, which includes hundreds of different rates depending on several variables. These rates are updated once or twice a year, usually in April and October, and can change with very little notice.
Visa and Mastercard, in particular, have complex interchange tables that list different rates for various industries, card types, transaction methods, and other criteria. Unfortunately, many of these details are buried in technical documents, making it hard for the average business owner to interpret.
Why Interchange Fees Vary
Not all transactions are charged the same interchange fee. The rate depends on several factors, including:
Card Type
Credit cards usually have higher interchange rates than debit cards. Among credit cards, rewards cards and business cards often carry even higher fees because the card issuer is funding those rewards programs.
For example:
- Basic debit card: lower interchange
- Standard credit card: medium interchange
- Premium rewards card: high interchange
Transaction Method
How a transaction is processed also impacts the fee. Transactions that are seen as more secure generally have lower interchange rates.
- Chip or contactless (tap) transactions: Considered secure, lower fees
- Keyed-in or online transactions: Seen as riskier, higher fees
- Recurring payments: May have their own rates, sometimes lower due to predictability
Business Type (Merchant Category Code)
Your business falls under a Merchant Category Code (MCC) which classifies the type of products or services you sell. Different industries are charged differently. For example, a nonprofit organization might have lower interchange rates than a travel agency or luxury goods retailer.
Transaction Size
Some interchange fees are subject to minimum or maximum fee caps, especially for small transactions. In micro-purchases (like buying a coffee), the flat fee portion can make the interchange feel very high compared to the total amount.
The Anatomy of a Transaction: Where Your Money Goes
Let’s say a customer makes a $100 purchase at your store using a rewards credit card. You might be charged a total processing fee of 2.9% + $0.30, or $3.20.
Here’s a rough breakdown of where that money goes:
- Interchange fee to issuing bank: $1.80 (1.8%)
- Assessment fee to card network (Visa, Mastercard): $0.15
- Processor markup (your payment provider’s fee): $1.25
As you can see, the interchange fee makes up more than half of the total cost. And yet, this is the part most merchants understand the least.
Why You Might Be Paying More Than You Think
Now that we’ve broken down the basics, let’s look at some reasons why you could be paying more in interchange fees than necessary—without even realizing it.
Bundled or Tiered Pricing Models Hide the Real Cost
Many payment processors offer what’s known as tiered pricing or bundled pricing. In this model, they group interchange fees into broad categories like “qualified,” “mid-qualified,” and “non-qualified” transactions.
You’re charged based on these tiers, but the processor doesn’t reveal what the actual interchange fee is for each transaction. This lack of transparency means:
- You can’t see which cards cost more to accept
- You may be paying more than necessary for lower-cost transactions
- The processor can assign transactions to more expensive tiers, increasing their markup
This is one of the most common ways merchants overpay without knowing it.
Rewards Cards Are Eating Your Profits
Customers love rewards cards—and who can blame them? They get points, miles, or cashback every time they spend. But someone has to pay for those perks, and it’s usually the merchant.
Rewards cards have significantly higher interchange fees than basic cards. While you can’t control what card your customer uses, you can track which types are being used most. If your processor provides a detailed interchange report, review it regularly to see how much these cards are costing you.
Some merchants consider adding a small service fee or offering a cash discount to help offset these costs—but that decision depends on your customer base and industry norms.
Not Updating Your POS or Payment Equipment
Using outdated payment terminals can result in higher interchange fees. For example, keyed-in transactions (when you manually type in the card number) are considered less secure than EMV chip or tap transactions—and are charged higher fees.
By simply upgrading to a terminal that supports contactless and chip payments, you could reduce the risk profile of your transactions and lower your interchange costs.
Also, make sure your POS system is set up correctly with the right MCC and transaction descriptors. Errors in how your business is categorized can lead to higher fees across the board.
Not Reviewing Statements or Interchange Data
Too many business owners don’t look at their monthly statements in detail. As long as the total amount seems reasonable, they assume everything is fine. But hidden within those pages could be signs that you’re paying too much.
Look for:
- Effective rate (total fees divided by total sales): This gives you a quick snapshot of your true cost.
- Breakdown by card type: See which ones are costing you the most.
- Miscellaneous fees or surcharges: These can signal inefficiencies or incorrect settings.
Knowledge is power. The more you know about your interchange data, the better decisions you can make.
What Can You Do to Reduce Interchange Costs?
While you can’t eliminate interchange fees—they’re non-negotiable—you can take steps to manage and reduce their impact.
Choose Interchange-Plus Pricing
Switching to an interchange-plus pricing model is one of the best ways to get control over your fees. This model separates the actual interchange fee (which goes to the bank) from your processor’s markup.
With interchange-plus, you:
- See exactly what you’re being charged
- Pay only what the card network requires, plus a transparent margin
- Can analyze trends and make strategic decisions
This model is often better for businesses that process a higher volume of sales or want more control over their financials.
Use Secure, In-Person Transactions When Possible
Encourage customers to use chip or tap payments. These are the most secure methods and usually qualify for lower interchange rates compared to keyed-in or online transactions.
This can also reduce chargeback risk—another source of fees and stress.
Optimize Your MCC and Processing Settings
Work with your processor to ensure your Merchant Category Code (MCC) is accurate. Some industries qualify for better rates, and even a small change in classification can result in savings.
Also, review how your terminal or gateway is configured. Incorrect settings might trigger higher interchange tiers.
Educate Your Staff
Your employees play a big role in how payments are handled. Train them on best practices such as avoiding manual key-ins, always using chip readers, and handling declined transactions properly.
Small mistakes at the point of sale can add up to big costs over time.
Should You Pass Fees to Customers?
Some merchants explore adding a surcharge for credit card payments or offering a cash discount to offset interchange fees. While this can help recover costs, it must be done carefully and legally.
In some states or countries, surcharging is regulated or even prohibited. Even where it’s allowed, it must be disclosed clearly and not applied to debit card transactions.
Before implementing such a policy, consult your payment processor and review local regulations. Also, consider your customers’ perspective—some may see it as a negative experience.
What the Future Holds for Interchange Fees
As of 2025, interchange fees continue to evolve. With growing pressure from regulators, merchant advocacy groups, and lawmakers, there is increased scrutiny on how fees are structured and disclosed.
Some potential developments include:
- Caps or regulations: Governments may step in to limit fees, especially for small businesses.
- Shift to real-time payments: Instant settlement systems may reduce reliance on traditional card networks, which could affect fee structures.
- Greater transparency: More processors may adopt interchange-plus models to meet demand for clarity.
- Increased digital wallet usage: Apple Pay, Google Pay, and others may change how interchange is handled behind the scenes.
Staying informed about industry trends will help you adapt and stay competitive.
Final Thoughts
Interchange fees are a complex but critical part of credit card processing. Though they’re often invisible at first glance, they play a massive role in how much you pay to get paid.
By understanding what interchange fees are, how they’re calculated, and why they vary, you empower yourself to make smarter decisions. Whether it’s choosing a better pricing model, upgrading your equipment, or simply reviewing your statements more carefully, even small adjustments can lead to big savings.
In a world where every dollar matters, gaining control over interchange fees isn’t just good practice—it’s essential business strategy.