What are interchange fees?

Interchange fees are the transaction fees that a merchant pays when a customer makes a purchase using a credit or debit card. These fees are paid by a business each time a card transaction is put through.

Paying interchange fees takes a piece of what would otherwise be business profits. These fees typically make up the largest part of all card processing fees. As such, merchants are interested in knowing what they’re paying for and whether it’s possible to reduce the amount of interchange fees that are paid on each transaction.

How do interchange fees work?

Payment processors, payment gateways, card-issuing banks, payment networks and the merchant's bank all charge a percentage-based fee on each transaction. These charges appear as a single bundled amount on the payment processor bill. Each interchange fee can involve up to about 300 individual interchange fees that have been combined into one.

The proceeds of these costs are said to cover handling costs, customer support, system maintenance, bad debt and fraud costs and the risk that is involved in payment approval, amongst other factors. Interchange fees are determined by the card schemes themselves and are reviewed or changed periodically.

Who sets interchange fees?

Credit networks are responsible for setting interchange fees. They will differ based on many factors, which will be discussed below.

Each card network regularly reviews and adjusts their interchange rates, so they shouldn’t be thought of as set in stone. Typically, each card scheme looks at and/or updates these fees annually or biannually.

How much are interchange fees?

In Europe, interchange fees end up being around 0.3-0.4% of the full transaction amount. Rates for using a debit card instead of a credit card tend to be lower.

Interested in the latest Visa interchange rates? The fees associated with the EU can be found on Visa’s website. To see at Mastercard interchange rates, take a look on their website.

Other card networks, such as Discover and American Express, do not publish their rates online.

How interchange fees are calculated

Interchange fees are determined by a percentage of the transaction, often with an extra flat rate added. Since interchange fees are a bundle of fees added together and depend on the various factors mentioned above, they are different for each business.

The starting rate a business is given for its interchange fees can be changed over time based on many factors. Some of the main ones are discussed below.

• The card scheme. A Mastercard involves different fees than Visa, Discover or American Express.
• Card-present or card-not-present. If a customer makes an in-store transaction, the interchange fee may be lower than if the transaction was done over the phone or online.
• Type of card. A debit card typically has a lower exchange rate than credit cards because the level of risk with a credit card is considered higher.
• Merchant category code. The card scheme will assign a category card to each merchant, which may involve a lower or higher rate depending on the type of business.
• Consumer vs. commercial. An individual’s card will involve lower interchange fees than a commercial card.
• The region involved. A transaction where the card-issuing bank is located in the same country as the business is usually less expensive than a transaction that crosses borders.

European Interchange Fee Regulation

In June 2015, the Regulation on Interchange Fees for Card-based Payment Transactions was introduced within the EU. It involves the capping of interchange fees on widely-used cards. Additionally, the regulation imposes transparency obligations on retailers and banks, working to improve the functioning of the payment market for all card types.

The interchange fee caps were applied in December 2015, while the transparency rules came into effect in June 2016. They are applicable in all of Europe, covering both domestic and intra-EEA transactions. It leaves inter-regional transactions, however, out of scope. There is a separate agreement on those with global card schemes, limiting online payments and their associated interchange fees to 1.15% or 1.5% for debit and credit cards, respectively.

Post-Brexit, the UK has been considered an inter-regional market, which means merchants might be paying up to 168 million EUR each year in additional card fees.

Merchants, particularly those who operate mostly online or fully online, can have a tough time calculating their actual cost of acceptance because of discrepancies in interchange fees. Furthermore, the international traffic involved in e-commerce and the various countries of origin involved make it difficult to ensure the correct charges are levied for products or services.

It’s important to note further that European countries such as Serbia, Ukraine or Montenegro have card network players that aren’t as strictly regulated as elsewhere in the EU/EEA. The result is that cross-border e-commerce in these markets can cost up to 2.5 times more than a local transaction using the same card network.

How to avoid interchange fees

Though it may seem like a business has little to no control over the interchange fees it must pay, there are still ways to try and lessen these costs.

1. Encourage the use of debit cards

Since debit card transactions tend to have lower interchange rates, businesses may prefer them over credit cards and want to encourage their customers to use debit

2. See if you can negotiate with the credit card company to lower your rates

Some credit card companies may be willing to discuss lower interchange rates, though this is typically more successful for larger businesses in lower-risk industries.

3. Examine your transaction types

Point-of-sale (POS) payments are considered less risky than transactions put through without a card present. As such, it may be worth investigating whether it’s possible to increase POS transactions and decrease card-not-present ones.

4. Use an address verification service (AVS)

Credit card processors may feel that AVS reduces the risk of fraud. If they’re aware you check your customers’ identification, it could result in lower interchange fees.

5. Look into alternative payment types

You can eliminate not only interchange fees but all types of card processing fees by looking into payment service providers who offer other payment methods. kevin. is a payment gateway utilising account-to-account (A2A) payments - at a fair price that is highly competitive when compared to card interchange rates.

Eliminate credit and debit card interchange fees with kevin.

Open banking has opened up a new world of possibilities when it comes to accepting payments. It no longer has to be a given that a business accepts paying costly interchange fees, plus all other fees associated with card schemes. There are other alternatives available, such as A2A payments. This payment method is on the rise for good reason - businesses are increasingly realising the value it brings.

With kevin., you can reach over 350 million customers all around Europe. With high conversion rates and low transaction costs, the benefits of account payments are clear. Safety and security are always at the forefront with kevin., which is reassuring for merchants and their customers alike. With 10% month-on-month growth, it's clear that businesses are increasingly seeing the value of open banking and A2A payments.