Interchange fees are the charges a merchant’s bank pays to the cardholder’s bank every time a customer pays with a credit or debit card. For credit cards they typically run from about 1.15% to 3.15% of the transaction. They are the single largest piece of what a business pays to accept cards, they are set by the card networks rather than negotiated with the merchant, and the exact rate on any given sale depends on the card used, how it was presented, what the business sells, and whether federal rules cap the issuer.
How the Fee Gets Taken
When a card is tapped or inserted, the terminal sends the transaction to the merchant’s bank (the acquiring bank), which routes it through the card network to the bank that issued the customer’s card. The issuing bank approves or declines and sends the answer back.
At settlement, the issuing bank moves the sale amount to the acquiring bank minus the interchange fee. On a $100 grocery sale at a 1.5% interchange rate, the issuing bank keeps $1.50 and passes $98.50 along. The acquiring bank then deposits funds into the merchant’s account after its own cut. Nothing is billed separately; the fee is simply withheld. That is why many small business owners don’t see the full weight of interchange until they sit down with a statement.
What Drives the Rate
The networks publish rate tables with hundreds of interchange categories. Two customers buying the same item at the same register can generate different fees depending on what’s in their wallets and how they pay.
Card Type and Rewards Tier
Debit carries lower interchange than credit, because the money comes straight from the customer’s account and the issuer takes less risk. Within credit, a basic card costs the merchant less than a premium rewards card. The points and cashback a cardholder enjoys are funded in part by higher interchange charged to the business. A standard Visa credit transaction might sit around 1.5% plus a flat per-transaction amount, while a Visa Signature rewards card can push past 2.5%.
In-Person vs. Online
Card-present transactions where the chip is read carry lower rates than online or phone orders. Fraud is harder when the plastic is physically inserted. Keyed and online purchases carry higher interchange to offset chargebacks and fraudulent orders.
Merchant Category
Every business that accepts cards gets a four-digit Merchant Category Code describing its primary line of work.1Visa. Visa Merchant Data Standards Manual Grocery stores and gas stations tend to see lower rates because they process high volumes of small, low-risk sales. Categories the networks treat as higher risk see steeper rates. The MCC follows a business across all its transactions, so being classified correctly matters.
Scheduled Updates
Rates are not set once. Mastercard, for example, updates its interchange schedule twice a year to reflect fraud trends and market conditions.2Mastercard. Mastercard Interchange Fees and Rates Explained A merchant’s effective interchange cost can shift even when nothing about the business has changed.
Where Interchange Sits in Your Total Processing Cost
Interchange is the biggest piece of what a merchant pays to accept cards, but it isn’t the whole bill. The full cost, sometimes called the merchant discount rate, has three parts.3Congress.gov. Merchant Discount, Interchange, and Other Transaction Fees in the Payment Card Industry
- Interchange, paid to the issuing bank. Set by the network, not negotiable.
- Assessment fees, paid to the card network itself, generally around 0.1% to 0.2%.
- Processor markup, paid to the company running the terminal or online gateway. This piece is negotiable and varies widely.
A merchant paying 2.5% total on a sale might be sending roughly 1.8% to the issuing bank, 0.15% to the network, and 0.55% to the processor. Because interchange and assessments are fixed by the networks, the processor’s markup is where a business actually has leverage.
How the processor bills matters too. Under interchange-plus pricing, the actual interchange rate is passed straight through and a fixed markup is added on top. If interchange on a transaction is 1.65% plus $0.10 and the processor’s markup is 0.30%, the merchant pays 1.95% plus $0.10. Each line on the statement reflects what the networks actually charged.
Under tiered pricing, transactions are grouped into broad buckets (qualified, mid-qualified, non-qualified), each with a single flat rate. A low-cost debit sale and a premium rewards sale can end up in the same tier even though the underlying interchange rates are very different. Tiered statements are easier to read, but processors have wide discretion over which bucket a sale falls into, and that discretion tends to favor the processor. For most merchants doing meaningful volume, interchange-plus is the cleaner deal.
The Durbin Amendment and Debit Caps
The Durbin Amendment, part of the Dodd-Frank Act and codified at 15 U.S.C. ยง 1693o-2, gave the Federal Reserve authority to regulate debit card interchange charged by large financial institutions.4Office of the Law Revision Counsel. 15 USC 1693o-2 – Reasonable Fees and Rules for Payment Card Transactions It does not apply to credit cards.
Under Regulation II, banks and credit unions with more than $10 billion in assets are limited to a debit interchange fee of 21 cents plus 0.05% of the transaction.5eCFR. 12 CFR 235.3 – Reasonable and Proportional Interchange Transaction Fees Issuers meeting fraud-prevention standards can add 1 cent per transaction.6eCFR. 12 CFR 235.4 – Fraud-Prevention Adjustment On a $50 debit purchase at a large bank, the maximum interchange works out to about 24.5 cents: 21 cents base, 2.5 cents (0.05% of $50), and the 1-cent fraud adjustment.
Institutions with assets under $10 billion are exempt from the cap. Community banks and smaller credit unions can charge higher debit interchange than the national banks.
The Durbin Amendment also forbids issuers and networks from restricting debit transactions to a single network. Every debit card must be enabled on at least two unaffiliated networks, and the merchant has the right to choose which eligible network to route through.7eCFR. 12 CFR 235.7 – Limitations on Payment Card Restrictions Many merchants don’t know they have the choice, and the processor’s default is often the more expensive route.
What Merchants Can Do About It
Interchange itself isn’t negotiable, but a merchant has a few levers.
The first is routing. On debit, ask the processor which network each transaction is being sent through and whether the cheaper eligible network is being used.
The second is a credit card surcharge, a fee added at checkout when a customer pays by credit. Card network rules cap surcharges at 4% of the transaction, and the surcharge can’t exceed the merchant’s actual cost to accept the card. A merchant must notify Visa and their acquiring bank at least 30 days before starting.8Visa. Surcharging Credit Cards – Q&A for Merchants Clear signage is required at the store entrance and at the point of sale, and the surcharge must appear as its own line on every receipt. Surcharging debit transactions is prohibited under federal law and network rules. A handful of states, including Connecticut, Massachusetts, and Maine, ban credit card surcharges outright, so a business operating in more than one state has to check each one.
The third is a cash discount, which runs the opposite way: the shelf price is the card price, and customers who pay cash get a reduction. Federal law prevents networks from blocking cash discounts, the discount must be available to all customers, and it must be clearly disclosed. Cash discounting avoids most of the regulatory friction of surcharging.
Two Costs That Catch Merchants Off Guard
The 1099-K Shows Gross, Not Net
Payment processors report card sales on Form 1099-K at the gross amount, which the IRS defines as the total before adjustments for fees, refunds, or discounts.9Internal Revenue Service. Instructions for Form 1099-K A merchant who processes $500,000 in card sales but receives $488,000 after fees will still see $500,000 on the form. The $12,000 isn’t lost; interchange, assessments, and processor markup are all deductible business expenses. But the merchant has to track and deduct them separately rather than trusting the 1099-K to show a net figure. Skipping that step means paying tax on money the business never kept.
Refunds Usually Don’t Return the Interchange
When a customer returns a purchase for a full refund, the merchant typically does not get the interchange fee back. The issuing bank already took its cut at settlement, and most processors treat refunds as separate transactions rather than reversals. Some processors charge an additional fee to run the return. The business ends up paying interchange on a sale that produced no revenue, and sometimes a second fee on the way out. This is where restocking fees often come from. For merchants with high return rates, non-refundable interchange quietly erodes margin in a way a basic cost-of-goods analysis won’t surface.
Pending: The Credit Card Competition Act
Credit card interchange remains largely unregulated at the federal level. The Credit Card Competition Act would extend a version of the Durbin routing rule to credit cards. As of early 2026 it has been introduced in the Senate and referred to the Banking Committee, and it has not been enacted.10Congress.gov. S.3623 – Credit Card Competition Act of 2026 The bill would apply to issuers with more than $100 billion in assets, require their credit cards to be enabled on at least two unaffiliated networks, and let merchants route transactions over whichever network offers the lower fee. It excludes three-party networks such as American Express and Discover, where the network itself issues the card. Supporters argue it would create downward pressure on credit interchange; the major networks and large issuing banks have said it would undermine rewards and card security.