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What are interchange fees and how do they work?

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The GoCardless content team comprises a group of subject-matter experts in multiple fields from across GoCardless. The authors and reviewers work in the sales, marketing, legal, and finance departments. All have in-depth knowledge and experience in various aspects of payment scheme technology and the operating rules applicable to each. The team holds expertise in the well-established payment schemes such as UK Direct Debit, the European SEPA scheme, and the US ACH scheme, as well as in schemes operating in Scandinavia, Australia, and New Zealand. See full bio

Last editedMar 20233 min read

In 2019 alone, it’s estimated that card payments made up around 63% of all payments in Australia and that number will have only grown during the pandemic. Indeed, the card and payments market in the country is projected to increase by a further 6% by 2026.

With so many payments being made by card, it’s imperative that businesses understand the interchange fees that occur after every card payment is made. Also known as an interchange reimbursement fee, this is a fee that can be defined by many variables and is a part of the overall cost of every card-based transaction, that must be accounted for if businesses want an accurate picture of their finances.

What is an interchange fee?

When a payment is processed via a credit or debit card scheme, the merchant’s bank must pay a fee to the cardholder’s bank. The business must then reimburse this amount as part of the payment processing fee alongside any acquirer markups or card scheme fees. Interchange fees make up the largest part of these fees (between 70% and 90%).

The fee is charged as a percentage of the purchase and typically appears on statements as a single amount, even though there could be hundreds of single interchange fees making up the overall fee.

How much are interchange fees?

Each card issuer (Visa, Mastercard, American Express, etc) has its own fees that depend on multiple complex and variable factors. On average, for a standard card payment on a Visa debit card, the interchange fee rate is somewhere around 0.22%. So, if you spend $1,000, you’ll pay around $2.20. For credit cards it gets more complicated, as you pay more depending on the venue.

You might, for example, pay slightly more at a retail store than you would for a taxi. The fees are often slightly higher for Mastercard payments and particularly so if you’re using a premium card. In fact, Mastercard charges just 0.44 cents for a normal card and 11 cents for a premium card. This is because platinum cards often come with added bonuses that the issuer needs to pay for.

Note that interchange fees are not static and are based on both current interest rates and the risks involved. All card issuers adjust their rates at least twice a year.

How to calculate interchange fees?

Besides the standard interchange fees set by your card issuer, there are several other factors that could influence how your interchange fees are calculated.

Card type

The lower the risk, the lower the interchange fee. This means lower fees for debit cards with chip and PIN, and higher rates for contactless credit cards. As already discussed, premium cards also charge more to pay for their customer benefits.

Card present or not present

Generally speaking, fees are lower for transactions where the card is physically present (face-to-face) because the risk of potential fraud is lower. Mail order and online payments typically charge a higher rate as they are seen as inherently riskier.

Merchant category code

In Australia and in the US, both Mastercard and Visa grant lower fees to businesses such as charities and utility companies. In fact, for some charities they negate the fees entirely. They might also charge a higher rate for high-net-worth items. Larger businesses also typically pay lower fees as they have built up more trust and ‘clout’ with the card issuer.

Country of transaction

If you’re making purchases overseas, then interchange fees might be lower or higher. In Europe fees are generally low, whereas in the US they are much higher. In Australia, the cap for debit and prepaid fixed interchange has been reduced from $0.15 to $0.10 (as of 1 February 2022), while the cap remains at 0.20% for debit and prepaid interchange rates that are percentage-based. In the US, meanwhile, there is no cap.

Security

The more secure a transaction is, the lower the interchange fees are. This means that the more security protocols a merchant has in place, the better for their bottom line.

We can help

GoCardless is the global leader in bank payments, uniting bank debit, open banking and payments intelligence. We make it easy to collect one-off and recurring payments directly from your customers' bank accounts automatically. As there are no cards involved in the process, there are minimal fees to speak of and zero interchange fees to worry about.

This allows you to save time and money by getting paid on time, every time. The ease and reliability of the system will also help you to win and retain more customers and reduce the amount of time and stress your financial admin team needs to spend dealing with payment collection.