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What Are Interchange Fees And How To Calculate Them

GoCardless
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Last editedAug 20212 min read

One of the most important things for any merchant to know is how much a transaction costs them to make. It may be tempting to simply look at the “plus” side of the equation, and count up the money coming in, but this will give a false impression of how the business is performing. 

Instead, the merchant must have a firm grasp of how much it is costing them to process the transaction. Obvious overheads such as the rent paid on any premises and employee costs may be simple to factor in, but merchants would be wise to also include the interchange fee. This is a fee that impacts on the cost of taking a payment, and an understanding of how to manage the interchange fee will help any merchant to drive their profit margins higher.   

What is the interchange fee?

The interchange fee is generated as a result of the process that transpires when a customer makes a card payment:

  • The bank used by the merchant will send a payment request to the bank used by the customer

  • The customer’s bank will then run a series of checks designed to confirm that the payment request isn’t being made fraudulently, and can be accepted. The bank will also confirm that there are sufficient funds in the account to cover the payment. 

  • The customer’s bank will then pay the money into the merchant’s bank or, if there is an issue, send a rejection through. The speed at which all of this happens underpins the popularity of modern payment methods, and this ease and convenience is reflected in the interchange fee that the merchant is charged.    

On one level, the interchange fee is an amount charged by the card scheme in question to the merchant’s bank. In fact, the card issuers often pass the fee on to the customer’s bank as a means of incentivising the banks to promote the use of their particular cards. This leads many people to assume that the interchange fee is something that only needs to concern the two banks, but the reality is that it is the merchant who eventually ends up paying the interchange fee from the balance paid into their account.  

How much the interchange fee will be

Although the fee is paid into the customer’s bank, it is the card network that sets the rate at which it is charged. There is no standard rate charged across the board, with interchange fees usually made up of a percentage of the value of the transaction plus a fixed fee for each transaction.  

Each network will calculate the interchange fee they charge on the basis of factors such as:

  • The type of payment card used

  • Whether the payment was made online or in person 

  • The security protocols in use when the payment is made – such as chip and pin or 3DSecure

  • The country where the payment is being made

  • The market sector in which the merchant is trading

  • The location in which the payment card was issued. If the customer’s bank and the merchant’s bank are in different countries, for example, the complexity that this introduces to the process will result in the interchange fee being higher

  • The number of transactions in total. This means that larger merchants processing a higher number of payments may be able to negotiate lower interchange fees on the basis of the volume of transactions.  

We Can Help

If you’re interested in finding out more about interchange fees, or any other aspect of your business finances, then get in touch with our financial experts at GoCardless. Find out how GoCardless can help you with ad hoc payments or recurring payments.

Over 70,000 businesses use GoCardless to get paid on time. Learn more about how you can improve payment processing at your business today.

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