Interchange
Interchange refers to the fee paid between banks for the acceptance of card-based transactions, typically when a customer uses a credit or debit card to make a purchase. The fee is usually paid by the merchant’s bank (acquirer) to the cardholder’s bank (issuer) as part of the payment processing system. This is evaluated within Credit Card Mechanics.
Plain-Language Meaning
Interchange is the cost that a merchant’s bank pays to a cardholder’s bank every time a credit or debit card transaction is processed. This fee helps cover the costs and risks associated with handling and approving card payments.
Practical Example
When you use your credit card to buy something at a store, the store’s bank pays a small fee to your card-issuing bank as part of the transaction process. This fee is called the interchange.
What It Does Not Mean
Interchange does not refer to the total fees a merchant pays for accepting cards, nor does it mean the entire payment processing cost. It is specifically the fee exchanged between banks, not the fee charged directly to consumers or merchants.
How the System Uses It
The system uses interchange fees to compensate the card-issuing bank for the services, risk, and infrastructure involved in processing card transactions. These fees are set by payment networks and are a key component in how card payments are routed and settled between banks.
Common Misconceptions
- “Interchange is the same as the merchant fee.” Interchange is only one part of the total merchant fee, which may include other charges from payment processors.
- “Consumers pay the interchange fee directly.” The interchange fee is paid between banks and is not charged directly to consumers.
- “Interchange fees are set by individual banks.” Interchange fees are typically set by card networks like Visa or Mastercard, not by individual banks.
Related Pages
Related Glossary Terms
FAQ
- Who ultimately pays the interchange fee? The merchant’s bank pays the interchange fee to the cardholder’s bank, but the cost is often passed on to merchants as part of their overall payment processing fees.
- Do interchange fees vary by transaction type? Yes, interchange fees can vary depending on factors such as the type of card used, the transaction amount, and the merchant’s industry.