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Interchange Fundamentals

Interchange is the largest component of card processing costs. It's set by card networks, paid by acquirers to issuers, and passed through to you. You can't negotiate interchange directly, but you can influence which rates apply.

Understanding interchange helps you identify when you're overpaying and what you can actually control.

What Is Interchange?

Interchange is a fee paid by the merchant's bank (acquirer) to the cardholder's bank (issuer) on every card transaction. It compensates issuers for:

  • Float: Issuer pays merchant before collecting from cardholder
  • Credit risk: Cardholder might not pay their bill
  • Fraud risk: Unauthorized transactions
  • Rewards programs: Cash back, miles, points
  • Operating costs: Card issuance, customer service, fraud monitoring

Who Sets Interchange?

Card networks (Visa, Mastercard, etc.) publish interchange schedules. Individual issuers don't negotiate rates. The network sets categories based on:

  • Card type (debit, credit, rewards, commercial)
  • Merchant category (MCC)
  • Transaction type (card-present vs card-not-present)
  • Data quality (AVS, CVV, Level 2/3)
  • Processing method (chip, swipe, keyed)

Your Total Processing Cost

Total Cost = Interchange + Assessments + Processor Markup
ComponentTypical %Who Sets ItNegotiable?
Interchange1.5-2.5%NetworksNo
Assessments0.13-0.15%NetworksNo
Processor markup0.1-0.5%+ProcessorYes

Interchange is 70-90% of your total cost. Focus your optimization here.


Interchange Rate Categories

By Card Type

Card TypeTypical RateWhy
Regulated debit0.05% + $0.21Durbin Amendment caps
Unregulated debit0.80% + $0.15Smaller issuers exempt
Standard credit1.65% + $0.10Basic credit cards
Rewards credit1.80-2.10% + $0.10Rewards funded by interchange
Premium/Signature2.10-2.40% + $0.10High-end rewards cards
Commercial/Corporate2.50-2.90% + $0.10Business/purchasing cards
International1.80-2.40% + variesCross-border premium

By Transaction Type

Transaction TypeRate ImpactWhy
Card-present (chip)LowestMost secure
Card-present (contactless)LowSecure, fast
Card-present (swipe)MediumLess secure than chip
Card-not-presentHighestHighest fraud risk
Keyed/manualHighestNo card verification

By Merchant Category (MCC)

CategoryTypical RateWhy
GroceryLowerThin margins, high volume
Gas stationsLowerCompetitive market
UtilitiesLowerEssential services
RetailMediumStandard risk
RestaurantsMediumStandard risk
E-commerceHigherHigher fraud
High-risk MCCsHighestElevated fraud/chargebacks

Interchange Qualification

Transactions "qualify" for different interchange tiers based on how they're processed. Missing qualification requirements = higher rates.

Qualification Levels

LevelRateRequirements
QualifiedLowestAll requirements met
Mid-qualifiedMediumMost requirements met
Non-qualifiedHighestRequirements not met

What Causes Downgrades

IssueDowngrade ImpactFix
Missing AVS data+0.3-0.5%Always submit address
Missing CVV+0.2-0.4%Always collect CVV
Late settlement+0.3-0.5%Batch same day
Wrong transaction typeVariesUse correct codes
Missing Level 2/3 data+0.5-0.8%Submit enhanced data

Qualification Checklist

For every transaction:

  • Submit billing address for AVS
  • Submit CVV for CNP transactions
  • Batch within 24 hours of authorization
  • Use correct transaction type indicators
  • Include tax amount (for Level 2)

Level 2 and Level 3 Processing

Enhanced data levels reduce interchange on B2B transactions.

Level 2 Data

Required fields:

  • Tax amount
  • Customer code/PO number
  • Merchant postal code

Savings: 0.3-0.5% on commercial cards

Level 3 Data

All Level 2 plus:

  • Line item details (description, quantity, unit cost)
  • Product codes
  • Freight/shipping amounts
  • Duty amounts

Savings: 0.5-0.8% on commercial/purchasing cards

Who Benefits from Level 2/3?

Business TypeLevel 2/3 Value
B2B sellersHigh (commercial cards common)
Government vendorsHigh (purchasing cards)
WholesalersHigh
Consumer retailLow (few commercial cards)
Consumer e-commerceLow

Implementation

Most processors support Level 2/3 data. Check:

  1. Does your processor accept Level 2/3?
  2. Can your POS/gateway transmit the fields?
  3. What % of your transactions are commercial cards?

ROI calculation:

Annual B2B volume × Commercial card % × 0.5% savings = Annual savings
Example: $1M × 40% × 0.5% = $2,000/year

Interchange Optimization Strategies

1. Encourage Debit

Regulated debit costs ~0.05% + $0.21. Credit costs 1.5-2.5%+.

$100 TransactionDebit CostCredit Cost
Interchange$0.26$1.80
Difference-+$1.54

Tactics:

  • PIN debit option at checkout
  • Debit-first button order
  • Cash discount programs

2. Reduce Card-Not-Present Rates

CNP transactions pay higher interchange. If you can convert to card-present:

ChannelRate Premium
Card-present chipBaseline
Card-not-present+0.3-0.5%
Keyed entry+0.5-1.0%

Tactics:

  • In-store pickup with card-present payment
  • Mobile POS for service businesses
  • Payment terminals for recurring (where compliant)

3. Qualify All Transactions

Ensure no unnecessary downgrades:

  • Always submit AVS/CVV
  • Batch daily (not weekly)
  • Use correct MCC
  • Include tax amounts

4. Implement Level 2/3 for B2B

If more than 20% of volume is commercial cards:

  • Enable Level 2 data (low effort)
  • Consider Level 3 for large B2B volume

5. Review Card Mix

Understand your card mix:

Card Type% of VolumeAverage Rate
Debit35%0.80%
Standard credit40%1.75%
Rewards credit20%2.10%
Commercial5%2.60%

High rewards/commercial percentage = higher costs. Can you shift mix?


Interchange-Plus Pricing

What It Is

Processor passes through exact interchange + adds fixed markup.

Your cost = Interchange (varies) + Markup (fixed)
Example: 1.80% + 0.10% + $0.10 = 1.90% + $0.10

Why It's Better

Pricing ModelTransparencyBest For
Interchange-plusFullMost merchants
Tiered/bundledLowProcessor (not you)
Flat rateSimpleVery small volume

What to Ask Your Processor

  1. "Can you show me exact interchange on my statement?"
  2. "What is your markup over interchange?"
  3. "Are there any other fees beyond interchange + markup?"

Reading Your Interchange Statement

What to Look For

Line ItemWhat It Means
VS CPS RETAIL DEBITVisa card-present retail debit rate
VS CPS E-COMMERCEVisa card-not-present rate
MC MERIT IIIMastercard high-qualification rate
EIRFElectronic interchange reimbursement fee (downgraded)
StandardNon-qualified rate (worst)

Red Flags

  • High percentage of "Standard" or "EIRF" transactions
  • Downgrades you can't explain
  • Interchange categories you don't recognize

Monthly Interchange Audit

  1. Pull interchange breakdown from processor
  2. Calculate average rate by card type
  3. Identify highest-cost categories
  4. Check for unexpected downgrades
  5. Calculate effective rate (total fees / total volume)

Network-Specific Notes

Visa

  • Publishes rates semi-annually (April, October)
  • CPS (Custom Payment Service) rates for qualified transactions
  • EIRF (Electronic Interchange Reimbursement Fee) for downgrades

Mastercard

  • Publishes rates semi-annually
  • Merit rates for qualified transactions
  • Standard rates for non-qualified

American Express

  • Different model (often direct acquiring)
  • Rates not publicly published
  • OptBlue program for third-party acquiring
  • Generally higher than Visa/MC

Discover

  • Similar structure to Visa/MC
  • Smaller market share
  • Competitive rates to gain acceptance

Scale Callout

VolumeFocus
Under $100k/moUse flat-rate processor. Don't overthink interchange.
$100k-$500k/moSwitch to interchange-plus. Review monthly.
$500k-$2M/moOptimize qualification. Consider Level 2. Negotiate markup.
Over $2M/moFull interchange analysis. Level 2/3. Payment consultant may help.

Where This Breaks

  1. Chasing debit when customers want credit. Forcing debit can hurt conversion. Measure the tradeoff.

  2. Over-optimizing small volume. Spending 10 hours to save $50/month isn't worth it. Focus effort where volume justifies it.

  3. Processor games. Some processors quote low interchange but add hidden fees elsewhere. Compare total effective rate, not just interchange.


Next Steps

Understanding your interchange?

  1. Learn rate categories - Card type, transaction type, MCC
  2. Check qualification levels - What causes downgrades
  3. Run monthly audit - Pull breakdown, find issues

Reducing costs?

  1. Follow optimization strategies - Five tactics
  2. Implement Level 2/3 for B2B - If 20%+ commercial
  3. Avoid downgrades - AVS, CVV, same-day batch

Getting better pricing?

  1. Switch to interchange-plus - Transparency
  2. Know what to ask - Three key questions
  3. Review statement - Spot red flags