What is Interchange, and What Does it Mean to Payment Facilitators?

Increased revenue is often cited as one of the benefits of becoming a payment facilitator. And it’s true that the ability to charge merchants payment processing fees offers PFs a new revenue stream.

But it’s important to note that the entire payment fee does not go directly into the PF’s pocket.

To determine your revenue as a PF, you will need to subtract the fees you’ll pay to your sponsor, who will then pay the other players in the payments ecosystem what they are owed. While there are multiple types of fees, one of the largest expenses is interchange.

Interchange is a fee that is paid as part of every credit or debit card transaction to the cardholder’s bank, otherwise known as the issuing bank. While the banks receive the fees, they do not set the rates – interchange rates are set by the card networks that carry the transactions. The rates are often expressed as a set amount plus a percentage of the transaction amount ($0.21 + 0.05%, for example).

Rates vary transaction to transaction and, typically, higher-risk transactions cost more than lower-risk ones. Generally, the rates vary by:

  • industry (industries with higher rates of chargebacks incur higher interchange rates)
  • type of transaction (whether the card is present, as in a point of sale transaction, or not present, as in an e-commerce transaction)
  • type of card used for the transaction (debit or credit)

Interchange fees are an important part of the economics within the payments industry, as one of the revenue sources that encourages players to participate. The networks must strike a balance with their rates, keeping them set high enough to incentivize banks to issue cards while not setting them high enough for merchants to decide that accepting them is not worth it. Visa and Mastercard make their published rates publicly available but Discover and American Express do not.

Because interchange differs depending on a variety of factors, it is important for PFs to know what their typical interchange fee will be. This will allow them to know how the rates will affect their overall payment revenue as a payment facilitator and to make more informed decisions when determining the processing fees they should charge their submerchants.