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
| Component | Typical % | Who Sets It | Negotiable? |
|---|---|---|---|
| Interchange | 1.5-2.5% | Networks | No |
| Assessments | 0.13-0.15% | Networks | No |
| Processor markup | 0.1-0.5%+ | Processor | Yes |
Interchange is 70-90% of your total cost. Focus your optimization here.
Interchange Rate Categories
By Card Type
| Card Type | Typical Rate | Why |
|---|---|---|
| Regulated debit | 0.05% + $0.21 | Durbin Amendment caps |
| Unregulated debit | 0.80% + $0.15 | Smaller issuers exempt |
| Standard credit | 1.65% + $0.10 | Basic credit cards |
| Rewards credit | 1.80-2.10% + $0.10 | Rewards funded by interchange |
| Premium/Signature | 2.10-2.40% + $0.10 | High-end rewards cards |
| Commercial/Corporate | 2.50-2.90% + $0.10 | Business/purchasing cards |
| International | 1.80-2.40% + varies | Cross-border premium |
By Transaction Type
| Transaction Type | Rate Impact | Why |
|---|---|---|
| Card-present (chip) | Lowest | Most secure |
| Card-present (contactless) | Low | Secure, fast |
| Card-present (swipe) | Medium | Less secure than chip |
| Card-not-present | Highest | Highest fraud risk |
| Keyed/manual | Highest | No card verification |
By Merchant Category (MCC)
| Category | Typical Rate | Why |
|---|---|---|
| Grocery | Lower | Thin margins, high volume |
| Gas stations | Lower | Competitive market |
| Utilities | Lower | Essential services |
| Retail | Medium | Standard risk |
| Restaurants | Medium | Standard risk |
| E-commerce | Higher | Higher fraud |
| High-risk MCCs | Highest | Elevated fraud/chargebacks |
Interchange Qualification
Transactions "qualify" for different interchange tiers based on how they're processed. Missing qualification requirements = higher rates.
Qualification Levels
| Level | Rate | Requirements |
|---|---|---|
| Qualified | Lowest | All requirements met |
| Mid-qualified | Medium | Most requirements met |
| Non-qualified | Highest | Requirements not met |
What Causes Downgrades
| Issue | Downgrade Impact | Fix |
|---|---|---|
| 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 type | Varies | Use 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 Type | Level 2/3 Value |
|---|---|
| B2B sellers | High (commercial cards common) |
| Government vendors | High (purchasing cards) |
| Wholesalers | High |
| Consumer retail | Low (few commercial cards) |
| Consumer e-commerce | Low |
Implementation
Most processors support Level 2/3 data. Check:
- Does your processor accept Level 2/3?
- Can your POS/gateway transmit the fields?
- 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 Transaction | Debit Cost | Credit 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:
| Channel | Rate Premium |
|---|---|
| Card-present chip | Baseline |
| 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 Volume | Average Rate |
|---|---|---|
| Debit | 35% | 0.80% |
| Standard credit | 40% | 1.75% |
| Rewards credit | 20% | 2.10% |
| Commercial | 5% | 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 Model | Transparency | Best For |
|---|---|---|
| Interchange-plus | Full | Most merchants |
| Tiered/bundled | Low | Processor (not you) |
| Flat rate | Simple | Very small volume |
What to Ask Your Processor
- "Can you show me exact interchange on my statement?"
- "What is your markup over interchange?"
- "Are there any other fees beyond interchange + markup?"
Reading Your Interchange Statement
What to Look For
| Line Item | What It Means |
|---|---|
| VS CPS RETAIL DEBIT | Visa card-present retail debit rate |
| VS CPS E-COMMERCE | Visa card-not-present rate |
| MC MERIT III | Mastercard high-qualification rate |
| EIRF | Electronic interchange reimbursement fee (downgraded) |
| Standard | Non-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
- Pull interchange breakdown from processor
- Calculate average rate by card type
- Identify highest-cost categories
- Check for unexpected downgrades
- 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
| Volume | Focus |
|---|---|
| Under $100k/mo | Use flat-rate processor. Don't overthink interchange. |
| $100k-$500k/mo | Switch to interchange-plus. Review monthly. |
| $500k-$2M/mo | Optimize qualification. Consider Level 2. Negotiate markup. |
| Over $2M/mo | Full interchange analysis. Level 2/3. Payment consultant may help. |
Where This Breaks
-
Chasing debit when customers want credit. Forcing debit can hurt conversion. Measure the tradeoff.
-
Over-optimizing small volume. Spending 10 hours to save $50/month isn't worth it. Focus effort where volume justifies it.
-
Processor games. Some processors quote low interchange but add hidden fees elsewhere. Compare total effective rate, not just interchange.
Next Steps
Understanding your interchange?
- Learn rate categories - Card type, transaction type, MCC
- Check qualification levels - What causes downgrades
- Run monthly audit - Pull breakdown, find issues
Reducing costs?
- Follow optimization strategies - Five tactics
- Implement Level 2/3 for B2B - If 20%+ commercial
- Avoid downgrades - AVS, CVV, same-day batch
Getting better pricing?
- Switch to interchange-plus - Transparency
- Know what to ask - Three key questions
- Review statement - Spot red flags
Related Pages
- Buying Payments - Processor selection
- Settlement & Reconciliation - Fee waterfall
- B2B Commercial - Level 2/3 details
- Debit Routing - Durbin and routing
- Card Payments - Card types and economics
- Reading Statements - Understanding your costs
- Processor Management - Negotiating rates
- Auth Optimization - Improving approvals
- AVS & CVV - Verification for qualification
- Benchmarks - Industry rate comparisons