What Are Interchange Fees & How Are They Calculated?

Interchange fees, also known as interchange reimbursement fees or interchange rates, are transaction charges that the merchant acquirer must pay whenever a customer uses a credit or debit card to purchase from your business. 

These card processing fees are typically paid to the customer’s card issuer to cover handling costs, bad debt costs, and the risk involved in approving the payment. 

They are one of the three components that make up the Merchant Service Charge (MSC) paid by merchants when they take card payments. 

The MSC comprises of:

• Interchange fees: Fees are typically charged customer’s card issuer (i.e. Natwest, HBSC) to cover handling costs, bad debt costs and the risk involved in approving the payment. 
• Card scheme fees: these are fees paid by the acquirer to the card payment system like Visa and Mastercard. See our guide to scheme fees here.
• Acquirer markup: these are fees charged by the acquirer to cover their costs and profit margin.

95% of merchants will not see the interchange fees split out in their monthly statements as they will be combined into one blended merchant service charge (aka processing fee). 

Only the larger merchants that qualify for Interchange plus (IC+) or (IC++) pricing will have the interchange portion split out in their statements.

The illustration below shows which party is the end recipient of each fee type. 

Who charges interchange fees?

Card issuing companies (e.g. Natwest, Lloyds, Barclaycard) charge interchange fees, but the amount they charge is set by the Card Schemes (e.g. Visa, Mastercard) and capped for non-corporate cards. 

How much are interchange fees?

Interchange fees are put in place by the card network (Mastercard, Visa, American Express, etc) and are, for the most part, advertised online for businesses to compare. 

Visa interchange rates: UK, EU, US, SG, AU, IN

Mastercard interchange rates: UK,  EU, US, AU

Legislation came into play in 2015 to cap interchange fees at 0.20% on consumer debit cards and 0.30% on consumer credit cards (these caps do not apply to commercial cards which have higher fees). 

As a result of Brexit, Mastercard and Visa revised the interchange fees for transactions between the UK and EEA from October 15th 2021.

Interchange caps since Brexit

Visa and Mastercard Consumer card-not-present (CNP) transactions between the UK and EEA countries will be charged in line with the interregional capped consumer rates of 1.15% for debit cards and 1.50% for credit cards (previously these were 0.20% for debit cards and 0.30% for credit cards). 

The consumer CNP interchange rates for EEA-issued cards at UK-merchant locations will remain unchanged.

The interchange rates for Visa Business cards will be set at 1.60% while Corporate and Purchasing cards are revised to 1.80%.

UK Interchange Fee Regulations (IFR) cap interchange fees at 0.2% of the transaction value for consumer debit and 0.3% for consumer credit, but only if you, the acquirer and the issuer are all located within the UK (following the UK’s exit from the EU). 

However, the actual fee can be less (if the scheme or the payment service providers have set an interchange fee lower than the cap, or if the Treasury sets a lower cap for domestic credit or debit card transactions). At present the Treasury has chosen not to set a lower cap for UK credit card transactions but it can leaving the EU. 

These interchange caps only apply if the card issuer, the acquirer and the POS are located in the UK. If any are outside of the UK (whether within the EEA or the rest of the world), the transaction will not fall within the scope of the Interchange Fee Regulation (IFR) and the caps will not apply. 

Although the UK’s Payment System’s regulator doesn’t have any influence on caps outside of the UK, Visa and Mastercard have committed to capping their interchange fee levels at 0.2%/0.3% (card present) and 1.15%/1.5% (card not present) for debit and credit cards respectively for transactions made in the EEA with consumer cards issued outside of the EEA (including cards issued in the UK).

Visa interchange rates

View the full list of Visa’s Interchange Fees for UK businesses here. 

Mastercard interchange rates 

View the full list of Mastercard Interchange Fees here.

Here’s an example of the interchange and scheme fees you will pay with Worldpay.

How are interchange fees calculated?

Several factors affect the interchange fee amount. Here are some of the key factors that influence the interchange fee.

Card scheme

Card scheme is another name for the card company, e.g. Visa. As already mentioned, each card scheme charges different interchange fees. This means that the cost of a customer paying with a Mastercard may not be the same as with a customer paying with a Visa.

Card-present vs. card-not-present

Card-present (CP) transactions, also known as face-to-face transactions, are usually considered low-risk transactions and have lower interchange rates. On the other hand, card-not-present transactions — transactions done over the phone, through a virtual terminal, or online — are usually considered riskier, so they tend to have higher interchange rates. 

Merchant category code (MCC)

The MCC is a four-digit used by credit card companies to categorise businesses. It basically indicates the types of goods or services you sell to consumers. So, your MCC can also affect your interchange fees. 

Consumer vs commercial

Commercial cards typically charge higher interchange fees than cards issued to individuals.

Transaction regionality

Domestic transactions — when the card-issuing bank or organisation is in the same country as the business — will be cheaper than cross-border transactions.

Card authentication

The way the customer authenticates themselves (e.g. chip and PIN, contactless) can also affect the interchange rate.

Reward cards

Finally, reward cards are another key factor that influences the interchange rate amount. When customers pay for their goods or services using a reward card, the interchange fees tend to be higher. That’s because the increased fees pay for the extras offered by reward programs. 

Why does an issuing bank receive interchange fees? 

Interchange fees are paid to the card issuing bank (e.g. Lloyds, Natwest) to cover the work they carry out to ensure the card isn’t being used fraudulently and that the customer has adequate funds or credit in their account. 

The fee will also cover their risk of incurring bad debt if they approved a fraudulent payment in error.. 

What is interchange+ pricing?

Interchange Plus pricing is sometimes offered to some merchants with a higher card turnover – typically over £10 million annually. 95% of UK merchants will be on a blended pricing model which will not split out the interchange rate. 

Interchange+ (IC+) explained

Interchange+ pricing typically breaks down your Merchant Service Charge (MSC) — the total rate you will have to pay — into two elements:

• The Interchange – a pass-through cost from the issuing bank to your acquirer to you.
• The Plus – your acquirer’s fee for processing the transaction and card network scheme fees.

Interchange++ (IC++) explained

The Interchange++ pricing model also shows you a comprehensive breakdown of the three major payment card costs: 

• The acquirer fee (the first plus)
• Card scheme fee (the second plus)
• The interchange fee.

Many larger merchants favour IC++ pricing over IC+ and other pricing models due to the added transparency. 

It is also worth mentioning that IC++ pricing tends to track interchange rates. This means that when they go down, your costs go down as well. 

IC+ and IC++ will typically only be offered to large merchants with over £10M in annual card turnover. Indeed, only 35% of these large merchants have IC+ or IC++ pricing and they are typically the largest merchants with annual card turnover above £50 million.

How do you avoid or reduce interchange fees?

Paying interchange fees is an unavoidable part of taking card payments — they are part of the non-negotiable “wholesale fees.” 

The only variable part is the acquirer markup which is negotiable. We can help you secure the processing fees lowest rate for your business – fill in this form to get started.