interchange fee - Business Definition
The transaction fee on credit card and debit card purchases charged by the banks that issue the cards. The interchange fee is designed to compensate for risk (the card user might not pay) and for the costs of processing a transaction. It is paid by the merchants who accept the cards for payment. An interchange fee typically comprises a fixed charge per transaction plus a percentage of the amount charged.Case Study Interchange fees are a major expense for merchants that accept credit and debit cards as payment for goods and services. Each credit card transaction includes four parties: the merchant accepting the card, the merchant's bank, the bank that issued the card, and the card user. Suppose a consumer uses a credit card for a $100 purchase. The merchant may sell the transaction to its bank for $98.00. That bank, in turn, sells the transaction to the issuing bank for $98.50. The cardholder is subsequently billed for the full $100 purchase. The card issuer's share of this transaction, in this case $1.50, is the interchange fee. Interchange fees are a function of several variables, including the quantity of transactions a merchant processes, the processing procedure followed by the merchant (in-person transactions incur a smaller fee than mail-order transactions), whether the card is swiped or entered manually (swiped is less expensive), and the type of card that is used in the transaction (premium cards that offer rewards are more expensive). The increasing use of credit cards and the substantial costs borne by merchants that accept the cards has resulted in an increasing number of legal battles between merchants and issuers.