Interchange Fee Meaning

A small fee paid by a merchant's bank (the acquirer) to a cardholder's bank (the issuer) for every credit or debit card transaction. This fee is meant to cover the costs of processing the payment, the risk of fraud, and the cost of the credit "grace period" provided to the customer.

While the merchant doesn't pay the interchange fee directly, it is usually the largest part of the "merchant discount rate" (the total fee a merchant pays for accepting a card). These fees vary depending on the type of card used (e.g., rewards cards have higher fees) and the industry of the merchant.

Interchange fees are a major source of revenue for banks and are a key reason why they offer rewards like "cashback" to cardholders.

In recent years, many regions (like the EU) have introduced caps on these fees to lower costs for small businesses, sparking a debate between banks and retailers over who should pay for the cost of the payment network.