Interchange Fee Explained: How Card Payment Fees Work for Merchants

An interchange fee is a charge businesses pay every time a customer uses a credit or debit card. This fee moves from the merchant’s bank (the acquiring bank) to the customer’s bank (the issuing bank) and helps cover costs such as fraud prevention, transaction authorization, network security, and cardholder rewards programs.

Because interchange fees vary by card type, transaction method, industry, and card network, they often represent the largest portion of total card processing fees. For merchants that rely on card payments, understanding interchange fees is critical for protecting margins, managing cash flow, and making informed pricing decisions.

This guide will cover:

• What interchange fees are and why they exist
• Who sets fees and how rates differ
• How fees are calculated
• How fees affect accounting and cash flow
• Practical ways businesses can reduce interchange-related costs

What Are Interchange Fees?

Interchange fees are wholesale fees embedded in every card transaction. While merchants don’t pay these fees directly to banks, they are passed through by payment processors as part of total processing costs.

Interchange fees apply to:

• Credit card payments
• Debit card payments
• In-person, online, and mobile transactions

Each payment is recorded as part of your business transactions and categorized based on how it is processed and the level of risk involved.

Why Do Interchange Fees Exist?

Interchange fees exist to compensate issuing banks for the costs they take on when cards are used, including:

• Fraud monitoring and reimbursement
• Chargeback handling
• Card issuance and account servicing
• Payment network infrastructure
• Funding rewards programs

Without interchange fees, banks would need to recover these costs through higher cardholder fees or reduced card benefits.

Before we go further: When invoices, payments, and deposits don’t align, interchange fees become difficult to trace. Using a structured invoicing process makes it easier to understand how card fees affect revenue.

Who Sets Interchange Fees?

Interchange fees are set by card networks, not by merchants or payment processors. Each network publishes detailed interchange schedules covering hundreds of transaction scenarios.

Rates change due to:

• Fraud trends
• Regulatory oversight
• Legal settlements
• Shifts in consumer payment behavior

Although cardholders don’t see interchange fees on receipts, these fees influence rewards programs, interest rates, and which cards merchants prefer to accept.

How Are Interchange Fees Calculated?

Most interchange fees follow the same structure:

• A percentage of the transaction amount
• Plus a fixed per-transaction fee

The final rate depends on several factors:

• Card brand and card type
• Debit vs. credit
• Consumer vs. commercial cards
• In-person vs. online transactions
• Merchant industry classification

For debit card transactions, interchange fees may be capped when the issuing bank holds more than $10 billion in assets. In these cases, the fee is limited to a base amount plus a small percentage of the transaction, which typically makes regulated debit payments cheaper than credit cards for merchants. 

These limits are defined under Federal Reserve Regulation II debit interchange rules and are one reason many businesses encourage debit or bank-based payments at checkout.

Visa

Visa interchange fees vary based on:

• Credit vs. debit cards
• Consumer vs. business cards
• Card-present vs. card-not-present transactions
• Merchant category codes

Visa outlines how interchange rates change based on factors like transaction method, card type, and merchant category, helping businesses understand why in-person, online, and industry-specific payments are priced differently.

Mastercard

Mastercard uses a similar structure but maintains its own interchange categories and thresholds. Even small differences between Visa and Mastercard rates can materially affect businesses processing high volumes. 

Discover

Discover sets its own interchange schedules, separate from Visa and Mastercard, which means rates can differ depending on transaction type and merchant category. 

The network has also been involved in interchange fee class action settlements, increasing merchant attention on how processing costs are disclosed and passed through.

American Express

American Express does not publish traditional interchange fees. Instead, it charges a wholesale discount rate that bundles issuing, network, and processing costs into a single percentage.

Credit Card vs. Debit Card Interchange Fees

Credit card interchange fees are typically higher because credit transactions:

• Carry higher fraud risk
• Fund rewards and loyalty programs
• Involve unsecured lending

Debit card interchange fees are generally lower, especially for regulated transactions. Encouraging debit payments or ACH payments can significantly reduce processing costs over time.

Interchange Pricing Models

How interchange fees show up on your processing statement depends on the pricing model your payment processor uses. While the underlying interchange rates are set by card networks, the pricing structure determines how clearly those fees are passed through to your business.

Interchange-Plus Pricing

Interchange-plus pricing separates costs into two parts:

• The actual interchange fee set by the card network
• A fixed markup charged by your processor
  

This model offers the most transparency. You can see exactly what you’re paying in interchange versus what your processor earns. It’s often preferred by businesses that want to analyze fees, compare processors, or control costs as volume grows.

Flat-Rate Pricing

Flat-rate pricing combines:

• Interchange fees
• Network assessments
• Processor fees

into one single percentage.

This approach is simple and predictable, which can be appealing for new or low-volume businesses. However, it may result in higher costs for low-risk transactions because all payments are priced the same, regardless of their actual interchange rate.

Tiered Pricing

Tiered pricing groups transactions into broad categories, such as:

• Qualified
• Mid-qualified
• Non-qualified

Each tier has its own rate, but the criteria for these categories are often unclear. Because transactions are bundled together, it can be difficult to see which interchange fees apply and why certain payments cost more than others.

Interchange Pricing Model Comparison

How Interchange Fees Work in Practice

A typical card transaction follows this sequence:

1. A customer pays with a card
2. The transaction routes through the card network
3. The issuing bank approves the payment
4. The acquiring bank pays the issuing bank minus interchange
5. The merchant receives funds after fees

Using structured invoice payments and a payment portal helps connect each transaction back to a specific invoice.

How Interchange Fees Affect Accounting

Every interchange fee affects how revenue and expenses are recorded. Fees must be reflected properly in:

• The general ledger
• Journal entry accounting
• Financial accounting reports

Businesses using double-entry accounting must ensure processing fees are recorded as operating expenses.

Understanding what accountants do also helps business owners see why accurate fee classification matters for compliance and reporting.

Interchange Fees and Accounting Methods

Interchange fees are operating expenses. How they’re recorded depends on your accounting method:

• Under accrual basis accounting, fees are recorded when incurred
• Under cash accounting, fees are recorded when paid

The IRS also provides guidance on how businesses should record transactions, including documenting payment fees as ordinary expenses and keeping consistent records that support accurate tax reporting and audits.

Interchange Fees, Assets, and Financial Statements

Processing fees reduce net income and affect:

• Cash balances on the balance sheet, since card fees are deducted before funds reach your bank account
  
• Long-term financial projections, where recurring processing costs can materially change profit forecasts
  
• Decisions around business structure, especially when comparing tax treatment and operating costs across entities

Fees also influence how businesses manage assets and liabilities, track fixed assets, and allocate costs correctly through amortization vs. depreciation, ensuring financial statements reflect the true cost of accepting card payments.

How Businesses Can Reduce Interchange Fees

While interchange rates aren’t negotiable, merchants can reduce their impact by:

• Using EMV terminals
• Avoiding keyed transactions
• Offering lower-cost bank transfers
• Setting clear billing cycles
• Issuing proper receipts of payment
• Using defined net 30 vs net 60 payment terms
• Improving invoice timing
• Applying consistent follow-up on unpaid invoices

Interchange Fees and Cash Flow

Interchange fees reduce the net amount deposited into your account on every card transaction. Because these fees are deducted before funds settle, they can quietly compress available cash, mostly for businesses with thin margins or high card volume. Over time, this can contribute to cash flow problems if fees aren’t tracked consistently.

Reviewing processing fees alongside your small business bank account activity helps improve liquidity planning by:

• Identifying the true net cash received from card sales
• Spotting weeks or months where higher card usage reduced available working capital
• Adjusting invoice timing or payment methods to smooth cash inflows

When interchange costs are monitored as part of regular cash reviews, businesses are better positioned to plan expenses, avoid short-term shortfalls, and maintain predictable operating cash.

Ready to Manage Interchange Fees With Confidence?

Interchange fees are unavoidable, but confusion isn’t. When invoicing and payments work together, businesses can see exactly how processing fees affect each transaction and overall cash flow. Tools like Invoice Fly online payments help merchants accept cards while maintaining clearer records of fees, settlements, and net revenue.