Every time you use a credit card to make a purchase, the merchant’s bank account is levied an interchange fee. The merchant’s bank (acquiring bank) recovers it from the merchant in due course after giving she/he certain discounts. “Interchange is a small fee paid by a merchant’s bank (acquirer) to a cardholder’s bank (issuer) to compensate the issuer for the value and benefits that merchants receive when they accept electronic payments,” according to Mastercard, the global payment card services behemoth.
Here is a guide on interchange fee and how it impact credit card payments:
How much is the interchange fee for credit cards, and what factors determine the fee?
Interchange fee, which is paid between banks for card-based transactions, covers the cardholder bank’s (issuer) costs related to lines of credit and fraud mitigation. Credit cards typically have an interchange fee of 2% of the transaction amount, while it is only 0.3% for debit cards in India. Interchange fee is only 0.3%-0.5% of the transaction value in most advanced economies, including the European Union (EU) and Australia.
Interchange fee is determined by a number of factors, including the type of card (credit or debit), the type and size of the merchant, the type of transaction (online or physical), and the area where the card is in use. This fee helps banks to cover the costs associated with maintaining the payment network infrastructure, managing the risks involved in processing payments, and helping fund the customer rewards programs.
How is the interchange fee calculated, and who pays the fee?
An interchange fee is usually a percentage of the card transaction amount. For instance, if you buy something worth ₹10000 and the interchange fee for the transaction is 2%, the merchant will not get the entire amount. In the above case, the merchant gets ₹9800 from the sale (after the ₹200 discount).
The interchange fee of ₹200 will be shared by the card issuing bank, the payment network (RuPay, Mastercard, Visa, etc.), the merchant’s bank (acquiring bank), the PoS (Point of Sale) or payment gateway provider (Razorpay, Pinelabs, etc.) The card issuing bank will get the bulk of the interchange fee (usually about 70%-80% of the fee) as they enable the transaction by providing credit and undertake the risk of collecting the money from the customer.
Merchants pay the interchange fee to their acquiring bank, which is then passed on to the card-issuing bank. They usually negotiate a ‘merchant discount’ with their bank that includes the interchange fee and processing costs. This way, the initial discount of 2% will come down for the merchant with her/his bank (acquiring bank) bearing some of the costs.
But why should merchants pay? Most merchants choose to pay the interchange fee as it offers them a sizeable business opportunity after providing a small discount. But some merchants accept only debit cards as the interchange fee for them is low. Some merchants pass on the interchange fee in credit cards to the customer by adding it to the final bill.
Do interchange fee vary?
Interchange fee vary across transactions. Card issuing banks charge an interchange fee based on the MCC (Merchant Category Code). MCC reflects the value of the risk and the average transaction size of the business.
MCC determines the MDR (Merchant Discount Rate) percentage in a transaction. A lower MDR is charged for transactions in certain MCCs, which are considered low-risk businesses. For example, grocery and utilities are routine, low-risk categories that attract a lower MDR of 1%-1.5% (depending on the bank and the payment gateway).
The interchange fee also varies across credit cards. Credit cards that offer high rewards typically have a higher interchange fee than standard cards. This fee is often used to fund the rewards program. Card-present transactions, in which the cardholder provides the card for use at the PoS, also have a lower interchange fee compared to transactions done either online or through mobile phones. This is because online and mobile-based transactions carry a much higher risk of fraud and data errors.
How about the interchange fee for UPI transactions?
UPI (Unified Payments Interface) transactions have grown by leaps and bounds in the last few years. They now account for a vast majority of digital transactions and have emerged as a preferred mode for payments. UPI transactions currently do not attract MDR. If a person (consumer) makes a payment from their bank account to the merchant’s bank account using UPI, no charges are levied for both the parties.
But transacting through PPIs (Prepaid Payment Instruments), which allow you to make digital UPI transactions without using your bank account, attracts an interchange fee of about 0.5%-1% of the transaction amount. PPIs (PhonePe Wallet, Amazon Pay, etc.) store money in a digital wallet and are used along with other payment modes for UPI transactions.
Allirajan M is a journalist with over two decades of experience. He has worked with several leading media organisations in the country and has been writing on mutual funds for nearly 16 years.
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