The interchange fee is the fee charged to the merchant bank (acquirer) by the credit card issuing bank to cover the cost of converting credit card charges to cash deposits in the merchant’s account. When credit cards are used for a transaction, the issuing bank (cardholder’s bank) pays the acquiring bank for their cardholder’s purchase less the interchange fee for the transaction. The acquiring bank then pays their merchant for the remaining balance minus a markup for processing the transaction. Merchants ultimately receive the gross amount of the sale minus a series of base costs and markups that include interchange fees, assessments and the provider’s markup.
The interchange fee is calculated by the issuing bank’s expenses for authorisation costs and losses due to fraud and credit.
VISA and MasterCard establish interchange fee rates and they are revised on a regular basis, though they usually range from between 1% – 2%. These credit card fees are a primary source of their profits. Interchange fees for the two largest credit card companies may change twice a year: in April and October
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