Interchange works like this: every time a customer pays with a credit or debit card, the merchant’s bank pays a fee to the bank that issued the card, and that fee is deducted from the sale before the merchant ever sees the money. The card networks (Visa, Mastercard, and others) set the rates, publish hundreds of rate categories, and route the transaction between the two banks in seconds. Interchange runs from roughly 0.05 percent on regulated debit up to more than 2 percent on premium rewards credit cards, which makes it the largest single component of what merchants pay to accept cards.
The Four Parties Behind Every Swipe
A card transaction pulls in four entities. The cardholder pays. The issuing bank gave that customer the card, holds the account or extends the credit behind it, and carries the risk that the customer actually pays the bill. The acquiring bank (also called the merchant’s bank) holds the merchant’s account and receives the funds on the merchant’s behalf. The card network sits between the two banks, setting the rules, technical standards, and fee schedules that govern the transaction.
Networks don’t issue cards and don’t hold merchant accounts. What they do is define the interchange rate that applies and move the transaction between the banks. The interchange fee itself is the payment that flows from the acquiring bank to the issuing bank on each transaction, compensating the issuer for extending credit, absorbing fraud losses, and maintaining card infrastructure. That cost lands on the merchant, who receives slightly less than the full purchase price on every card sale.
How a Single Transaction Moves
A card payment happens in stages, and money doesn’t actually change hands at the moment of the swipe.
Authorization
When the customer taps, dips, swipes, or enters card details online, the merchant’s payment system sends a request through the card network to the issuing bank. Within seconds, the issuer confirms the account is valid, the card isn’t reported lost or stolen, and there’s enough credit or funds available. It returns an approval or a decline. Authorization holds the funds. It doesn’t move them.
Clearing and Settlement
At the end of the business day the merchant typically sends a batch of approved transactions to its acquiring bank. The acquirer forwards the details through the network to each issuing bank involved. During clearing, the network calculates the exact interchange fee owed on each transaction. During settlement, the issuing bank transfers the transaction amount minus the interchange fee to the acquiring bank, which then deposits the remainder into the merchant’s account after subtracting its own processing markup. The interchange fee comes out before the merchant is paid, which is why it’s a built-in cost of every card sale rather than a bill that arrives later.
What Determines the Rate on a Given Transaction
There is no single interchange rate. The networks publish hundreds of categories, and where a specific transaction lands depends on several things at once.
Card-Present Versus Card-Not-Present
Transactions where the physical card is dipped, tapped, or swiped generally carry lower rates because fraud risk is lower when the card and cardholder are both in front of the terminal. Online, phone, and mail orders carry higher rates to compensate for that elevated risk.
Card Type
Basic debit carries the lowest rates, especially when it’s regulated debit under the Durbin Amendment. Standard consumer credit costs more. Premium cards (travel rewards, cashback, and similar perks) carry the highest rates, and those higher fees are what fund the rewards programs the issuers offer their cardholders. A Visa Infinite card costs the merchant significantly more per transaction than a basic Visa Classic.
Merchant Category Code
Every merchant is assigned a four-digit Merchant Category Code (MCC) based on the type of business it operates, and the networks use MCCs to set different rates by industry and to flag risk. Certain categories such as adult content, gambling, cryptocurrency, and dating services are classified as high-risk and face stricter oversight and higher effective costs.
Cross-Border Transactions
When a card issued abroad is used at a U.S. merchant, cross-border rates apply and are typically higher than domestic rates. Visa’s international credit rates at U.S. merchants run from about 1.10 percent for a basic card up to 2.05 percent for commercial products at the downgrade tier.1Visa USA. Visa USA International Transactions Interchange Reimbursement Fees The networks also add separate cross-border assessment fees on top.
Data Level Submitted
How much detail the merchant sends with the transaction matters. Level 1 processing includes only basic purchase information. Level 2 adds fields such as tax amounts, invoice numbers, and customer reference numbers. Level 3 requires line-item detail: item names, quantities, unit prices, commodity codes, and item-level tax.2Mastercard. Level 2 and 3 Data More data reduces perceived risk and can substantially lower the interchange cost on business-to-business and business-to-government sales. Corporate and government buyers often require their vendors to support Level 3 for exactly that reason.
The Federal Cap on Debit Interchange
The Durbin Amendment, part of the Dodd-Frank Act of 2010 and codified at 15 U.S.C. ยง 1693o-2, directs the Federal Reserve to ensure that debit card interchange fees charged by large issuers are reasonable and proportional to the issuer’s actual processing costs. It reaches only issuers (including their affiliates) with $10 billion or more in total assets. Smaller banks and credit unions are exempt, and the cap doesn’t touch credit cards at all.3GovInfo. 15 USC 1693o-2 – Reasonable Fees and Rules for Payment Card Transactions
The Current Cap
Under Regulation II, a covered issuer can charge no more than 21 cents plus 5 basis points (0.05 percent) of the transaction value per debit transaction. An additional 1 cent is available if the issuer meets specific fraud-prevention standards, bringing the maximum to roughly 22 cents plus 0.05 percent on a typical purchase.4Federal Reserve System. Debit Card Interchange Fees and Routing On a $50 debit purchase at a large bank, the maximum interchange fee would be about 24.5 cents.
In late 2023 the Federal Reserve proposed lowering the cap to 14.4 cents plus 4 basis points, with a 1.3-cent fraud-prevention adjustment.4Federal Reserve System. Debit Card Interchange Fees and Routing That proposal has not been finalized. A federal district court has also vacated Regulation II’s interchange fee standard entirely, but that ruling is stayed pending appeal, so the 21-cent cap remains in effect while the challenge plays out.5Federal Reserve Board. Regulation II – Debit Card Interchange Fees and Routing
Routing Choice
Durbin also requires every debit card to be enabled on at least two unaffiliated payment card networks, so the merchant can choose which network to route a transaction through.6Federal Reserve Board. Regulation II – Debit Card Interchange Fees and Routing In practice most debit cards carry both a major brand (Visa or Mastercard) and a PIN-debit network, and merchants can route through whichever offers the lower interchange rate. The customer generally doesn’t see this choice happening.
How Merchants Actually Pay Interchange
The networks set interchange, but merchants don’t pay them directly. They pay their processor, which bundles interchange with network assessments and its own markup. How that bundle appears depends on the pricing model.
Interchange-Plus
The merchant sees the actual interchange rate on each transaction as a separate line item, with the processor’s markup added on top. If interchange on a transaction is 1.65 percent plus 10 cents and the processor’s markup is 0.20 percent plus 5 cents, the merchant pays 1.85 percent plus 15 cents. The model is transparent, and when networks lower interchange the savings pass through.
Flat-Rate
The processor charges one fixed percentage on every transaction regardless of card type. Interchange, assessments, and margin are all baked in. Simple, but the merchant can’t see how the pie is sliced. On low-cost transactions like regulated debit, flat-rate often costs more than interchange-plus because the merchant pays the same high rate even when underlying interchange is very small.
Tiered
Transactions are sorted into qualified, mid-qualified, and non-qualified tiers, each with a different rate. The processor decides which transaction lands in which tier, and the criteria are often unclear. Many in the payments industry consider this the least transparent model.
Network Assessments
On top of interchange and the processor’s markup, the networks charge their own small assessment fees. These are separate from interchange and go directly to Visa, Mastercard, or whichever network is used. They typically run around 0.14 percent for Visa and 0.13 percent for Mastercard on transactions under $1,000. Small individually, they add up at scale, and they aren’t negotiable.
When Money Runs Backward
Two situations reverse the flow, and neither cleanly undoes the original transaction.
Refunds
When a merchant refunds a purchase, whether the interchange fee originally paid comes back depends on the processing agreement. There is no universal rule requiring processors to return interchange credits. Some do; some keep them, which means the merchant loses both the sale and the processing cost. Reading the processor contract is the only way to know which applies.
Chargebacks
A chargeback happens when the cardholder disputes the transaction through their issuing bank rather than asking the merchant for a refund. The issuer reverses the charge and pulls the funds back from the merchant’s account. On top of the lost sale, the processor typically charges the merchant a chargeback fee of $20 to $100 per dispute. If a merchant’s chargeback rate climbs too high relative to total transactions, the networks can place the business in a monitoring program with additional fines, and in the worst case the merchant loses the ability to accept cards.
Passing Interchange to the Customer
Some merchants add a surcharge on credit card payments to offset interchange. Federal law permits credit card surcharges with conditions: the merchant must notify the card network 30 days before starting, display the surcharge clearly at the point of entry and point of sale, and print the surcharge amount on every receipt. The surcharge can’t exceed 4 percent of the transaction.7Acquisition.GOV. 6-6. Surcharges
Surcharging debit is prohibited under federal law regardless of the state. Roughly a dozen states, including California, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas, prohibit credit card surcharges entirely.8NCSL. Credit or Debit Card Surcharges Statutes Merchants in those states can’t pass interchange to customers through a surcharge. Offering a cash discount (a lower price for paying cash rather than a higher price for using a card) is a separate practice that is generally permitted nationwide, though the legal line between a “cash discount” and a “surcharge” can matter.
What Could Change Interchange Soon
Several open matters could shift interchange costs in the next few years.
Credit Card Competition Act
H.R. 7035, introduced in the House in January 2026, would extend Durbin’s routing-choice idea to credit cards. Today most credit transactions can be processed on only one network. The bill would require large issuers to enable at least two unaffiliated networks on each credit card, letting merchants route credit transactions through a competing and potentially cheaper network.9Congress.gov. HR 7035 – 119th Congress – Credit Card Competition Act of 2026 As of mid-2026 it has been referred to the House Committee on Financial Services and has not advanced further.
Merchant Antitrust Litigation
A long-running antitrust case against Visa and Mastercard, In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, has produced multiple settlement attempts. A $5.5 billion damages-class settlement was approved and began paying merchants in late 2025.10Payment Card Settlement. Payment Card Interchange Fee Settlement – Official Court-Authorized Website A separate injunctive-relief settlement announced in March 2024, which would have reduced credit interchange rates and capped them through 2030, was rejected by the presiding judge. That portion remains unresolved.
The Regulation II Challenge
The federal district court decision vacating Regulation II’s interchange fee standard is stayed pending appeal, so the current 21-cent cap holds for now. If the vacatur is upheld and the Federal Reserve doesn’t issue a replacement, debit interchange for large issuers could become unregulated. The Fed’s own proposal to lower the cap to 14.4 cents is still pending.4Federal Reserve System. Debit Card Interchange Fees and Routing