Interchange fees are a critical aspect of card processing and have a significant impact on the business’s bottom line. However, it is an important component of the revenue of the payments industry, affecting both merchants and consumers.

What are Interchange fees?

Interchange fees are the fees that a merchant’s bank pays to the card issuer’s bank for each transaction. These fees are a percentage of the transaction amount and are charged to the merchant’s bank every time a card is used for payment. The fees are set by the card networks, such as Visa and Mastercard, or by regulators in various countries, and are typically based on the type of card used (debit, credit, prepaid, multi-currency, rewards, etc.), the transaction amount, the location (domestic or overseas), and the merchant category code (MCC).

How do Interchange fees work?

When a customer uses a credit or debit card to make a purchase, the merchant’s acquiring bank pays an interchange fee to the card-issuing bank as compensation for processing the transaction. The acquiring bank then passes this fee onto the merchant as a “Merchant Discount Rate (MDR), typically as a percentage of the transaction amount. The acquiring bank has other revenue streams such as float income.

How does it work in India?

In India, interchange fees are primarily regulated by the Reserve Bank of India (RBI). The RBI periodically reviews and revises the interchange fee structure to promote transparency, competition, and efficiency in the payment system. The aim is to strike a balance between the interests of payment system participants, such as card issuers, acquirers, and merchants. The fees are typically a percentage of the transaction value or a fixed amount per transaction.
How do Interchange fees affect your business?

Interchange fees can have a significant impact on a merchant’s profitability as they decide the MDR charged by the acquiring bank to them. The MDR fees can range from 1% to 3% of the transaction amount, and for some high-risk industries, the fees can be even higher.

Understanding interchange fees, the float income of banks, and the resultant MDR is an important part of managing a successful business. By taking steps to optimize payment processing and manage fees, merchants can improve their profitability and provide better experiences to their customers.

At CARD91, we understand the dynamic relationship between Interchange fees and MDRs and help our issuance partners to monetise their transactions.

-Ayushi Jain, Manager- Sales & Partnerships, CARD91