Have you ever been curious about what goes on behind the scenes when it comes to your credit card transactions and who benefits from them? One crucial piece of this puzzle is known as the “interchange fee.” In this blog post we’ll explore interchange fees, how they function and provide an example of how a $100 credit card transaction gets divided among the issuer, card network, acquirer and merchant. Let’s simplify the world of card payments.
So what is an interchange fee?
At the heart of every card transaction lies an interchange fee. When you use a credit or debit card to make a purchase the full amount doesn’t go straight to the merchant. Instead a small fee is deducted from the merchant’s account during the transaction. This fee is then distributed among the issuer, card network and acquirer.
The interchange fee is collected by the card network (such as Visa or Mastercard) from the acquirer when you swipe your card at a store or make a purchase by inserting or tapping it. This cost is then divided among all parties involved in the transaction, with a portion allocated to your bank—the one that issued your card. For example if you use your card for a $100 purchase.
The way money is divided varies depending on factors such, as card networks and merchant size. Let me break it down for you;
- Issuer (The bank of the cardholder); A significant portion of the interchange charge goes to the issuer. Let’s say they receive $1.50 in this example.
- Card Network (Visa, Mastercard, etc.); The card network that facilitates the transaction also takes a share of the fee. For our example let’s assume they receive $0.50.
- Acquirer (The bank working with the merchant); The bank that collaborates with the merchant, known as the acquirer also receives a portion of the fee. In this case we can assume they receive $0.25.
- Merchant: After deducting these amounts what remains—$97.75 in this scenario—goes to the merchant. Merchants often slightly increase their prices for credit card transactions because they bear around 2-3% in credit card costs.
Do debit card interchange fees work similarly?
The answer is no—the distribution differs for debit cards as merchants receive a share compared to issuers.
A crucial aspect of card transactions is the interchange fees which facilitate transferring money from your bank account to merchants, in this game, the issuer bank gets the biggest slide of the pie. So next time, when you see a big incentive where some banks want you to open a credit card with them, you know why.