Loyalty Register glossary
Interchange
The fee a merchant's bank pays the cardholder's bank on each card purchase, under rates set by the card network. It funds much of card rewards.
An interchange fee is the fee that a merchant’s bank (the acquirer) pays to the cardholder’s bank (the issuer) on each card purchase. The card network sets the rate schedules, and the merchant ultimately bears the cost as part of accepting cards. For card issuers, interchange is one of the main sources of money that pays for cardholder rewards, including the points earned on co-brand cards.
Updated · By Loyalty Register Editorial TeamRelated terms
Who pays interchange fees?
The money flows in one direction on every purchase. The issuer pays the merchant’s bank the purchase amount minus interchange; the acquirer then pays the merchant, minus interchange and its own markup and network fees. So the merchant pays, the issuer receives, and the network sets the rate. The cardholder does not see interchange, though it shapes what rewards their card can offer.
How are interchange rates set?
Card networks publish schedules with many different rates. The rate depends on the type of card (debit, standard credit or premium rewards credit), the merchant’s category, how the card was used (in person, online or keyed in) and the size of the transaction. It is usually a percentage of the purchase plus a small fixed amount. Many merchants never see interchange as a separate line, because it is bundled into a flat rate from their processor; others pay “interchange plus” pricing, where interchange is passed through at cost and the processor adds a fixed markup.
Is interchange regulated in the US?
Debit interchange at large issuers is capped. Under the Federal Reserve’s Regulation II, a covered issuer may not receive more than 21 cents plus 0.05% of the transaction value on a debit transaction, plus a 1 cent fraud-prevention adjustment if it is eligible. Issuers with less than $10 billion in assets are exempt. The cap applies to debit, not to credit cards, which is why rich rewards are far more common on credit cards than on debit cards.
How does interchange fund loyalty points?
An issuer receives interchange on every purchase and spends part of it on rewards. In a hypothetical case, a $100 purchase on a credit card brings the issuer $2 of interchange. If the card awards 1 point per dollar and the issuer pays the partner program 1 cent per point, the 100 points cost $1, leaving $1 toward the issuer’s other costs. Cards that earn higher interchange can afford higher earn rates, which is one reason premium cards usually earn more. Annual fees and interest also feed the rewards budget.
What should a loyalty program watch?
If your program sells points to a card issuer, part of your income depends on interchange you do not control. Rule changes, revised network schedules or a shift in spending toward lower-rate cards can squeeze the issuer’s budget and lead to pressure on your price per point at renewal. Understand the issuer’s economics before you negotiate, and do not build the program budget on the assumption that card income will keep growing. As a merchant, remember that rewards cards cost you more to accept, so customers paying with them are partly funding someone else’s loyalty program.