What Are Interchange Fees & Its Calculation?

Interchange fees are a common part of any financial transaction with credit or debit cards. Learn more about how to calculate them and if they’re worth it!

When your customer uses a credit card or debit card to pay for your services, there are quite a few things that happen in the space of seconds. Literal seconds!

The result of all those complicated whip-fast processes is the humble interchange fee.

Today we’ll talk about why you pay interchange fees, how much they cost you and if they’re worth it!

Here’s What We’ll Cover:

What Are Interchange Fees?

How Much Are Interchange Fees?

How to Calculate Interchange Fees?

Should You Avoid Card Payments?

Key Takeaways

What Are Interchange Fees?

The short definition of interchange fee is a fee a bank charges a merchant for processing a card payment. These could be credit or debit card transactions.

It sounds simple but it’s actually far more complicated than any of us imagine. From the moment your customer enters their card details, a number of messages are sent at lightning speed. There is a process between the payment portal, the bank and the credit card companies to authorise the payment.

The interchange fee is the fee that the bank or payment processor charges you for that transaction. If you have a Visa or Mastercard terminal to take in-person card payments, you still need to pay interchange fees to your bank.

Quick facts:

• Although banks charge interchange fees, Visa and Mastercard set the rate.
• Interchange fees are to cover the costs of managing your card services.
• Average interchange rates vary from country to country. Different debit transactions and credit transactions are charged differently too. For example, a business credit card has a higher fee than a consumer credit card.
• Electronic payments also carry interchange fees. It’s not just in-person payment methods.

How Much Are Interchange Fees?

It depends on the intermediary but below is a rough guide on interchange rates in the UK:

Card Issuer	Types of Cards	Transaction Fee Rate
Visa	Consumer Credit Secure, Non-secure or Contactless	0.30%
Visa	Commercial Credit Secure, Non-secure or Contactless	1.40%
Visa	Corporate and Purchasing Credit	1.70%
Visa	Consumer Debit	0.20%
Visa	Commercial Debit Secure, Non-secure or Contactless	0.30%
Mastercard	Consumer Credit	0.30%
Mastercard	Commercial Credit Corporate	1.50 – 1.90%
Mastercard	Commercial Credit Business cards	1.25 -1.65 %
Mastercard	Commercial Purchasing	1.35%

These values are true as of October 2021. To check the most up to date rates from both companies, you can refer to the Visa and Mastercard websites. Your bank should also give you a detailed breakdown of how much you’ll spend on interchange fees as a business.

American Express and international cards have higher fees.

On top of these percentages, you also have a “card scheme fee”. Scheme fees are set by your bank. They are the charges they add on to enrol you in their card processing scheme.

How to Calculate Interchange Fees?

Interchange fees always depend on the transaction you’re doing and the amount you’re paid.

Here are some examples:

You sell a sandwich for £5 at your café. The customer chooses to use their Visa credit card. The merchant will pay 0.30% of the overall transaction as a fee.

Sale price = £5

Fee rate = 0.30%

0.30% x £5 = £0.015

You as the seller receive £4.985 after the fee deduction.

Should You Avoid Card Payments?

When you do the calculations, it seems steep to have card processing fees like this. As a small business owner, you may be tempted to avoid them. And many do! Many businesses decide to go cash only. Ultimately, however, in today’s age, it’s not a good idea.

1. The pandemic popularised contactless payments

Contactless payments were already a staple in British life. They are even more important now after the pandemic. Because contactless was invented for small purchases, you’ll find people will carry cashless and less often.

1. You may lose business because of the inconvenience Generally, if a customer wants to buy from you and you only accept cash, they may just leave. It-s rare that a customer will leave and come back with cash. Some will but many won’t.

Key Takeaways

Every card transaction has an extra charge to the merchant bank. Larger merchants can absorb the cost more easily. But as a small business, you are still better off with a card processor than without one.

For more accounting guides like this one, head to our resource hub.

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