Interchange fee

An interchange fee, also called the discount rate, is the sum paid by a merchant to a payment card processor (either debit card or credit card) as a fee for accepting a credit card or debit card. The amount of the rate will vary, typically between 1 percent and 3 percent of the purchase amount, depending on the type of transaction. For example, the interchange fee is higher for online purchases than for in-person purchases, because in the latter, the card is physically present and available for inspection.

The term “interchange fee” is a term used in the payment card industry to describe a fee that a merchant’s bank (the “acquiring bank”) pays a customer’s bank (the “issuing bank”) when merchants accept cards using card networks such as Visa and MasterCard for purchases. In a credit card or debit card transaction, the card-issuing bank in a payment transaction deducts the interchange fee from the amount it pays the acquiring bank that handles a credit or debit card transaction for a merchant. The acquiring bank then pays the merchant the amount of the transaction minus both the interchange fee and an additional, usually smaller fee for the acquiring bank or ISO, which is often referred to as a discount rate, an add-on rate, or passthru.

Recently, in the U.S., new regulations (as part of the “Durbin Amendment”) were passed which limit the amount of interchange fees for certain debit card related transactions. In particular, in June 2011, the Federal Reserve Board of Governors created a rule setting standards for debit card interchange fees and prohibiting network exclusivity arrangements and certain routing restrictions. This rule,was required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

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