Interchange fees, also known as swipe fees, are charges that merchants pay every time a customer uses a credit or debit card to make a purchase.
Interchange fees are set by credit card networks such as Visa and Mastercard and are paid to the card-issuing banks. Interchange fees are a cost for accepting credit cards and vary greatly across different industries. This article covers how much interchange different industries pay.
What are Interchange Fees?
Interchange fees are composed of a percentage of the transaction amount and sometimes a fixed fee. The average interchange rate is approximately 1.81% in the USA and Canada.
Interchange fees cover the cost of transaction handling, fraud prevention, and credit risk associated with the transaction. While they might seem small on a per-transaction basis, they add up quickly, especially for businesses with high transaction volumes.
Why Industries Pay Different Interchange Fees
Industries pay different interchange rates due to several key factors that influence the cost and risk associated with processing transactions. These factors include the level of fraud risk, the average transaction size and volume, the type of card used, and the specific nature of the business. Here’s a more detailed explanation:
Different Industries Have Different Risk and Fraud
Different industries have varying levels of fraud risk associated with their transactions. This risk affects the interchange rates set by card networks:
- E-commerce: Online transactions are more susceptible to fraud compared to in-person transactions. The absence of a physical card increases the risk, resulting in higher interchange fees.
- Fuel Stations: Fuel purchases often involve self-service pumps, which are prone to skimming and other fraud techniques. This elevated risk translates to higher interchange rates.
Larger Transactions Hold Higher Risk
The average transaction size and frequency can significantly impact interchange rates:
- Grocery Stores: Typically have a high number of transactions with lower average ticket sizes. To accommodate frequent, smaller transactions, grocery stores often benefit from lower interchange rates.
- Lodging (Hotels): Transactions in the lodging industry often involve larger amounts due to the nature of the services provided, leading to higher interchange fees to cover the increased risk and processing costs.
Each Merchant Category Code (MCC) has Different Interchange Fees
Each industry is assigned a specific Merchant Category Code (MCC), which influences the interchange rates applied:
- Retail: General retail MCCs may have different rates compared to specialized retail categories.
- Utilities and Government: Often benefit from lower rates due to their essential nature and typically lower risk profiles.
Example Interchange Fees by Industry
In this section, we will explore how interchange fees differ across industries, examining the underlying reasons for these variations and the implications for businesses within each sector. The following rates are for the USA.
Retail Industry
The retail industry, one of the largest sectors accepting card payments, faces a broad range of interchange fees. These fees can vary significantly depending on the type of card and transaction.
- Visa: Retailers typically pay interchange fees ranging from 1.43% + $0.10 to 2.40% + $0.10 per transaction.
- Mastercard: The rates range from 1.55% + $0.10 to 2.50% + $0.10.
Retailers with higher volumes can often negotiate lower rates, but smaller businesses may find these fees more burdensome. The introduction of premium cards, which offer more rewards to consumers, has also led to higher interchange rates.
Grocery Stores
Grocery stores generally benefit from lower interchange fees compared to other retail sectors. This is partly due to the high frequency of transactions and the lower risk associated with grocery purchases.
- Visa: Grocery store interchange fees typically range from 1.15% + $0.05 to 2.40% + $0.10.
- Mastercard: The rates range from 1.15% + $0.05 to 2.50% + $0.10.
These lower rates help grocery stores manage their thin profit margins, which can be crucial for maintaining competitive pricing.
Restaurants
The restaurant industry, characterized by smaller ticket sizes and high transaction volumes, experiences a range of interchange fees depending on the card type and processing method.
- Visa: Restaurants generally pay between 1.54% + $0.10 and 2.70% + $0.10 per transaction.
- Mastercard: The rates range from 1.64% + $0.10 to 2.80% + $0.10.
The use of tips and pre-authorizations in the restaurant industry can also impact the interchange fees, sometimes leading to higher costs.
Fuel Stations
Fuel stations face unique challenges with interchange fees, partly due to the high incidence of fraud and the automated nature of many transactions.
- Visa: Interchange fees at fuel stations typically range from 1.15% + $0.10 to 2.40% + $0.10.
- Mastercard: The rates range from 1.15% + $0.10 to 2.50% + $0.10.
These rates can fluctuate based on the type of card and whether the transaction occurs at the pump or inside the store.
Lodging (Hotels)
The lodging industry, encompassing hotels and other accommodations, often deals with higher interchange fees due to the higher transaction amounts and increased fraud risk.
- Visa: Hotel interchange fees typically range from 1.43% + $0.10 to 2.65% + $0.10.
- Mastercard: The rates range from 1.55% + $0.10 to 2.70% + $0.10.
These higher fees reflect the increased risk and complexity of transactions in the lodging industry, including pre-authorizations and cancellations.
E-commerce
E-commerce businesses often face higher interchange fees compared to brick-and-mortar stores. This is due to the higher fraud risk associated with card-not-present transactions.
- Visa: E-commerce interchange fees generally range from 1.80% + $0.10 to 2.70% + $0.10.
- Mastercard: The rates range from 1.90% + $0.10 to 2.90% + $0.10.
As online shopping continues to grow, these fees remain a significant concern for e-commerce businesses.
Utilities and Government
Utilities and government services typically enjoy lower interchange fees, reflecting the lower risk and necessity of these transactions.
- Visa: Interchange fees for utilities and government services generally range from 1.43% + $0.10 to 2.35% + $0.10.
- Mastercard: The rates range from 1.55% + $0.10 to 2.40% + $0.10.
These lower rates help ensure that essential services remain accessible and affordable for consumers.
Healthcare
The healthcare industry, including hospitals and medical practices, also faces specific interchange fees. These fees can be influenced by the high transaction amounts and the necessity of recurring payments for ongoing treatment.
- Visa: Healthcare interchange fees typically range from 1.43% + $0.10 to 2.65% + $0.10.
- Mastercard: The rates range from 1.55% + $0.10 to 2.70% + $0.10.
These rates can vary based on the type of service provided and whether the payment is processed in-person or online.
Education
Educational institutions, such as universities and private schools, also incur interchange fees for tuition and other payments. These fees are often influenced by the large transaction amounts and the frequency of payments.
- Visa: Education interchange fees typically range from 1.43% + $0.10 to 2.65% + $0.10.
- Mastercard: The rates range from 1.55% + $0.10 to 2.70% + $0.10.
Lower interchange fees for educational institutions help keep tuition costs manageable for students and families.
Charitable Organizations
Charitable organizations and non-profits may receive preferential interchange rates to support their missions. These lower rates help maximize the funds available for their charitable activities.
- Visa: Charitable organizations typically pay between 1.35% + $0.05 and 2.40% + $0.10 per transaction.
- Mastercard: The rates range from 1.29% + $0.05 to 2.50% + $0.10.
These reduced fees reflect the lower risk associated with donations and the societal benefits of supporting charitable causes.
Factors That Influence Interchange Fees
Several factors influence the interchange fees that businesses pay, including:
- Card Type: Debit cards usually have lower interchange fees than credit cards. Premium credit cards with rewards programs often have higher fees.
- Transaction Type: Card-present transactions (where the card is physically swiped or dipped) generally have lower fees than card-not-present transactions (such as online purchases).
- Merchant Category Code (MCC): Different industries are assigned specific MCCs, which can influence the interchange rates applied to their transactions.
- Processing Volume: Merchants with higher transaction volumes may negotiate lower interchange rates with their payment processors.
