Card interchange is a complicated, sometimes vexatious, topic. Everyone seems to have their own agenda when talking or writing about it, which is why so much on the topic is ambiguous, misleading or just plain wrong. Let’s start with a basic definition of interchange fee:

Interchange is a percentage fee paid by the merchant’s payment service provider at the time of a card transaction to the cardholder’s issuing bank. The interchange fee covers the card issuer’s handling costs including the risk measures performed during transactions.

In the case of Visa and Mastercard, who operate a four-party model, the fee for a typical purchase transaction is paid by your merchant account provider (known as the acquirer) to your customer’s bank or credit card provider (known as the issuer).

The four parties in the model are: 1) the merchant, 2) cardholder, 3) acquirer and 4) card issuer. (In actual fact, Visa or Mastercard sit in between the various banks or providers to administer payments between them. So really, perhaps it should be called a five-party model).

How is the fee determined?

The precise fee paid each time a card is used depends on a number of factors including:

  • Type of card used (e.g. debit, credit, commercial)
  • Security of the payment (chip, contactless or swiped via magnetic stripe)
  • Whether the payment was made via card machine, website or over the phone
  • Merchant’s industry sector
  • Country of the transaction
  • What country the customer’s card was issued in

And the list goes on. Needless to say, card issuers have different interchange rates that make the true cost of card processing highly variable.

What merchants pay

Payment providers generally pass on the cost of interchange to the merchant as part of their charge for providing card payment services. You may see this described as a ‘merchant service charge’ (MSC for short) or ‘merchant discount rate’ (MDR for short).

Acquiring banks and payment providers differ in how they charge for their services. They may present transaction fees differently and use simplified wording. So far, so normal for business, right?

Utility companies, mobile phone firms and broadband providers all have various prices for fairly similar services. Sometimes, they have promotions or special offers available to all customers or just for new or existing customers.

Not to criticise or defend banks or payment providers – but it’s a simple matter of fact that businesses price differently and display these prices to customers differently. It’s also a matter of fact that performing like-for-like comparisons can be difficult as a result.

Blended or unblended costs

There are two general fee structures that payment providers can choose to require for card transactions:

Blended (or bundled) rates: Generally, this is simple pricing with fewer individual rates. There may even be a single rate so regardless of the type of card the customer uses (e.g. debit or credit card), card brand (e.g. Visa, Mastercard, Amex), your industry sector etc., you pay the same rate per transaction.

Unblended (or unbundled) rates: Generally, this is more complicated pricing with many more individual rates. Sometimes, you see this described as ‘interchange+’ or ‘interchange++’ pricing.

Interchange+ pricing consists of two elements: the cost of interchange and the markup your bank or payment provider adds for providing card payment acceptance services.

Interchange++ pricing consists of three elements: the cost of interchange, the markup your bank or payment provider adds for providing card payment acceptance services, and the cost of the card scheme fee.

The charges you pay, as well as the transparency and granularity over the breakdown of these charges, depend on your pricing plan and contract with your payment provider.