What are interchange rates and how can I benefit?

Interchange rates are the lifeblood of card transactions in corporate payments. With each card swipe, a complex series of events is set into motion, ultimately compensating the issuer for the value they provide to the merchant through the purchase. But how exactly are these rates determined, and how can your business benefit from them? Keep reading to learn more about interchange, the factors that influence these rates, and how understanding them can help optimize your corporate payment strategy.

Who are the major players in interchange?

Your basic card payment model has six key players to know: 

• The cardholder: This is the person or business using a credit or debit card to pay for something. 
• The merchant: The supplier of the product or service being purchased by the cardholder. 
• The payment processor: The company that enables the merchant to accept the credit card or debit card. 
• The acquirer: The merchant’s bank that accepts the payment. Then the acquirer receives funds on behalf of the merchant and remits funds to the merchant for the transaction.
• The issuer: The bank issuing the cardholder the credit card or debit card. The issuer also provides service to the cardholder. 
• The card network/card scheme: The company that provides the network rails between the issuer and the acquirer. 

How does interchange compare with MDR?

Before you can understand interchange, you must first understand the MDR (or merchant discount rate). MDR is the amount the acquirer charges the merchant for each purchase. Interchange is the portion of MDR that gets remitted back to the issuer. The remainder of the MDR stays with the acquirer.

What is interchange?

Interchange is the fee paid by the acquirer to the issuer in exchange for the value and benefits the merchant receives from the issuer when they accept electronic payments, such as credit or debit card transactions. Therefore, the value the issuer provides includes: 

• Confirming key transaction details, such as the cardholder’s identity
• Confirming fund availability
• Covering the costs and credit risk in the transaction
• Other services for the cardholder

How does interchange work? 

1. The cardholder purchases a product or service from a merchant. 
2. Next, the merchant’s payment processor receives the transaction data and transmits it to the issuer and the acquirer. 
3. The issuer approves or rejects the transaction on behalf of the cardholder and sends an authorization code to the payment processor. 
4. Finally, the acquirer receives funds from the issuer for the transaction on behalf of the merchant and remits funds to the merchant to complete the transaction. 

Who determines interchange rates? 

The card networks (or card schemes) set the rules that govern credit and debit transactions and set interchange rates. Popular card networks are MasterCard and Visa. So each has different rules and rates. 

How often are interchange rates updated? 

Interchange rates can be updated at any time and are based on the individual card network. For example, in North America, MasterCard updates interchange rates annually in April and Visa in October. 

What factors influence interchange rates? 

Interchange rates are influenced by many factors, including: 

• Card is not present: Manually entered transactions have higher interchange rates because of the lack of swipe data and the increased risk of fraud.
• Merchant category code (MCC): Higher-risk industries or lines of business are consequently charged higher interchange fees. 
• Card type: Commercial cards have higher interchange rates to cover the costs of rewards, spending controls, and detailed reporting. 
• Average transaction size (ATS): Lower ATS rates can therefore qualify merchants for lower interchange fees. 
• Geography: Where the business is located can impact interchange rates. 
• Regulations: Some countries have caps on interchange rates. 
• Card network/scheme: Mastercard, Visa, Discover, etc., all have different rules and rates. 

How can I benefit from interchange? 

While the issuer receives interchange, cardholders benefit from card transactions when their issuer offers a rebate. For example, WEX merchants who use a virtual card receive a rebate on every transaction, which helps their accounts payable teams convert a cost center into a potential revenue generator. 

For more insights and updates on corporate payments, check out:

• Virtual card rebates
• Current trends in finance
• Accounts payables: Terms you need to know

Learn more about how WEX payment solutions can be tailored to your business, so you can accelerate and streamline operations while creating lasting growth and success for your organization.

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The information in this blog post is for educational purposes only. It is not legal or tax advice. For legal or tax advice, you should consult your own legal counsel, tax, and investment advisers.

Editorial note: This article was originally published on February 29, 2024, and has been updated for this publication.