Card Interchange
    • 02 May 2024
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    Card Interchange

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    Article summary


    What is interchange?

    Interchange (reimbursement) fees are fees paid by merchants each time they accept a card.
    This is one of the most important (and common) types of revenue that can be generated from a FinTech idea.

    Interchange distribution

    The image below shows the flow and parties involved in card transaction processing - from card being swiped by customer/cardholder, and to authorization being routed back to the merchant:
    Card transaction

    The interchange distribution flow is shown below:
    Interchange distribution

    • FinTech customer swipes the card at a merchant - the merchant pays a discount rate that they have negotiated with an acquiring bank
    • The acquiring bank pays the issuing bank the interchange fee, net of network fees
    • The issuing bank, i.e. the FinTech’s sponsor bank, pays Synctera 100% of the interchange
    • Synctera then distributes:
      • FinTech's portion of the interchange revenue to the FinTech (70% in the example above)
      • The remainder of the interchange revenue is used to compensate the FinTech’s sponsor bank for the services they provide to the FinTech (in the example above, Synctera splits the remaining 30% 50/50 with the bank)

    See related blog on the Synctera website.

    Who decides on interchange rates and what drives interchange?

    Structure and calculation:

    • Interchange fees are the costs associated with an interchange category
    • Each category has specific requirements, sometimes with performance thresholds within categories
    • Interchange fees are calculated as a flat rate plus a percentage of the sale for each transaction (debit transaction have a maximum fee amount / cap)
    • Rates typically vary from <1% to nearly 3%
    • The card networks publish their interchange fee tables on a regular basis:
    • Interchange rates are non-negotiable
    • The card networks have no involvement in the agreements between Acquirers and merchants (discount rate) or Issuers and their cardholders (revenue distribution)

    Qualification and optimization:

    Transaction swipe:

    1. Acquirer determines what interchange rate a transaction will qualify for based on known criteria and submits IRD (Interchange rate designator: Two-digit code for Interchange rate) on every clearing transaction. See criteria below.
    2. Network checks criteria based on transaction data and accepts or declines
    3. Network assigns interchange on clearing transaction


    1. Transactions is settled (net settlement between acquirer and issuer)
    2. Interchange compliance process validates interchange, makes adjustments if needed (= INTERCHANGE COMPLIANCE ADJUSTMENTS:
      a. See Chapter 9 U.S. Region Interchange Compliance in the US Interchange Manual for details

    Criteria that determines interchange qualification:

    • Processing Method — Card present (CP) vs. card-not-present (CNP). Swipe, signature vs. PIN, dip, tap, or keyed.
      • CNP transactions are higher than CP
      • Signature transactions are higher than PIN
    • Transaction Size:
      • The higher the transaction, the higher the interchange fees
    • Transaction Type:
    Transaction typeIssuer interchangeAcquirer interchange
    Refund / ReturnPaysReceives
    Cash (ATM & Manual)PaysReceives
    • Transaction Data — Information provided with each transaction.
    • Merchant Category Code (MCC) — Based on the type of business a merchant has.
      • Smaller merchants typically have higher interchange fees
      • Larger merchants often negotiate a rate with the network, which means they pay lower interchange fees
    • Card Brand / Network — Visa, Mastercard, American Express, Discover.
    • Card Type - Credit vs. Debit, Rewards credit card vs. non-rewards, etc.
      • Credit is higher than debit (as the risk of accepting credit card transactions is higher than for debit card transactions)
    • Cardholder Type — Cards issued to businesses, corporations, or municipal agencies have different interchange categories than traditional consumer credit cards.
      • Commercial is higher than consumer

    See dashboard on Synctera Insights for interchange analysis.

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