What is Credit Card Interchange Fees & How to Calculate? - Kotak Bank
  • Personal
  • Business
  • Corporate
  • Private Banking
  • Privy League
  • NRI Services
  • Investors
  • Personal
  • Business
  • Corporate
  • Private Banking
  • Privy League
  • NRI Services
  • Investors
Apply Now
28 APRIL, 2023

Every time a customer uses a credit or debit card to make a purchase, the merchant's bank account is charged interchange fees. These fees are intended to cover the costs of processing the transaction, mitigating fraud and bad debt risks, and approving the payment.

Types of transactions and their corresponding interchange fees

Let us discuss in detail the various aspects of interchange fees.

What Is an Interchange Fee?

To charge these fees, a variety of entities, including card-issuing banks, payment processors, credit card payment networks, payment gateways, and the merchant's bank, will levy a percentage-based fee on each transaction.

These charges may be consolidated into a single amount on a payment processor's invoice, but it's important to note that the "single" interchange fees comprise roughly 300 separate fees.

Importance of understanding how they are calculated

Understanding what interchange fees are and how they are calculated is crucial for both merchants and consumers. For merchants, interchange fees can make up a significant portion of the cost of accepting credit and debit card payments and can significantly impact their bottom line.

Knowing how interchange fees are calculated can also help consumers decide which payment methods to use. Some payment methods may come with higher fees, which can be passed on to the consumer through higher prices or reduced rewards.

Steps involved in the processing of a credit card transaction

  • Credit card processing involves three fundamental processes: authorization, settlement, and funding. Let's look at the credit and debit card authorization process.
  • The cardholder presents their card to the merchant using various methods such as swiping, tapping, inserting in the machine, or entering card details for online payments. The merchant then requests payment authorization from their payment processor, which submits the transaction to the appropriate card association and eventually to the issuing bank.
  • The issuing bank reviews the request and checks parameters such as CVV, AVS validation, and expiration date before approving or declining the transaction.
  • Now, let's look at the credit card settlement and funding process. This part of the process is how the merchant receives payment for the credit cards they have accepted.
  • Merchants send batches of authorised transactions to their payment processor, which then passes transaction details to the card associations for communication with the issuing banks.

Factors that determine interchange fees

The calculation of credit card interchange fees involves many factors that can vary depending on the transaction and the parties involved. This fee can be either a flat rate, a percentage of the transaction amount, or a combination of the two, and is subject to variation depending on the type of transaction and merchant involved. Moreover, the type of card used, be it debit, credit, or prepaid, also influences the interchange rate.

Factors Affecting Interchange Fees

The card type used, the company and industry size, the transaction type, and other variables all affect interchange fees. The factors determining fees like credit card annual fee or interchange fees vary. Let’s look at these factors in brief.

Type of Card

The credit card interchange fees charged by various credit and debit card types differ. Premium cards with rewards programs typically have higher interchange costs than standard cards.

Industry & Business Size

The industry a business works in, as well as its size, can have an impact on interchange fees. Higher interchange costs apply to more prominent companies and those operating in risky sectors like travel or gaming.

Transaction Type

The nature of the transaction may also impact the interchange fee in credit cards. Online card transactions typically have higher interchange fees than in-person transactions, like at a physical shop. This is because there is less chance of fraud or chargebacks with in-person purchases.

By being aware of the variables that affect interchange fees, businesses can reduce expenses and bargain for reduced fees from payment processors.

How the Interchange Fees Are Calculated

Exchange rates are complicated and differ based on the card used, the company's size, and the transaction type. But the formula for determining interchange fees in credit cards frequently combines a flat charge with a percentage of the total transaction cost.

The formula used to Calculate Interchange Fees

Typically, credit cards have an interchange fee of approximately 2.00%, while the corresponding rate for debit cards is 0.30%. It must be noted that it is different from the credit card annual fee.

The particular fee levied for a given transaction varies depending on the card type (credit, debit, premium), the type of transaction (in-person, online), and other elements like the size and sector of the merchant.

Impact of Interchange Fees

Interchange costs significantly impact both merchants and customers.

Effects on Retailers

  • Costs: It can increase significantly due to exchange fees, especially for small companies.
  • Reduced Profit Margins: High interchange fees may cause businesses to raise prices to pay the costs, which could result in decreased profit margins and clientele loss.
  • Limited Payment Acceptance: High interchange fees can deter businesses from taking particular credit and debit card types, reducing the range of payment options offered to customers.

Consumer Impacts

  • Higher Prices: Because merchants may increase prices to cover the cost of taking credit and debit cards, interchange fees can lead to higher consumer prices.
  • Limited Payment Options: Customers may only have limited payment options if merchants are deterred from taking particular credit and debit card types because of high interchange fees.
  • Rewards and Benefits: A few credit and debit cards provide customers rewards and benefits, like cash back or travel miles.


Interchange fees are charged to merchants' bank accounts every time a customer uses a credit or debit card to purchase. These fees are meant to cover the costs of handling the transaction and mitigating fraud and bad debt risks. Understanding how interchange fees are calculated is crucial for both merchants and consumers.

Latest Comments

Leave a Comment

200 Characters


Frequently Asked Questions

What are Credit Card Interchange fees?

Whenever a customer uses a credit/debit card to purchase from a store, the merchant's bank account is charged transaction fees, known as interchange fees.

How are Credit Card Interchange fees calculated?

Credit card companies simplify the cost for merchants by incorporating interchange fees into a flat rate plus a percentage of the total sales amount, which includes taxes.

Why do Credit Card Interchange fees exist?

Interchange fees are paid to the card-issuing bank and cover various costs associated with handling the transaction, including fraud and bad debt costs and the risk involved in approving the payment.

Can merchants negotiate their Credit Card Interchange fees?

Merchants can negotiate their acceptance fees with the acquiring bank they select.

Are Credit Card Interchange fees the same for all credit card networks?

Credit card networks determine the interchange rates. These rates are established independently by Visa and MasterCard, which support banks' cards.

Read Next

Flipkart No Cost EMI On Credit Cards: Guide To Avail The Deal


Benefits of Using Credit Card


Unlocking Savings: Exploring Discounts & Promo Codes with Yatra on Flights Bookings

Load More

Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.