Interchange
Interchange is the fee that flows from the merchant's bank to the customer's bank with every card or mobile payment. It is the single largest cost component of a card payment and is legally capped in the EU.
When you pay by card or phone at the supermarket, the merchant doesn’t receive the full amount. A small share of every purchase goes to the banks and companies that process the payment. The largest part of that share is called interchange. It travels from the merchant’s bank to the bank that issued your card. On a 50-euro purchase, that’s often around 10 cents in Europe. The German technical term for this is Interbankenentgelt (interbank fee), meaning exactly the same thing.
Why a few cents per purchase move billions
On its own, the amount seems laughably small. But several billion card payments are processed in Germany every year. Cent amounts thus add up to a multi-billion-euro market. For banks, interchange is one of the most reliable sources of income in retail banking.
This is exactly where a conflict of interest arises. Merchants want the fee as low as possible, banks want it as high as possible. But merchants have little power to resist: anyone who doesn’t accept Visa or Mastercard loses customers. That’s why the EU set a legal cap in 2015. For consumer debit cards it stands at 0.2 percent of the transaction value, and for credit cards at 0.3 percent.
In the US, there is no comparably strict cap for credit cards. There, rates are often 1.5 to 2.5 percent. This explains why American cards hand out such generous bonus miles and cashback. These rewards are paid for out of the high interchange revenue — ultimately co-financed through store prices by all customers, including those who pay cash.
The path of the money in a card payment
Four parties are involved in a card payment. There’s the customer with their bank, which issued the card. And there’s the merchant with their payment service provider, which collects the payment on their behalf. In between sits a card network like Visa or Mastercard, which transports the messages between both sides.
If you pay 50 euros, your bank debits your account exactly 50 euros. But the merchant receives only about 49.20 euros. The difference splits into three parts: the interchange for your bank, a fee for the card network, and the margin of the payment service provider. Of these, interchange is usually the largest chunk.
A common misconception: many people assume Visa and Mastercard are the recipients of the fee. That’s not true. The networks do set the interchange rates, but they don’t collect them themselves. They earn money through their own, considerably smaller network fees. The interchange goes to the card-issuing bank. Its amount also depends on the case: online payments without a physical card are more expensive than payments at the store checkout, because the fraud risk is higher.
Interchange in the news and in payment apps
The term regularly comes up in business news when fintechs are reported on. Many young finance apps earn a significant part of their money from interchange generated by their users' cards. When an app offers accounts for free, this is often the hidden source of revenue. If the legal cap is lowered, their business model comes under immediate pressure.
You’ll also encounter this topic in retail without the word ever being mentioned. If a kiosk only accepts card payments starting at ten euros, it’s because of these costs. On small amounts, the fixed portions of the fee eat up the margin. The EU cap has eased the problem but not eliminated it.
Interchange should be distinguished from the so-called merchant discount rate (Disagio). The discount rate is the total deduction a merchant pays per payment. Interchange is only one component of it. Anyone reading reports on payment processing should keep the two terms apart.