Interchange Revenue
Interchange revenue is the income a card-issuing bank receives from the merchant's payment service provider with every card payment. It is one of the most important revenue sources for neobanks and payment apps and is legally capped in the EU.
When someone pays by card at the supermarket, the customer only sees one amount. Behind the scenes, however, this amount is split up. The merchant doesn’t receive the full sum but pays a small share to the companies involved. Part of this goes to the bank that issued the customer’s card. This exact share is called interchange, and the income generated from it is called interchange revenue. It involves small percentages, usually between 0.2 and around 1.5 percent of the purchase price.
Why payment apps survive without account fees
Many young financial companies offer checking accounts and cards free of charge. At first this seems illogical, since someone has to pay for the operation. The answer often lies in interchange: the more often customers use their card, the more the provider earns. So the account isn’t really free, it’s just paid for from the other side, namely by retailers.
For investors and journalists, this figure is therefore an important benchmark. It shows how actively customers actually use an offering. A provider with a million cardholders who rarely pay earns little. A provider with half as many but very active customers can be significantly more profitable. In fintech quarterly reports, the interchange share of revenue is therefore often prominently featured.
However, this dependency has a downside. Interchange rates are politically set and can be lowered. Since 2015, an upper limit has applied in the EU: 0.2 percent for debit cards and 0.3 percent for credit cards for private customers. Anyone who bases their business model solely on this is dependent on a single rule.
The flow of money in a card payment
Four parties are involved in a card payment. The customer and the merchant are the two visible ones. Then there’s the customer’s bank, which issued the card, and the merchant’s payment service provider. Card networks like Visa or Mastercard technically connect these parties and set the rules.
An example with round numbers: A customer buys goods for 100 euros. The merchant might be credited with 98.50 euros, while the payment industry keeps 1.50 euros. Of this 1.50 euros, the interchange share goes to the customer’s bank. A smaller remainder goes to the card network and to the merchant’s service provider. In return, the customer’s bank bears the risk that the customer won’t pay their bill.
It’s important to distinguish this from two similar terms. The merchant fee is the total deduction the store feels. Interchange is only the part of it that ends up with the card-issuing bank. Another common misconception is that the customer pays interchange directly. This is only indirectly true, since merchants factor the costs into their prices.
Where this figure appears in news and products
In everyday life, this topic comes up with cashback offers. When a payment app refunds one percent of spending, it usually finances this from its interchange revenue. Airline miles and points programs from credit cards also stem from this source. This is why rewards are more generous in the US than in Europe: there, credit cards have no comparable cap.
In business news, the term mainly appears in fintech quarterly results. Companies like Revolut, N26, or the providers behind Apple Pay and Google Pay earn money on every transaction. Lawsuits against Visa and Mastercard also regularly revolve around the level of these fees. When regulators announce a reduction, the share prices of payment service providers often react immediately.