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When you buy something with a credit card, the merchant pays a fee in order to accept that payment. Several parties get a cut of that fee, including the bank that issued your credit card. This portion that goes to the card issuer is known as "interchange," and it typically ranges from about 1% to 3% of your transaction amount, plus a flat fee.
Interchange fees, sometimes called "swipe fees," are largely invisible to consumers, but they're worth knowing about because they help explain how your credit card rewards are funded.
They may also affect a merchant's pricing and, in some cases, whether your card is even accepted there.
Why do interchange fees exist?
Processing payments comes with costs: Credit card companies have extensive systems in place to securely and safely collect money from consumers and send it to a merchant, and they charge for that service.
These companies also offer a variety of benefits to cardholders — including extended warranties, rental car insurance and credit card rewards — and interchange fees help fund those benefits.
In fact, when the 2010 Durbin amendment limited interchange fees charged on debit card purchases, debit card rewards programs essentially disappeared. In countries where credit card interchange fees are capped, there are also far fewer rewards.
Who sets interchange fees?
Interchange rates are set by the payment networks that credit cards run on, including Visa, Mastercard, American Express and Discover. Rates vary depending on many factors, including what kind of purchase it is, where you make it, what kind of merchant it is, what bank issues the card, what specific card you're using (such as rewards versus no rewards), and more.
In general, American Express has tended to charge higher interchange fees, which means AmEx cards have historically been more expensive for merchants to accept. (In recent years, though, AmEx says it has mitigated this expense through its OptBlue program for small businesses.)
What do interchange fees mean for cardholders?
Merchants, not cardholders, are charged interchange fees, but the charges can still affect consumers in a variety of ways. A retailer may, for instance, choose to embed the cost of those fees in the prices of its goods, in effect passing it along to customers.
Some merchants, especially those that sell many lower-priced items, may require customers to make a minimum purchase if they want to use a credit card, because it can help the merchant cover the interchange fee. For example, if a customer purchases a $1 pack of gum and the merchant has to pay 40 cents toward an interchange fee, the profits may be so low that it’s not worth selling the gum.
And in some cases, merchants have even banned the use of certain credit cards, complaining that the interchange fees they're being charged to accept that plastic are too high.