Credit card companies charge merchants a percentage of each transaction, plus a flat fee per sale
When you swipe or tap a credit card at a store, the merchant pays a fee to process that payment. This fee goes to multiple parties: the card network (Visa, Mastercard, American Express, Discover), the bank that issued your card, and the payment processor handling the transaction. The total cost to the merchant is called the interchange fee, and it typically ranges from 1.5% to 3.5% of the sale amount, plus 10 to 30 cents per transaction.
The exact percentage depends on the type of card used, the merchant's industry, the size of their business, and how the transaction is processed. A coffee shop paying for a debit card transaction will pay less than a gas station processing a rewards credit card. A large grocery chain negotiates lower rates than a small boutique. Understanding these fees matters if you own a business, because they directly affect your profit margin on every sale.
Key Takeaways
- Merchants pay interchange fees of 1.5% to 3.5% of the sale amount plus a per-transaction fee, which varies by card type and merchant category.
- Visa and Mastercard set the interchange rates, while the card-issuing banks keep most of that fee; the payment processor takes a smaller cut.
- Rewards cards and premium cards cost merchants more to process than basic cards because the issuing bank pays out more in rewards.
- Large merchants can negotiate lower rates, but small businesses and independent contractors typically pay the standard published rates.
- Merchants can legally pass the cost to customers through surcharges in most states, though many choose not to because it discourages sales.
Who receives the interchange fee and how much each party gets
The interchange fee is split among three parties, but the split is not equal. The card-issuing bank (the bank that gave you your credit card) keeps the largest share, typically 70% to 80% of the total fee. Visa or Mastercard keeps a smaller percentage for operating the network and processing the transaction. The merchant's payment processor—the company the store uses to accept cards—takes the remainder.
For example, if you buy $100 worth of groceries with a standard Mastercard and the interchange fee is 2%, the merchant pays $2. The issuing bank might receive $1.60, Mastercard might receive $0.25, and the payment processor might receive $0.15. The exact split varies by card type and the merchant's agreement with their processor.
Why interchange fees are higher for some cards than others
Not all credit cards cost merchants the same amount to process. Rewards cards—cards that give you cash back, airline miles, or points—carry higher interchange fees than basic cards. This is because the issuing bank pays out rewards to cardholders, and the higher interchange fee helps cover that cost. A card offering 2% cash back on all purchases will have a higher interchange rate than a card with no rewards.
Premium cards with annual fees, like business cards or travel cards with concierge services, also have higher interchange rates. Debit cards cost merchants less to process than credit cards. American Express and Discover, which operate as both the card network and the issuing bank, set their own rates and typically charge merchants more than Visa and Mastercard do.
The merchant's industry also affects the rate. Restaurants, gas stations, and online retailers pay different interchange rates because they carry different fraud risk and chargeback rates. A grocery store pays a different rate than a jewelry store, even if both are processing the same card type.
How transaction size and processing method affect the fee
Interchange fees include both a percentage and a flat per-transaction fee. The percentage applies to the sale amount, while the flat fee is charged regardless of whether you buy $5 or $500. This means small transactions are proportionally more expensive for merchants to process. A $5 coffee purchase with a 2% interchange rate plus $0.25 per transaction costs the merchant $0.35 total—7% of the sale. A $100 purchase with the same rates costs $2.25, or 2.25% of the sale.
How the transaction is processed also matters. In-person card-present transactions (where the merchant can see the card) have lower interchange rates than card-not-present transactions like online purchases or phone orders. This is because card-present transactions have lower fraud risk. A merchant who manually enters a card number over the phone pays a higher rate than one who swipes the card in the store.
What merchants can do about interchange fees
Large merchants with high sales volume can negotiate lower interchange rates with their payment processors or banks. Walmart, Target, and other major retailers have enough transaction volume to demand better terms. Small businesses and independent contractors typically cannot negotiate and pay the published rates set by Visa and Mastercard.
Some merchants pass the cost to customers through a surcharge—an extra fee added to the bill when you pay with a credit card. This is legal in most states, though a few states and some card networks restrict it. Many merchants choose not to use surcharges because customers dislike paying extra and may take their business elsewhere. Others offer a discount for paying with cash or debit instead of credit.
Merchants can also reduce their interchange costs by encouraging lower-cost payment methods. Some offer a small discount for debit card payments or cash, or they may refuse to accept American Express because its rates are higher. A few merchants have switched to digital wallets or other payment systems to reduce fees, though this requires customers to change their payment habits.
How interchange fees affect what you pay as a customer
Interchange fees are built into the prices you see in stores. Merchants factor these costs into their pricing, so you pay for them whether you use a credit card, debit card, or cash. A store that pays 2% in interchange fees on credit card sales will raise prices slightly to cover that cost across all customers. This means cash customers are effectively subsidizing credit card rewards.
When merchants do use surcharges, you see the fee directly on your receipt. Some online retailers show it as a "credit card processing fee" or "payment processing fee" at checkout. In states where surcharges are legal, merchants can charge up to the actual cost of processing your card, though many charge less to avoid customer backlash.
Frequently Asked Questions
Can a merchant refuse to accept a certain credit card?
Yes. Merchants can choose which cards to accept, though most accept all major networks to avoid losing sales. Some small businesses refuse American Express because its interchange rates are higher. A merchant cannot refuse a card based on your personal characteristics, but they can refuse based on the card type or network.
Why do online purchases cost merchants more to process?
Card-not-present transactions have higher interchange rates because merchants cannot verify the card is real or that the cardholder authorized the purchase. Fraud risk is higher, so card networks charge more. In-person transactions where the merchant can see and verify the card cost less to process.
Do debit cards have lower interchange fees than credit cards?
Yes, generally. Debit card interchange rates are typically lower than credit card rates because debit transactions carry less risk and the issuing bank does not pay out rewards. However, some premium debit cards may have higher rates than basic credit cards.
Can I negotiate interchange fees if I own a small business?
Probably not directly. Small merchants typically cannot negotiate with Visa or Mastercard because their transaction volume is too low. You can shop around for payment processors and choose one with lower fees, but the underlying interchange rate is set by the card networks and is the same across processors.
What happens if a merchant adds a surcharge to my bill?
The surcharge appears as a separate line item on your receipt and is added to your total bill. It is legal in most states as long as the merchant discloses it clearly before you complete the transaction. Some states cap surcharges at the actual cost of processing, while a few states ban them entirely.