How Interchange Works in Card Payments

When you make a payment with your credit or debit card, a complex but fast transaction process happens in the background to move money from your account to the merchant’s. A key part of this process is called interchange.

What is Interchange?

Interchange refers to the fee that a merchant’s bank (acquirer) pays to the cardholder’s bank (issuer) when a card transaction is processed. This fee helps cover the issuer’s cost of handling and securing the payment, fraud protection, and other services.

Who’s Involved in an Interchange Transaction?

1. Cardholder – You, the person using a credit or debit card to make a purchase.
2. Merchant – The business that sells goods or services.
3. Acquirer – The merchant’s bank or payment processor.
4. Issuer – The cardholder’s bank (the one that issued the card).
5. Card Network – Visa, Mastercard, American Express, etc., that routes the transaction.

Step-by-Step: How Interchange Works

Here’s a simplified breakdown of the interchange process:

1. Transaction Initiation

• You swipe or tap your card at a store or enter card details online.
• The merchant’s payment terminal or online gateway sends the transaction details to the acquiring bank.

2. Authorization Request

• The acquiring bank forwards the request to the card network (e.g., Visa).
• The card network passes it to the issuing bank to check if the transaction can be approved.

3. Approval or Decline

• The issuing bank checks:
  • Available balance or credit
  • Fraud risks
  • Account status
• It sends an approval or decline back through the card network to the merchant.

4. Interchange Fee Applied

• If approved, the acquiring bank pays the merchant the transaction amount minus fees.
• The interchange fee is sent from the acquirer to the issuer.

5. Settlement

• Within 1–3 business days, the issuing bank deducts the funds from the cardholder's account and sends them to the acquirer.
• The merchant gets the final payment, minus fees.

What Determines the Interchange Fee?

Interchange fees are not fixed—they vary based on several factors:

• Card type (debit, credit, rewards)
• Transaction method (in-store, online, contactless)
• Merchant category (e.g., retail vs. airline)
• Region and regulations

Typically, fees range from 1% to 3% of the transaction amount.

Why Interchange Matters

For Merchants:

• It's a cost of doing business via card payments.
• Understanding interchange can help negotiate better processing fees.

For Banks:

• It’s a major source of revenue.
• Helps fund cardholder benefits like fraud protection, rewards, and customer service.

Conclusion

Interchange is the engine behind the scenes of every card transaction. While invisible to consumers, it’s a vital mechanism that ensures secure, smooth, and efficient movement of money between banks and businesses. For merchants, payment processors, and financial institutions, understanding how interchange works can lead to smarter decisions and improved profitability.

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