Interchange Banking

Interchange banking is the system that facilitates card payments between banks when customers use credit or debit cards. Money moves from the customer's bank (issuing bank) to the merchant's bank (acquiring bank) through payment networks like Visa or Mastercard. Interchange fees are the costs merchants pay to accept card payments.

How It Works

Every card swipe involves multiple parties:

• Customer's Bank (Issuing Bank) - Issued the card, must send money
• Merchant's Bank (Acquiring Bank) - Receives the money for merchant
• Payment Network (Visa/Mastercard) - Facilitates the transfer
• All parties - Need compensation for their role

The Process: Transaction initiated → Authorization approved in 2-3 seconds → Settlement next day → Funds distributed minus fees

Example: Customer purchases $1,000 in equipment with a business credit card. After interchange fee (2.0%), network fee (0.15%), and processor markup (0.30%), merchant receives $975.50 - a total cost of $24.50 or 2.45%.

Interchange Fee Structure

Rates vary based on:

• Card Type - Debit (0.05% + $0.21) to premium cards (3.50%)
• Transaction Type - Card present (lower) vs. card not present/online (higher)
• Merchant Category - Low-risk (grocery) vs. higher-risk (travel)
• Processing Method - Chip (standard) vs. manually keyed (highest)

Who Gets What

• Issuing Bank (70-80%) - Fraud risk, rewards programs, customer service
• Card Network (10-15%) - Infrastructure, authorization systems
• Acquiring Bank/Processor (10-20%) - Transaction processing, merchant support

Business Impact

Interchange fees are a significant cost for businesses, especially those with low margins or large transactions. Strategies to manage costs include steering customers toward ACH payments for large amounts, implementing surcharge programs, and negotiating processor rates.