What is an interchange fee?

An interchange fee is the percentage of the purchase that credit card companies charge merchants to accept their cards. The exact interchange percentage varies by the credit card issuer (Visa, MasterCard, American Express, and Discover) and the type of transaction (grocery, gas, on-line, in-store). The actual pricing of interchange fees is quite complex and varies according to each card issuer's historical performance experience with fraud and chargebacks for each type of transaction.

While the fees vary, on average, interchange fees are approximately 2% of the transaction value. For issuing banks, interchange fees can be a significant source of revenues. For banks with large portfolios of transactors, consumers who use their credit cards but pay in full every month, it is even more important.

In many ways, interchange fees are the reason that rewards programs and points work as a loyalty program. Banks rely on the interchange revenues to offset the cost of the reward programs. This is a primary reason that few reward loyalty programs offer more than 1%.

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