Interchange fees

Fees paid by one financial institution to another to cover handling costs and credit risk in a financial institution card transaction. Interchange fees generally flow toward the institution funding the transaction and assuming the risk. In a credit card transaction, the interchange fee is paid by the merchant acquirer accepting the merchant’s sales draft to the card-issuing institution, which, in turn, passes the fee to its merchants. In EFT/POS transactions, interchange flows in the opposite direction: the card-issuing institution (or customer) pays the fee to the terminal-owning institution. When a transaction is an off-line debit sale, the card-issuing institution collects an interchange fee from the merchant, rather than from the customer, unlike in an EFT/POS transaction, where the customer pays the interchange fee. Interchange revenue is derived from fees set by the card associations. Depending on the card association, fees can range from 1% to 3% of the value of the transaction. Interchange revenue is recognized as a card issuer’s second largest revenue line item.