What Are Interchange and Scheme Fees: A Clear Explanation of Payment Processing Costs
Written by Lee Hart
When you pay with a card, several small fees get passed between banks and card networks. These fees aren't visible to you as a customer, but they affect businesses that accept your cards. Interchange fees are paid to the card issuer (your bank), while scheme fees go to card networks like Visa or Mastercard, and together they make up a significant portion of what merchants pay to accept card payments.
These fees vary based on several factors including the type of card used (credit or debit), how the payment is made (in-person or online), and even the type of business accepting the payment. In recent years, scheme fees have increased significantly, adding extra costs for merchants who accept card payments.
Understanding these fees helps businesses make better decisions about which payment methods to accept and how to manage their costs. The Merchant Service Charge that retailers pay includes these interchange and scheme fees, plus additional costs for services like payment terminals and payment processing.
Key Takeaways
- Interchange fees go to card-issuing banks while scheme fees are paid to card networks like Visa and Mastercard.
- These fees vary based on card type, transaction method, and business category, with recent increases affecting merchant costs.
- Merchants can optimise their payment acceptance strategies by understanding fee structures and considering different payment methods.
Understanding Interchange Fees
Interchange fees form a critical component of card payment processing costs that impact businesses accepting card payments. These fees are set by card networks and paid to card issuers for each transaction processed.
Definition and Purpose of Interchange Fees
Interchange fees are charges paid by a merchant's bank (the acquirer) to the cardholder's bank (the issuer) when customers make purchases using payment cards. These fees serve as compensation to card issuers for taking on cardholder risk and providing immediate payment to merchants.
Interchange fees are non-negotiable and are regularly adjusted by card schemes like Visa and Mastercard. They typically range from 0.1% to 0.2% for debit transactions in the UK and EU, though rates can be higher for other transaction types.
The primary purpose of these fees is to fund the card payment ecosystem, supporting fraud prevention, credit risk management, and the infrastructure that enables electronic payments to function efficiently.
How Interchange Fees Are Calculated
Interchange fees vary based on several key factors that determine the final cost applied to each transaction. The calculation considers:
- Card type: Credit cards typically incur higher fees than debit cards
- Transaction type: Card-present transactions (in-store) versus card-not-present (online)
- Merchant category: Different industries have different risk profiles and fee structures
- Geography: Fees in the UK and EU are generally lower than in other regions due to regulatory caps
The EU Interchange Fee Regulation (IFR) caps interchange at 0.2% for consumer debit cards and 0.3% for consumer credit cards within the European Economic Area. These rates can be presented as a percentage of the transaction value, a fixed fee, or a combination of both.
Types of Transactions That Incur Interchange Fees
Nearly all card transactions involve interchange fees, but the specific amounts vary significantly across different transaction types.
Card-present transactions include:
- In-store chip and PIN payments
- Contactless tap payments
- Mobile wallet transactions at physical terminals
Card-not-present transactions include:
- Online purchases
- Telephone orders
- Recurring subscription payments
Business-to-business (B2B) transactions and commercial card payments often incur higher interchange rates than consumer transactions. Different fee structures apply based on whether transactions are domestic or cross-border, with international transactions typically carrying premium rates.
Some transactions, such as certain public sector payments or charity donations, may qualify for special interchange rates.
Overview of Scheme Fees
Scheme fees are essential components of card payment processing costs that businesses must account for. These charges are set by card networks and vary based on transaction types, card types, and other factors.
What Are Scheme Fees?
Scheme fees are charges imposed by card schemes such as Visa and Mastercard for processing transactions through their networks. Unlike interchange fees that go to the card issuer, scheme fees are paid directly to the card network organisations.
These fees cover the costs of maintaining the payment infrastructure, network services, fraud prevention, and brand marketing. Major card schemes operating in the UK include Visa, Mastercard, and American Express.
Scheme fees have increased significantly in recent years, adding to merchants' processing costs. They typically comprise a fixed fee per transaction plus a percentage of the transaction value.
The exact scheme fee structure depends on numerous factors, including transaction type (online vs in-store), merchant category, and the region where the transaction occurs.
How Scheme Fees Differ from Interchange Fees
Scheme fees and interchange fees are often confused, but they serve different purposes and benefit different parties:
Recipient:
- Scheme fees go to card networks (Visa, Mastercard)
- Interchange fees go to the card-issuing bank
Regulation:
- Interchange fees are capped in the European Economic Area
- Scheme fees are not subject to the same regulatory caps
Purpose:
- Interchange fees compensate issuers for risk and processing
- Scheme fees cover network infrastructure and services
While interchange fees remain relatively stable due to regulation, scheme fees have been rising, representing an increasing portion of merchants' payment processing costs.
Common Scheme Fee Structures
Scheme fees come in various types, each serving different purposes within the payment ecosystem:
Core Processing Fees:
- Assessment fees (percentage of transaction value)
- Authorisation fees (fixed fee per transaction)
- Clearing and settlement fees
Additional Fees:
- Cross-border fees for international transactions
- Currency conversion fees
- Network access fees
The specific structure can vary significantly. For example, Visa's consumer debit scheme fees might range from 0.11% to 0.312% plus €0.0082 per transaction.
Factors affecting scheme fees include:
- Transaction amount
- Card type (credit vs debit)
- Card origin (domestic vs international)
- Processing method (chip and PIN, contactless, online)
Merchants should analyse their transaction profiles to understand how different scheme fee structures impact their overall costs.
How Interchange Fees Work in Card Payments
Interchange fees form the backbone of card payment economics, enabling transactions between merchants and cardholders through complex but well-established processes. These fees support the payment infrastructure while compensating various parties for their roles in the transaction.
Role of Card Networks
Card networks like Visa and Mastercard establish the interchange fee structure but don't actually collect these fees themselves. Instead, they set the rates that issuing banks charge to acquiring banks during transactions.
When you tap your card to pay, the interchange fee is deducted from the payment amount before it reaches the merchant. These fees vary based on several factors:
- Card type (credit vs debit)
- Transaction type (in-person vs online)
- Merchant category
- Security measures used (chip, PIN, etc.)
In 2021, US businesses paid approximately £137.8 billion in card processing fees, with interchange fees making up 70-90% of these costs.
Parties Involved in Interchange Transactions
Four primary parties participate in every card transaction, each playing a crucial role in the interchange process:
- Cardholder: The customer making a purchase with their card
- Merchant: The business accepting the card payment
- Issuing Bank: The financial institution that issued the card to the customer
- Acquiring Bank: The merchant's bank that processes card payments on their behalf
The interchange fee flows from the acquiring bank to the issuing bank. Meanwhile, the merchant pays a Merchant Service Charge which includes the interchange fee plus additional costs for services provided by their bank.
Under the Interchange++ pricing model, merchants can see a breakdown of these three key components: the acquirer fee, card scheme fee, and interchange fee.
Scheme Fees in the Payment Ecosystem
Scheme fees represent a critical cost component in card payment processing that merchants must account for in their business operations. These fees are set by card networks and vary based on transaction types and regions.
Who Pays Scheme Fees and Why
Scheme fees are paid by acquiring banks (the merchant's bank) to card networks like Visa and Mastercard. These acquiring banks typically pass these costs on to merchants as part of their overall payment processing charges.
Unlike interchange fees that go to card-issuing banks, scheme fees go directly to the card networks to fund their operations. Card networks use these fees to:
- Maintain and upgrade their global payment infrastructure
- Develop new payment technologies and security features
- Market their brand and card products
- Provide settlement services between issuing and acquiring banks
Scheme fees aren't negotiable for individual merchants and have increased significantly in recent years, adding to the cost pressure on businesses that accept card payments.
Scheme Fees for Domestic and Cross-Border Transactions
Scheme fees vary substantially between domestic and cross-border transactions. Domestic transactions typically incur lower scheme fees compared to international payments.
Cross-border transactions come with additional complexities that result in higher scheme fees:
- Currency conversion services
- International routing of payment data
- Enhanced fraud monitoring for international payments
- Additional compliance and regulatory requirements
It's worth noting that scheme fees are charged again on refunds, unlike some other payment costs. This creates an additional expense for merchants with high return rates.
For businesses operating across borders, understanding these fee differentials is essential for accurate cost forecasting and pricing strategies. UK merchants should be particularly aware of changes due to Brexit and other regulatory developments that have impacted the fee structure.
Impact on Merchants
Merchants face significant financial implications from both interchange and scheme fees, which directly affect their bottom line and pricing strategies. These fees constitute a substantial portion of payment processing costs that businesses must carefully manage.
Effect of Interchange and Scheme Fees on Merchant Costs
For most merchants, card processing fees represent the third-highest operating expense after labour and rent. Small businesses with tight profit margins feel these impacts most acutely. A typical merchant might pay between 1.5% to 3.5% of each transaction in total fees, with interchange often comprising 70-90% of that amount.
Many merchants never see these fees itemised, as they're frequently bundled into a single blended merchant service charge on monthly statements. This lack of transparency makes it difficult for businesses to understand their true costs.
Some merchants respond by implementing minimum purchase requirements for card transactions or offering cash discounts. Others negotiate with payment processors for better rates based on their transaction volume.
Pass-Through to Consumers
When faced with rising interchange and scheme fees, merchants typically have three options: absorb the costs, reduce expenses elsewhere, or pass them on to customers.
Most businesses ultimately pass at least a portion of these fees to consumers through higher prices. This is particularly common in low-margin industries such as grocery and petrol stations.
Some businesses implement card surcharges or offer cash discounts to encourage payment methods with lower processing costs. These practices are more prevalent in countries with less regulation on surcharging.
The varying costs between card types can also influence merchant behaviour. For example, premium rewards cards typically carry higher interchange fees, potentially leading merchants to discourage their use or increase prices universally to compensate.
Factors Influencing Interchange and Scheme Fees
Several key factors determine how much merchants pay in interchange and scheme fees when processing card payments. These variables affect costs significantly and understanding them can help businesses better manage their payment processing expenses.
Transaction Type and Channel
The way a customer pays has a major impact on fee structures. Card-present transactions (in-store purchases where the physical card is used) typically have lower fees than card-not-present transactions (online or telephone purchases).
This difference exists because card-present transactions have lower fraud risk, as the customer is physically present with their card. Online transactions carry higher interchange fees due to increased security concerns.
Geographic considerations also matter significantly. Cross-border transactions (where the merchant and cardholder are in different countries) typically incur higher fees than domestic ones. This reflects the additional processing complexity and risk involved.
Payment method also affects costs, with mobile payments sometimes having different fee structures than traditional card swipes or chip-and-PIN transactions.
Card Type and Risk Profiles
Different card types carry varying fee levels based on their inherent risk and rewards profiles. Credit cards generally have higher interchange fees than debit cards because they present greater financial risk to issuers.
Premium cards (platinum, gold, rewards) typically charge higher fees than standard cards. These increased costs help fund the extensive rewards programmes these cards offer to cardholders.
Business or corporate cards often have higher interchange rates than consumer cards, reflecting the larger transaction values and additional services provided.
The card scheme itself (Visa, Mastercard, etc.) significantly impacts fees, with each network setting its own rate structures. For example, processing a Mastercard transaction might cost differently than processing an identical Visa transaction.
Regulation and Recent Changes
Interchange and scheme fees have faced increasing regulatory scrutiny worldwide, with significant changes implemented to protect merchants from excessive charges. Recent regulatory actions and scheme updates continue to shape the landscape of payment processing costs.
EU Interchange Fee Regulation
The European Union implemented the Interchange Fee Regulation (IFR) which established caps on interchange fees for consumer card transactions. These caps currently limit fees to 0.2% for consumer debit cards and 0.3% for consumer credit cards. This regulation took effect from 9 December 2015.
The caps also apply to certain fees related to some American Express card transactions. This regulatory framework aims to reduce costs for merchants and potentially lead to lower prices for consumers.
The UK has maintained these same caps post-Brexit, providing consistency for UK merchants in domestic transactions. However, cross-border transactions between the UK and EEA have faced different fee structures since Brexit.
Recent Updates from Card Schemes
Card schemes like Visa and Mastercard regularly update their fee structures, creating challenges for merchants to track costs. According to payment industry documents, new fee rates are expected in 2025, which merchants should prepare for.
The Payment Systems Regulator (PSR) has been active in reviewing the market, particularly focusing on UK-EEA consumer cross-border interchange fees. Their review found that merchants are paying an additional £150-200 million per year in interchange fees on these transactions due to lack of competition.
The PSR is considering implementing new regulations to address transparency and pricing issues in card scheme rules. These potential changes aim to create a fairer market and reduce costs for UK merchants.
Strategies for Optimising Payment Fees
Businesses can significantly reduce their card processing costs through deliberate optimisation strategies. These approaches focus on negotiating better terms and selecting payment partners that align with transaction patterns.
Negotiating Rates with Providers
Effective negotiation starts with understanding your transaction profile. High-volume merchants can leverage their sales volume to secure better interchange rates and reduced scheme fees.
When approaching negotiations, come prepared with:
- Current processing volumes and average transaction values
- Seasonal patterns in your payment processing
- Competitor rate comparisons
- Industry benchmarks for similar businesses
Managing interchange involves optimising transaction routing and implementing merchant category strategies. Ask providers about tiered pricing structures based on monthly processing volumes.
Request a detailed breakdown of all fees rather than accepting blended rates. This transparency allows you to identify specific areas for cost reduction.
Consider negotiating caps on monthly scheme fees if your business processes a high number of low-value transactions, as these can quickly accumulate.
Choosing the Right Payment Partners
Selecting appropriate payment partners begins with evaluating payment processors that pass interchange savings to merchants. Not all acquirers structure their fees equally, making comparison essential.
Look for providers offering interchange-plus pricing (IC++) rather than tiered or flat-rate models. This pricing structure separates the interchange fee, scheme fee, and acquirer markup, providing clearer visibility into what you're paying.
Consider these factors when selecting partners:
- Geographic focus matching your customer base
- Card-type optimisation for your typical transactions
- Integration capabilities with your existing systems
- Additional value-added services offered
Partners specialising in your industry may offer optimised routing that can substantially reduce costs by directing transactions through the most cost-effective processing channels.
Future Trends in Interchange and Scheme Fees
The payments landscape is evolving rapidly, with several key trends poised to impact interchange and scheme fees in the coming years. These developments will likely reshape how businesses and consumers experience payment processing costs.
Alternative payment methods are gaining traction and may influence traditional card networks. As these options become more popular, they could place competitive pressure on card networks globally, potentially driving changes in fee structures.
Regulatory oversight continues to intensify, particularly in cross-border transactions. The Payment Systems Regulator (PSR) has already identified issues with UK-EEA interchange fees, noting that merchants paid an additional £150-200 million per year due to lack of competition. This regulatory scrutiny is likely to persist.
Digital innovation is another significant factor shaping future fees. Technologies like blockchain and open banking may create new payment rails that operate outside traditional card schemes, potentially offering lower-cost alternatives.
Fee transparency is becoming increasingly important to merchants. More businesses are demanding clearer breakdowns of:
- Interchange components
- Scheme fee structures
- Processing costs
Consumer preferences are shifting toward contactless and mobile payments, which may influence how fees are calculated and applied. These preferences could lead to new fee categories or adjustments to existing ones.
The balance between security enhancements and cost efficiency will remain a challenge. As fraud prevention measures become more sophisticated, their costs may be reflected in updated fee structures.
Frequently Asked Questions
Interchange and scheme fees impact how much businesses pay to accept card payments. These fees vary based on transaction types, card networks, and regional regulations.
How do interchange fees affect card transactions?
Interchange fees are paid by the merchant's bank to the cardholder's bank during each transaction. They cover the cardholder's bank costs related to credit lines and fraud prevention.
These fees are a significant part of the transaction fees merchants pay when they accept debit or credit card payments.
The fee amount typically varies depending on factors like card type, transaction method, and merchant category.
What determines the rates of Mastercard scheme fees?
Mastercard scheme fees are determined by several key factors. These include the region where the transaction takes place, the type of card used, and the merchant's business category.
Risk assessment also plays a role in fee determination, with higher-risk industries often facing higher fees.
Mastercard may adjust these fees periodically based on market conditions and their business strategy.
In what way are Visa scheme fees structured in Europe?
Visa's European scheme fees follow a tiered structure based on transaction volume and merchant category. The European Union has implemented caps on certain interchange fees to protect merchants.
Visa publishes its interchange information for transparency, allowing merchants to understand what they're paying.
Cross-border transactions typically incur different fees compared to domestic payments within Europe.
What constitutes the differences between scheme and interchange fees?
Interchange fees go to the card-issuing bank, while scheme fees are paid to the card network (like Visa or Mastercard). Interchange fees typically form the larger portion of transaction costs for merchants.
Scheme fees cover the costs of operating the payment network and brand marketing.
Scheme fees are set by payment system operators, whilst interchange fees are often subject to regulatory caps in many regions.
Can you explain the role of interchange fees in card settlement?
Interchange fees facilitate the movement of funds between banks during card transactions. When a customer makes a purchase, the interchange fee is paid by the acquirer to the issuer for each payment.
These fees help offset the costs and risks taken on by issuing banks, including fraud management and payment guarantees.
They also fund cardholder benefits like rewards programmes and interest-free periods on credit cards.
How are Barclay's interchange and scheme fees computed?
Barclays, like other banks, calculates interchange fees based on the card network's established rates. For merchants, these calculations typically involve a percentage of the transaction value plus a fixed fee per transaction.
Different card types (credit, debit, commercial) command different interchange rates when processed through Barclays' payment systems.
The bank must adhere to interchange fee caps established by UK and EU regulations when processing domestic transactions.
About The Author
Lee Hart
