Interchange fee on credit card transactions: How it affects you?
19 Aug 2025
If you use a credit card, you may have come across several terms related to charges and financial parameters. One such term is 'interchange fee.'
This is a crucial component of the credit card ecosystem that keeps the purchase financing cycle running smoothly.
The fee is charged every time a credit card transaction takes place, impacting merchants and potentially consumers.
So, how does it affect you? Let's see.
What is an interchange fee?
Fee explanation
The interchange fee is a small charge paid by a merchant's bank (acquirer) to a cardholder's bank (issuer).
It compensates the issuer for the value and benefits merchants get from accepting electronic payments.
In India, credit cards generally have an interchange fee of 2% of the transaction amount.
This fee covers the costs related to lines of credit and fraud mitigation for cardholder banks (issuers).
Factors determining such a fee
Determinants
Several factors determine the interchange fee, including card type (credit or debit), merchant type and size, transaction type (online or physical), and location.
This fee helps banks cover costs related to maintaining payment network infrastructure, managing risks of processing payments, and funding customer rewards programs.
Interchange fees vary across transactions based on Merchant Category Code (MCC), which reflects the risk value and average transaction size of a business.
How to calculate interchange fee?
Fee calculation
Interchange fees are generally a percentage of the card transaction amount.
For example, if you purchase something worth ₹10,000 with an interchange fee of 2%, the merchant gets ₹9,800 after deducting the fee.
The interchange fee is shared among different parties involved in the transaction. Merchants pay this fee to their acquiring bank which passes it on to the card-issuing bank.
Things to know about the charge
Merchant responsibility
Merchants usually negotiate a 'merchant discount' with their bank that includes the interchange fee and processing costs. Some merchants accept only debit cards due to lower interchange fees, while others pass on credit card interchange fees to customers by adding them to the final bill.
