What Are Interchange Fees and Current UK Regulations?

Interchange fees are one of three types of fees that businesses have to pay every time they take a credit or debit card payment.

All three processing fees, referred to collectively as the Merchant Service Charge (MSC), appear as one charge on a merchant’s invoice and are taken as a percentage of the transaction’s value. For this reason, it can sometimes be hard to know exactly how much you’re paying in interchange fees.

In this guide, we’ll explain everything business owners need to know about interchange fees, including how much they cost and how they’re calculated. We’ll also cover current regulations that govern how much you can be made to pay in interchange fees.

What Are Interchange Fees?

Interchange fees are one of the three card processing fees that businesses must pay when they accept a credit or debit card payment from a customer.

The interchange fee rate is put in place by the card network (Visa, Mastercard, American Express etc.) and paid to the bank that issues the customer’s card. So, if a customer uses a Visa credit card issued by HSBC, for example, the interchange fee will go to HSBC. The fee covers the cost of handling the transaction and the risk incurred by the bank in approving the payment.

Merchants don’t pay the interchange fee directly to the customer’s bank. Instead, the bank that holds your merchant account will automatically pass on the interchange fee to the customer’s bank when processing an incoming payment for goods or services.

This means the amount the merchant receives from the transaction will be its total value minus the processing fees, which include the interchange fee.

How Much Are Interchange Fees?

In the UK, the average interchange fee is 0.3% of the transaction total for credit card payments and 0.2% for debit card payments. The average total Merchant Service Charge is 0.55%.

Interchange fees make up the bulk of the Merchant Service Charge, however you probably won’t see interchange fees listed on your bank statement. They’re lumped in as part of a single Merchant Service Charge, which also includes card scheme fees (charged by card networks like Visa and Mastercard) and an acquiring markup (charged by your bank).

In the US, interchange fees are quite a bit higher. According to payments consultant CMS Payments Intelligence, the average interchange fee in the US is 1.8%.

Who sets interchange fee rates?

Interchange fees rates are set by the card networks, such as Visa and Mastercard, rather than by the card-issuing banks that receive them. Many countries, including the UK, have rules that limit the maximum interchange fee to protect merchants.

Visa and Mastercard, the biggest card networks in the UK publish their interchange rates. Here’s a summary:

Factors That Influence Interchange Fees

A variety of factors determine the interchange fee you’ll pay for a card transaction. Here are the most important ones.

Domestic vs. cross-border

For businesses in the UK, the most important factor determining your interchange fee is where the customer’s card was issued.

UK regulations cap interchange fees when a UK-based business processes a credit or debit card issued in the UK. However, there are no caps when a UK-based business processes a card issued in another country. So cross-border transactions can carry much higher interchange fees.

Read more on how to accept international payments in our guide.

Credit vs. debit

Credit cards typically have higher interchange fees than debit cards. This is in part to cover the greater risk the banks take on when approving a credit card payment (the customer might not repay it) and in other parts thanks to regulations that set lower maximum fees for debit card transactions.

Online vs. in-person

Most card networks charge significantly higher interchange fees for card-not-present transactions (transactions where the customer is not physically tapping, swiping, or inserting a card into a card machine). This is because the risk of fraud is greater.

Card-not-present transactions include online transactions, over-the-phone payments, invoices, or any keyed-in payment (where the till operator physically enters the card information into the till themselves).

Card network

Card networks like Visa, Mastercard, and American Express all set their own interchange fees. So, all other factors being equal, you could pay different interchange fees for a Visa credit card transaction and a Mastercard credit card transaction.

American Express tends to charge higher interchange fees than Visa and Mastercard, which is partially why some merchants refuse to accept AMEX cards.

Personal vs. business card

Personal credit and debit cards have lower interchange fees than business/commercial credit and debit cards. The main reason for this is that issuing banks often use interchange fees to fund rewards programmes that they have running for businesses that use their commercial cards.

Merchant category code

Every merchant is assigned a four-digit merchant category code based on the type of business they run. Some merchant category codes, like those representing charities or utilities, receive discounted interchange fees.

Current Interchange Fee Regulations

In the UK, current regulations state that interchange fees on domestic transactions (those made between a UK merchant and a UK card issuing bank) are capped at 0.3% for credit cards and 0.2% for debit cards.

Most major card networks, including Visa and Mastercard, charge these maximum rates for domestic transactions on consumer cards.

However, there are no regulations covering interchange fees for cross-border transactions. Since Brexit, this means that UK merchants can pay much higher fees for transactions involving cards issued in the EU. Mastercard and Visa, for example, charge interchange fees of 1.5% for online credit card transactions between a UK merchant and an EU customer.