Interchange is the fee the merchant's bank pays the cardholder's bank on every card transaction. The rate is published by the card network, not agreed between the two banks involved.
Why a default rate exists at all
A card network connects thousands of issuing banks to millions of merchants through acquiring banks. Any issuer's card must work at any accepting merchant.
Negotiating terms bilaterally between every issuer and every acquirer would be impossible at that scale. The network solves it by publishing a default schedule that applies unless parties agree otherwise.
That default is interchange. It is best understood as the price of universal acceptance rather than as a fee for any specific service rendered on a given sale.
What determines which rate applies
Interchange is not a single number. Schedules run to hundreds of rates varying by card type, merchant category, transaction method and the data submitted with the authorization.
A premium rewards card carries a higher rate than a basic debit card. A card physically dipped at a terminal generally qualifies for a lower rate than one keyed in manually.
Merchants that submit richer transaction data can qualify for lower categories, which is why business card processing often involves passing additional fields with each sale.
The two-sided market logic
A card network needs cardholders and merchants simultaneously. Neither side joins a network the other has not joined, so the network must make both sides attractive.
Interchange moves revenue from the merchant side to the issuing side, funding rewards, fraud losses and credit risk. That funding is what makes issuing cards worth doing.
Raising interchange strengthens issuer incentives to promote the network's cards while raising merchant costs. The networks set rates at the point they judge keeps both sides participating.
Where regulation has intervened
Debit interchange in the United States is capped for larger issuers under federal law, with the cap tied to issuer costs and a fraud adjustment.
Smaller issuers were exempted from the cap, creating a two-tier debit market. Credit card interchange was not addressed by that provision and remains network-set.
Litigation between merchants and networks has separately reshaped the rules merchants must follow, including their ability to surcharge or steer customers toward cheaper payment methods.
How the cost reaches the merchant
Merchants do not pay interchange directly. They pay their acquirer a merchant discount rate that includes interchange, network assessments and the acquirer's own margin.
Pricing models differ. Interchange-plus passes the network rate through with a stated markup, while blended pricing averages everything into a single rate regardless of card type.
Blended pricing hides which transactions are expensive, which is precisely why larger merchants insist on the pass-through model and monitor their category mix closely.