Interchange is the biggest line item on your merchant statement and the one your processor hopes you never fully understand. Here is a plain-English breakdown.
Every time a customer pays by card, the transaction travels through a chain of parties before the money lands in your account. Understanding who gets paid what — and why — is the key to understanding your processing costs.
Here is the chain in order:
Each party in that chain takes a cut. The biggest cut — the one that goes to the issuing bank — is called the interchange fee.
Interchange is the fee that your processor pays to the customer's bank every time a card transaction is approved. It is then passed on to you — the merchant — as part of your total processing costs.
Interchange rates are set by Visa and Mastercard (not by your processor) and they publish these rates publicly. They are not negotiable. Every processor in the country pays the same interchange rates for the same card types. What is negotiable is the markup your processor adds on top.
Key point: Interchange is unavoidable. It goes to the card-issuing bank as compensation for fraud risk and the cost of maintaining the credit line. Your processor cannot change it and neither can you — but a good processor will pass it through at cost rather than mark it up significantly.
Not all card transactions cost the same. Interchange rates vary based on several factors:
The most common model sold to small businesses. The processor groups all transactions into three buckets: qualified, mid-qualified, and non-qualified, each with a different rate. Qualified sounds good until you realize your processor decides what goes in each bucket — and most rewards cards and business cards quietly land in the expensive non-qualified tier. You have no visibility into the actual interchange rate and the markup is hidden inside the tier structure.
Used by Square, Stripe, and PayPal. You pay one rate on everything (e.g., 2.9% + $0.30). It is easy to understand but you are almost always paying more than you need to, because the processor is averaging the interchange cost across all card types and adding a generous margin on top.
You see the actual interchange rate for each transaction plus a fixed processor markup (e.g., interchange + 0.3% + $0.10). Nothing is hidden. If a basic debit card costs interchange of 0.05% + $0.22, you pay exactly that plus the stated markup. If a premium rewards card costs 2.1% + $0.10 in interchange, you see that too. This is the most honest pricing model and usually the most cost-effective for businesses processing more than $10,000/month.
Interchange still exists in a zero-fee dual pricing program — it does not disappear. What changes is who pays it. Instead of the merchant absorbing the interchange cost and the processor markup as a deduction from sales, those costs are built into the card price that customers see at checkout.
From the merchant's perspective, the result is identical to having zero processing costs: every card sale nets the full base price regardless of the card type used. The math still works behind the scenes — the fee just moved from your P&L to the card price your customers see before they decide how to pay.
Bottom line: Interchange is the cost of doing business with card networks. It is real and unavoidable. What is avoidable is the processor markup stacked on top of it — and what is completely solvable is having it come out of your revenue at all. Dual pricing eliminates your out-of-pocket cost entirely.
Pull up your last merchant statement and look for a section labeled "interchange," "base costs," or "pass-through fees." This is what goes to the issuing banks. The section above or below it — labeled "processor fees," "discount rate," "markup," or similar — is what your processor keeps. That second number is what you are negotiating when you shop for a better processor, and what disappears entirely under a zero-fee program.
A zero-fee dual pricing program shifts your interchange and processing costs entirely to the card price — so your monthly statement shows $0 in processing fees. Free analysis, no obligation.
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