interchange fee
A fee paid by a merchant's bank to a cardholder's bank every time a credit or debit card transaction occurs, typically 1.5-3% of the transaction amount.
Example
“When a customer uses a Visa credit card, the merchant's bank pays an interchange fee of roughly 2% to the customer's card-issuing bank.”
Memory Tip
INTERCHANGE FEE = the cut paid between banks in card transactions. Why merchants hate credit cards.
Why It Matters
Interchange fees directly affect the prices you pay for goods and services because merchants pass these costs along to consumers through higher prices or minimum purchase requirements. Understanding this hidden fee helps you recognize why merchants sometimes charge differently for card versus cash payments and why some businesses prefer certain payment methods.
Common Misconception
Many people believe interchange fees go directly to the credit card company they use, but actually the fee goes to the cardholder's bank, not the card issuer. The card issuer is a different entity that may benefit indirectly, but the primary recipient is always the bank that issued your specific card.
In Practice
When you buy a laptop for 1000 dollars at an electronics store using your debit card, the store's bank pays your bank approximately 15 to 30 dollars in interchange fees depending on the card type. The store absorbs this cost as a business expense, which is why some small retailers offer discounts for cash payments or set minimum amounts for card transactions to offset these mandatory fees.
Etymology
INTERCHANGE (exchange between banks) FEE. The FEE paid at the INTERCHANGE (between acquiring and issuing banks).
Common Misspellings
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See Also
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