What Are Interchange Fees?

The Card Payment Fee Structure

When a customer pays with a card, multiple parties take fees:

Total merchant fee: 1.5-3% of transaction

This breaks down into:

Interchange fee (0.8-1.8%): Paid by acquirer to issuer (card-holding bank)
Assessment fee (0.1-0.3%): Paid to card network (Visa, Mastercard)
Acquirer margin (0.3-0.8%): Retained by merchant’s payment processor

Example: €100 transaction at 2% total merchant fee

Interchange: €1.20 (goes to customer’s bank)
Assessment: €0.20 (goes to Visa/Mastercard)
Acquirer margin: €0.60 (goes to merchant’s payment processor)

Why interchange exists:

Card networks argue interchange fees:

Incentivize banks to issue cards (customer acquisition)
Fund rewards programs that drive card usage
Cover fraud and credit risk costs
Enable zero-liability consumer protection

Why merchants object:

Merchants argue interchange fees:

Are set by card networks without merchant input (not market-determined)
Have increased over time despite declining processing costs
Represent a hidden tax on commerce
Disproportionately benefit banks at merchant expense

European Interchange Fee Regulation

The 2015 Interchange Fee Regulation

In December 2015, the EU implemented the Interchange Fee Regulation (IFR), capping interchange fees:

Consumer cards:

Debit cards: 0.2% cap
Credit cards: 0.3% cap

Commercial cards:

Higher caps allowed (0.5-1.0%)

Before regulation (2014):

Average debit interchange: 0.6-0.8%
Average credit interchange: 1.2-1.6%

After regulation (2016+):

Debit interchange: 0.2% (capped)
Credit interchange: 0.3% (capped)

Impact on merchant costs:

For a merchant processing €10M annually (70% debit, 30% credit):

Before IFR:

Debit: €7M × 0.7% = €49K
Credit: €3M × 1.4% = €42K
Total interchange: €91K

After IFR:

Debit: €7M × 0.2% = €14K
Credit: €3M × 0.3% = €9K
Total interchange: €23K

Savings: €68K (75% reduction)

This represented one of the most significant merchant cost reductions in payment history.

Impact on European Payment Ecosystem

For merchants:

✅ Lower payment processing costs
✅ Improved profitability (especially thin-margin retailers)
⚠️ Some acquirers increased other fees to compensate

For issuing banks:

❌ Revenue decline (interchange was 15-25% of card revenue for many banks)
❌ Reduced ability to fund rewards programs
⚠️ Shifted focus to other revenue sources (annual fees, interest)

For card networks:

⚠️ Reduced network revenue (lower volume × assessment fees)
⚠️ Increased pressure from merchant advocacy groups
🔄 Increased focus on premium cards with higher interchange

For consumers:

⚠️ Reduced credit card rewards (funded by interchange)
✅ Potential merchant price decreases (though not widely realized)
⚠️ Increased annual fees on some cards

Global Regulatory Trends

Australia: The Early Mover

2003: First interchange regulation

Australia’s Reserve Bank reduced interchange fees from 0.95% to 0.50% on average in 2003.

2016: Further reduction

Interchange capped at 0.30% for debit and credit cards.

Long-term impact:

20+ years of data shows:

Merchant payment costs declined significantly
Card usage continued growing despite lower interchange
Alternative payment methods (including bank transfers) gained share
Consumer rewards programs reduced but card adoption remained strong

Key lesson: Lower interchange doesn’t kill card payments, but it reduces their economic advantage and creates opportunity for alternatives.

United States: Political Debate

Durbin Amendment (2011):

Capped debit card interchange at $0.21 + 0.05% for banks with >$10B assets.

Impact:

Large bank debit interchange declined ~40%
Small banks exempt (created two-tier system)
Merchants saved ~$8-10B annually
Issuer revenue shifted to annual fees

Ongoing discussion:

Credit card interchange (1.5-2.5%) remains unregulated in the US.

Periodic legislative proposals to cap credit card interchange:

2023: Credit Card Competition Act (not passed)
Ongoing merchant advocacy for regulation
Card network lobbying to maintain status quo

Regulatory momentum: Growing merchant political pressure, but card network lobbying remains powerful.

China: Tight Regulation

China regulates interchange tightly:

Debit card interchange: ~0.35%
Credit card interchange: ~0.45%

Impact:

Low interchange contributed to:

Rapid growth of Alipay and WeChat Pay (mobile wallet A2A payments)
Mobile payment adoption exceeding 80% of retail transactions
Card payments relegated to secondary payment method

Key lesson: Low interchange in China created conditions for mobile A2A payment dominance.

Other Markets

Canada: Voluntary network agreements cap interchange at 1.4-1.5% (not regulatory, but pressure-driven)

India: RBI caps interchange at 0.4-1.0% depending on card type

Brazil: Antitrust pressure and regulation pushing interchange down

Key trend: Global movement toward lower interchange, driven by merchant advocacy and regulatory intervention.

Why Regulators Target Interchange

Economic Arguments for Regulation

1. Market power concerns

Card networks (Visa, Mastercard) control ~80-90% of card payment volume globally. This duopoly enables:

Setting interchange rates without competitive market forces
“Take it or leave it” terms for merchants (card acceptance is economically mandatory)
Coordinated pricing that doesn’t reflect cost reductions from technology improvements

2. Regressive pricing

Interchange fees are percentage-based, meaning:

Luxury retailers selling expensive items pay high absolute fees
But low-margin essential goods retailers (grocery, fuel) also pay high fees
Merchants selling necessities effectively subsidize premium card rewards programs used by higher-income consumers

3. Hidden costs

Consumers don’t see interchange fees directly:

Fees are embedded in merchant prices (all consumers pay higher prices)
Cardholders receive rewards funded by these fees
Non-cardholders subsidize cardholders (regressive transfer)

4. Technology cost decline

Payment processing costs have declined dramatically:

Electronic payment processing costs: <€0.10 per transaction
Yet percentage-based interchange remains 1-2%
No competitive market mechanism to pass savings to merchants

Regulatory Rationale

Regulators intervene when markets fail to produce competitive outcomes. Interchange fee markets exhibit classic market failure characteristics:

High concentration (duopoly)
High barriers to entry (network effects)
Mandatory merchant participation (can’t refuse cards economically)
Opaque pricing (consumers don’t see fees)

Regulation aims to correct this market failure by setting fee caps that approximate competitive market outcomes.

Impact on A2A Payment Adoption

How Interchange Caps Accelerate A2A Payments

1. Narrowed cost advantage of cards

Before interchange regulation:

Card costs: 1.5-2.5%
A2A costs: 0.5%
Spread: 1.0-2.0 percentage points (compelling merchant savings)

After interchange regulation:

Card costs: 0.8-1.2% (interchange + assessment + acquirer margin)
A2A costs: 0.5%
Spread: 0.3-0.7 percentage points (still meaningful but less dramatic)

Impact on A2A value proposition:

Interchange regulation reduces the cost gap between cards and A2A, which might seem to hurt A2A adoption. However:

Merchants now accustomed to regulatory intervention on payment fees are more open to exploring alternatives
Lower card costs reduce merchant complacency (previously “cards are expensive but there’s no alternative”)
Regulatory attention legitimizes merchant concerns about payment costs
Creates political and business environment supportive of payment innovation

2. Reduced issuer revenue for cardholder acquisition

Lower interchange reduces issuer budgets for:

Credit card rewards programs
Marketing and customer acquisition
“Free” cards with no annual fees

This makes cards less attractive to consumers relative to A2A payments, which:

Offer immediate tangible benefits (faster settlement, better security)
Don’t depend on rewards programs funded by merchant fees
Align consumer and merchant interests (both benefit from lower fees)

3. Merchant advocacy momentum

Interchange regulation demonstrates that:

Merchant advocacy can achieve regulatory change
Payment fees are subject to political intervention
“This is just how it works” is not immutable

This emboldens merchants to:

Demand lower-cost alternatives (creating merchant pull for A2A)
Implement multiple payment methods (reducing card exclusivity)
Negotiate harder with acquirers (improving overall payment economics)

4. Payment institution economics

For payment institutions (banks, PSPs):

Lower interchange means lower card processing revenue
Creates incentive to diversify revenue sources
A2A payment partnerships become more attractive (new revenue stream)
Strategic imperative to offer lower-cost merchant options to prevent attrition

Future Regulatory Trajectory

Where Interchange Regulation Is Headed (2026-2035)

Short-term (2026-2028):

European IFR caps remain stable
US political debate continues (potential regulation under merchant-friendly administration)
More countries implement caps (Southeast Asia, Latin America)
Global trend toward 0.2-0.3% debit, 0.3-0.5% credit caps

Medium-term (2028-2032):

Potential further European reductions (0.1% debit, 0.2% credit)
US credit card regulation becomes more likely as merchant political pressure builds
Major markets globally converge toward 0.3-0.5% total interchange
Card networks adapt business models (increase assessment fees, create premium tiers)

Long-term (2032-2040):

Interchange fees stabilize at minimal levels (0.1-0.3% range globally)
Payment economics shift from interchange-based revenue to service-based pricing
Card payments and A2A payments reach cost parity in many markets
Competition shifts to user experience, settlement speed, and service quality rather than cost

Wild card: Abolition of interchange

Some regulators and economists argue for complete interchange elimination:

“Bill and keep” model: Issuers and acquirers each cover own costs
Banks charge cardholders directly (annual fees, transaction fees) rather than extracting fees from merchants
Merchant payment costs decline to near-zero (only acquirer processing fees)

Probability: Low in next 5 years, moderate in next 10-20 years

Strategic Implications

For Merchants

Near-term actions:

Monitor regulatory developments in your markets (regulatory changes create cost-saving opportunities)
Implement A2A payments now (capture savings while card costs remain above A2A costs)
Negotiate with acquirers (use A2A as leverage to negotiate lower card processing rates)
Diversify payment methods (reduce dependence on any single payment method)

Long-term strategy:

Even as card costs decline due to regulation, A2A payments offer non-cost advantages:

Instant settlement (vs 2-3 day card settlement)
Lower fraud rates (vs card-not-present fraud)
No chargebacks (vs card chargeback risk)
Better customer data (vs card network data limits)

Cost advantage may narrow, but operational advantages persist.

For Payment Institutions

Strategic positioning:

Interchange regulation creates strategic imperatives:

Diversify revenue beyond card interchange (regulatory risk to card revenue model)
Offer A2A payment capabilities (meet merchant demand for lower-cost alternatives)
Invest in value-added services (compete on service quality, not just pricing)
Engage in regulatory processes (shape future regulatory frameworks)

Revenue model adaptation:

Shift from interchange-based revenue to:

Service fees for payment processing
Data and analytics services
Treasury and cash management services
Risk management and fraud prevention services

For Card Networks

Adaptation strategies:

Premium card tiers with higher value propositions (travel benefits, insurance, concierge services)
Data and insights services for merchants and issuers
Authentication and security services beyond payments
International payment capabilities where A2A is less competitive

Long-term survival:

Card networks must evolve from interchange-extraction businesses to service-provision businesses.

Conclusion: Regulatory Trends Favor Payment Diversity

The global trend toward interchange fee regulation is clear and likely irreversible. While short-term regulatory battles continue, the long-term direction is toward lower interchange fees that approach the actual cost of payment processing.

This regulatory environment creates structural tailwinds for A2A payment adoption:

Narrowing card cost advantage (even if gap narrows, A2A remains cheaper)
Reduced issuer rewards budgets (cards become less attractive to consumers)
Merchant advocacy momentum (merchants empowered to demand alternatives)
Payment institution revenue diversification (A2A becomes strategic necessity)

For merchants and payment institutions, the strategic message is clear: payment method diversity is not just good business practice - it’s essential for navigating a regulatory environment that is fundamentally changing the economics of card payments.

The question is not whether interchange fees will decline further (they will), but how quickly different stakeholders adapt to this new reality.

About This Series: This article is part of a comprehensive series exploring account-to-account payment infrastructure from multiple perspectives. Understanding regulatory trends provides essential context for strategic payment method decisions.

Next in Series: “Consumer Payment Behavior: Trust, Convenience, and Change” examines the psychological and behavioral factors that influence consumer payment method adoption.