Interchange
Interchange is a fee paid by the merchant's acquiring bank to the card-issuing bank on every card transaction, typically expressed in basis points of the transaction value.
Interchange is the largest component of card processing economics. When a customer pays with a Visa or Mastercard, the merchant's bank (acquirer) pays the customer's bank (issuer) an interchange fee. The interchange rates are set by the card networks (Visa, Mastercard) and vary by card type, merchant category, and transaction characteristics.
For embedded finance programs, interchange is a primary revenue source when the platform is on the issuing side (card issuing programs, BaaS-enabled debit programs). On the acquiring side (payment processing for merchants), interchange is a cost that determines processing economics.
Key interchange concepts: consumer rewards cards typically carry higher interchange than debit cards; business/commercial cards carry higher interchange than consumer; Level 2/3 data transmission reduces interchange on B2B transactions; interchange-plus pricing passes through actual interchange costs while flat-rate pricing bundles interchange into a fixed percentage.
At $10M monthly card volume, the difference between capturing 25 basis points (BaaS default) and 120 basis points (well-designed direct program) is $1.14M annually.