Interchange Rate

Fee paid by one bank to another to cover handling costs and credit risk in a bank card transaction. Interchange fees generally flow toward the bank funding a transaction and assuming some risk in the process. In a credit card transaction, the interchange fee, also known as the issuer's reimbursement fee, is paid by the bank purchasing (or accepting) the merchant's sales drafts (the Merchant Bank) to the card issuing bank, who then bills the cardholder. The interchange fee, a percentage of the transaction amount, is derived from an accounting formula that takes into account authorization costs, fraud and credit losses, and the average bank cost of funds, and is periodically revised. In automated teller and electronic debit point-of-sale systems, interchange flows in the opposite direction; when a consumer gets cash at an automated teller machine, the terminal owning bank collects the fee.