Debit interchange is the fee paid between banks for the acceptance of card-based transactions. Typically, when a customer uses a debit card to make a purchase, the business’s bank (the acquiring bank) pays an interchange fee to the cardholder’s bank (the issuing bank). This fee compensates the issuing bank for the risks and costs it incurs in handling the transaction.

With about 2.9 billion Visa debit cards in circulation worldwide as of early 2023, debit interchange is a major part of the payments process for businesses. Below, we’ll explain what factors can impact debit interchange and what businesses and card issuers can do to refine this fee.

What’s in this article?

• What factors affect debit interchange?
  
• What is the Durbin amendment?
  
• How to fine-tune debit interchange as a card issuer
  
• How to lower debit interchange costs as a business
  

What factors affect debit interchange?

Card networks (e.g., Visa, Mastercard) set interchange fees, which vary based on many factors including the following:

• Card type: Different types of debit cards have different interchange rates. For example, rewards debit cards or premium debit cards might have higher interchange fees than basic debit cards.

• Transaction type: The way the transaction is processed influences the interchange fee. Card-present transactions (in which the customer physically swipes or taps the card) typically have lower fees than card-not-present transactions (online or phone orders).

• Merchant category code (MCC): The business type impacts the interchange rate. Some industries, such as supermarkets and utilities, might have lower interchange fees due to lower perceived fraud risk or high transaction volumes.

• Transaction size: The transaction size can also play a role. Card networks might have different interchange rates for smaller or larger transaction amounts.

• Network and issuer: Interchange fees can differ between card networks and even among different issuing banks within the same network.

• Authorisation type: PIN-based debit transactions generally have lower interchange fees compared to signature-based transactions.

• Regulatory factors: Government regulations can impact interchange fees, especially for larger financial institutions.

What is the Durbin Amendment?

Debit transactions that occur in the United States must comply with the Durbin Amendment, a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Named after its sponsor, Senator Richard Durbin of Illinois, the Durbin Amendment caps the fees for debit card transactions involving large banks, defined as those with over $10 billion in assets.

Under the Durbin Amendment, large banks cannot charge businesses fees higher than 21 cents plus 0.05% of the transaction value for processing debit card transactions. The amendment also prohibits payment card networks from restricting the number of networks on which debit transactions can be processed. A debit card must be usable on at least two unaffiliated networks, which gives businesses the ability to choose a lower-cost network.

Other countries and regions have similar regulations governing these charges. In the European Union and United Kingdom, the cap on debit interchange fees is 0.2% of the transaction value. These standards ensure that businesses’ average costs for card payments are not higher than their costs for cash payments.

How to fine-tune debit interchange as a card issuer

Interchange fees are a substantial revenue stream for card issuers. Here’s how to maximise this revenue while complying with mandated caps.

Encourage card-present transactions

• Collaborate with businesses to offer exclusive discounts or promotions for debit cardholders, since businesses are the ones accepting payments from people using your cards. This can drive in-store traffic and increase card-present transactions.

• Promote the convenience and speed of contactless payments (e.g., tap and go) to reduce friction and encourage usage at the point of sale.

• Partner with popular digital wallets to make it easy for cardholders to use the debit cards on their smartphones for in-store purchases.

Promote signature debit transactions

• Work with businesses that accept your cards to display signage at the point of sale reminding customers to choose signature debit for rewards or benefits. These transactions typically incur higher percentage-based fees.

• Use email, text messaging (SMS), or push notifications to educate cardholders about the advantages of signature debit and encourage them to select this option whenever possible.

• Consider offering additional rewards or points for signature debit transactions to incentivise cardholder behaviour.

Partner with a small bank (if applicable)

• Research and identify small banks exempt from Durbin Amendment caps. Evaluate their capabilities and ensure they align with your target market and strategic objectives.

• Negotiate interchange rates, processing fees, and other terms that benefit your institution and cardholders.

• If you’re switching to a new partner bank, ensure a smooth transition for cardholders and businesses.

Improve cardholder rewards programmes

• Design a tiered rewards programme with increasing benefits for higher spending levels to encourage cardholders to use their debit cards more frequently.

• Offer bonus rewards or points for specific spending categories that typically earn higher interchange fees such as travel, dining, and entertainment.

• Use data analytics to provide targeted offers and promotions based on the spending habits of individual cardholders.

Issuing premium debit cards

• Determine the ideal customer segment for premium debit cards based on income, spending habits, and lifestyle preferences.

• Package the premium card with valuable benefits that appeal to the target market such as travel insurance, airport lounge access, and concierge services.

• Use targeted marketing campaigns to promote the premium card and its benefits to the right audience.

Data analytics and portfolio management

Regularly analyse transaction data to identify trends, understand cardholder behaviour, and uncover opportunities to increase interchange revenue.

Segment your cardholder base according to spending patterns, demographics, and other relevant factors to customise your marketing and rewards programmes.

Continually monitor your portfolio performance and adjust your tactics to improve interchange revenue and cardholder satisfaction.

Collaborate with businesses

• Partner with businesses to develop joint marketing campaigns that promote debit card usage and benefit both parties.

• Provide businesses with resources and training on the benefits of accepting debit cards and on how to encourage customer adoption.

• Establish a feedback loop with businesses to gather insight and address any concerns related to debit card acceptance.

How to lower debit interchange costs as a business

On the business side, lower interchange costs can translate to lower operational costs. This can help increase profits and improve the company’s long-term financial health. Here’s an overview of how to lower debit interchange costs.

Negotiate with banks

• Regularly review and renegotiate the terms with your merchant service provider. You can often adjust rates based on your transaction volume or your business’s financial health.

• If your business has high transaction volumes, it might be possible to negotiate lower rates based on your processing history.

Choose less expensive networks

• Ensure your payment terminals are programmed to ask for PINs. This allows transactions to be routed over PIN debit networks, which usually have lower fees than signature debit networks.

• Regularly compare fees across different networks and configure your systems to route transactions through the least expensive option available.

Encourage PIN debit transactions

• Encourage customers to use PIN entry by offering small discounts or rewards for PIN transactions.

• Use signage at points of sale to inform customers about the benefits of using PIN entry to guide their payment method choice.

Adopt efficient payment technology

• Use up-to-date payment terminals that can handle multiple forms of payment and automatically route transactions to the cheapest network.

• Implement technology that supports contactless and mobile payments, which can sometimes qualify for lower interchange rates due to their security measures.

Monitor and analyse fees

• Regularly review your transaction statements and fees to identify any discrepancies or opportunities for savings.

• Use analytical tools to track and analyse the interchange fees you’re paying and to identify patterns and potential areas for cost reduction.

Increase transaction volume

• Consider processing transactions in bulk at certain times of the day to possibly qualify for lower fees.

• Boost overall sales through marketing and cross-promotions, which can increase card transaction volume and provide leverage for negotiating better rates.

Refine your card mix

• Different card types (e.g., basic cards, rewards cards) can incur different fees. Customise your acceptance policies, if feasible.