Interchange Revenue Calculation

This article explains how interchange revenue is calculated and how network and processor fees affect the final payout.

Overview

Gross interchange is the total interchange earned from card transactions. Before the organization's contractual interchange share is applied, Unit deducts network fees and processor fees from gross interchange.

The result is called net interchange.

Order of Operations

The interchange revenue calculation follows this order:

1. Gross Interchange
   This is the total interchange earned from card transactions.
2. Network Fees and Processor Fees Are Deducted
   Network fees, such as Visa network fees, and processor fees are deducted from gross interchange.
3. Net Interchange Is Calculated
   Net Interchange = Gross Interchange − Network Fees − Processor Fees
4. Organization Interchange Share Is Applied
   The organization's contractual interchange share is applied to the net interchange amount.
5. Remaining Amount Is Retained by Unit
   The remaining portion is retained by Unit.

Interchange Revenue Formula

Interchange revenue is calculated as:

Interchange Revenue = Organization Interchange Share × Net Interchange

Or:

Interchange Revenue = Organization Interchange Share × (Gross Interchange − Network Fees − Processor Fees)

Example

For example, if the monthly gross interchange is $90,000, combined network and processor fees are $30,000, and the organization's interchange share is 70%, the calculation would be:

70% × ($90,000 − $30,000) = $42,000

In this example, the organization's monthly interchange revenue is $42,000.

Important Notes

• Net interchange is not the same as interchange revenue.
• Net interchange = gross interchange − network fees − processor fees.
• Net interchange does not include the deduction of Unit’s revenue share.
• The organization's contractual interchange share is applied after network and processor fees are deducted.
• Visa network fees and processor fees are applied to gross interchange before the organization's share is calculated.

Factors That Influence Interchange Rates

Interchange rates vary depending on several factors. The exact calculation usually includes a percentage of the purchase amount plus a small fixed amount.

Common factors include:

• Card type: Business cards generally have higher interchange rates than consumer cards.
• Purchase amount: Smaller purchases typically result in a higher interchange rate as a percentage of the total amount.
• Online vs. in-person transactions: Online transactions generally have higher interchange rates due to increased fraud risk.
• Merchant category: Some merchant categories have lower interchange rates.
• Network: Different card networks, such as Visa and Mastercard, may have different interchange rates.
• Merchant-specific arrangements: Large retailers may negotiate lower interchange rates.
• Issuing bank size: Smaller banks generally receive higher interchange rates for debit card transactions than large banks.