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Interchange is generated when your customers make purchases with debit and credit cards. Find out how it works and discover how much you could be earning.
Last updated:
November 13, 2024
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9 minutes
Many tech leaders are interested in increasing revenue per user—especially in ways that their customers won’t “feel.”
Interchange does just that, while also driving acquisition, engagement, and retention. It’s a powerful strategy that has been employed by platforms like DoorDash, Uber, and Shopify.
Here’s how it works: when customers make purchases with your branded debit or credit cards, you earn a percentage of each transaction. This is known as interchange.
For many tech companies, it’s one of their largest revenue streams. As an example, Chime—an online banking platform with more than 22 million customers—earns almost all of their revenue from interchange.
Here’s one way to think about it: Your customers are going to make card purchases. Why not make it convenient and rewarding for them—and valuable for you?
If you’re a decision maker at a tech company who’s thinking about how to increase revenue per user, this guide is for you. In it, we’ll explain:
To show how interchange works, let’s use an example. Say you’re the VP of Product at Slate, a point-of-sale (POS) and business management platform for restaurants.
To help your customers manage their finances, you’ve recently partnered with a bank to offer them embedded checking accounts and business debit cards. Your customer, Clark Street Coffee, just received a Slate Debit Card.
For many tech companies, interchange is one of their largest revenue streams.
Clark (the business owner) buys a week’s worth of oat milk at Whole Foods and swipes his Slate Business Debit Card for $100. Whole Foods, as the merchant, keeps $97.60 of Clark’s $100 payment.
You can think of the other $2.40 as a processing fee that Whole Foods pays for the ability to accept Clark’s card payment. This $2.40 fee is split between a few different parties:
In the above example, we assumed an interchange rate of 2.4%. In reality, the rate varies from transaction to transaction based on things like:
There’s no way for Slate to precisely predict the interchange revenue that Clark’s card purchases will generate over time—for the simple reason that we don’t know what Clark will buy, where he’ll buy it, or how much he’ll spend.
The good news is that, although interchange rates vary, they tend to hover around certain percentages. The table below shows the general ranges you can expect. How much you keep will depend on what you negotiate with your bank partner.
Below we’ve identified some of the most important variables that affect interchange.
Business cards generate significantly higher interchange fees than consumer cards. For example:
Let’s say that, rather than buying oat milk for his coffee shop, Clark was simply going grocery shopping for himself. He uses a consumer debit card to buy a week’s worth of groceries for $100. In that case, the interchange will be roughly $1.50 instead of $2.40.
As you can see in Visa’s interchange table, interchange is primarily composed of two things: (1) a percentage of the total purchase amount, and (2) a small fixed amount.
For example, let’s assume that the Slate Debit Card generates interchange revenue as follows: 2.50% + $0.10. Consider the effect that the fixed amount ($0.10) has on the interchange rate, depending on the purchase amount:
As a result, smaller transactions typically generate higher interchange as a percentage of total purchase amount.
Online card purchases generate higher interchange fees than in-person card purchases.
The reason is that the risk of fraud is much lower when a physical card is present for the purchase. (An in-person purchase is often completed via EMV Chip dip or contactless tap—two of the more secure ways of completing a card transaction).
To compensate for the higher risk, card networks charge merchants more for online purchases. If Clark made the same $100 purchase at Whole Foods’ website (vs. in-store), the interchange could have been roughly $2.60 instead of $2.40.
Purchases at certain merchant types may generate less interchange, depending on their Merchant Category Codes (MCC).
For example, purchases at merchants that fall into the “Dairy Product Store” category generate less interchange than those at “Commercial Equipment.” If Clark made a $100 coffee equipment purchase at a kitchenware store, the interchange could have been $2.50 instead of $2.40.
Debit cards generate lower interchange fees than credit cards. As a rule of thumb, the difference is about 0.50%.
If Clark used the Slate Credit Card for his $100 purchase, the interchange would have been roughly $2.90 instead of $2.40.
Even though Visa is the primary network on Clark’s card (and Whole Foods’ terminal), some in-person transactions may get routed to secondary networks (e.g., Accel, Interlink, Pulse).
These secondary networks often have different interchange rates—typically lower than Visa or Mastercard. Clark could walk into a gas station or convenience store that uses Interlink, and the interchange revenue generated by his card purchase would vary accordingly.
Different merchants may generate different amounts of interchange.
For example, if Clark made the same $100 purchase at Webstaurant and not Whole Foods, the interchange could have been $2.30 instead of $2.40—with Webstaurant paying less in interchange fees and thus keeping more of the total transaction amount.
Large retailers often ink favorable deals with card networks, resulting in dramatically lower interchange rates.
For debit card purchases, large banks like Chase and Citi receive much lower interchange rates than smaller banks.
To be precise, banks that hold less than $10 billion in total assets can receive rates like the 2.40% mentioned above. On the other hand, big banks like Chase would typically receive less than 0.30% on a $100 transaction like the one in our example. The difference is the result of the Durbin Amendment within the Dodd-Frank Wall Street Reform and Consumer Protection Act.
If the Slate Debit Card had been issued by Chase, it would only generate $0.30 of interchange revenue—significantly less than a smaller bank. That’s why companies like Slate typically choose to partner with community banks, which have smaller balance sheets.
In the above example, let’s say the $100 purchase generates $2.40 of interchange revenue.
This is known as the raw interchange (also referred to as gross interchange or total interchange). From there, the card network (e.g., Visa) and the payment processor (e.g., Adyen) each take a cut—in this example, a total of $0.27.
The remainder ($2.13) is known as “net interchange.” That’s the amount paid by the card network to the bank that issued the card used to make the $100 purchase. The percent of net interchange that you keep will depend on what you’ve negotiated with your bank partner and your financial infrastructure platform.
Companies like Slate typically get to keep 70-80% of the net interchange. Let’s assume you have a great deal that lets you keep 80% at scale.
In this scenario, the amount of interchange revenue that Slate generates from Clark’s purchase at Whole Foods is $1.70.
The good news is that—depending on your financial infrastructure provider—you may not have to worry about calculating these percentages or invoicing these payments. Unit (our company) handles all of the calculations and distributions based on the terms of the deal you negotiated with your bank partner.
Let’s assume you earned $1.70 as interchange from Clark’s purchase. Now you have an important decision to make: how will you deploy it?
Your answer will depend on your goals. Typically, there are three approaches:
Most companies choose a version of the third approach. For example, as a customer retention strategy, you could offer 1.5% cash back on eligible purchases to customers who direct-deposit their paychecks into their Slate Checking Accounts. Or, you could offer 1.5% cash back on grocery purchases and 1% on everything else. You would keep the rest.
Over time, your interchange strategy will likely evolve with your product. Initially, many companies choose to launch with generous cashback rewards. As they scale, their value prop shifts from higher rewards to better features. Naturally, they reduce the amount of cashback they offer, while putting more interchange revenue toward their bottom line.
Roofstock is a real estate platform that helps investors acquire, manage, and sell rental properties at scale.
To help landlords manage their finances, Roofstock offers Stessa, a software tool that landlords use to collect rent, screen tenants, and automate accounting. By partnering with Thread Bank, Roofstock and Stessa can make embedded bank accounts and debit cards available to their customers.
Interchange generates new revenue while also driving acquisition, engagement, and retention.
For landlords, it’s been a game changer. Stessa’s customers can open as many bank accounts as they need, get dedicated debit cards for each property, and automate rent collection. Transactions are automatically tagged to their respective properties and imported to Stessa Accounting, which makes tax prep a breeze.
As a result, customers who use Stessa’s embedded financial products are twice as likely to log in to the platform. They’re retained at a rate 3.5x higher, and they’re three times likelier to upgrade to a Stessa premium plan.
Significantly, their average customer lifetime value (LTV) is four times higher than customers who don’t use Stessa’s embedded banking products—in part due to the interchange revenue generated by the Stessa debit card.
Unit is a financial infrastructure platform that helps tech companies like yours partner with banks to launch branded payment cards (e.g., debit cards, charge cards).
To date, nearly 200 leading platforms and marketplaces have trusted us to help them build and scale their embedded cards programs. If you’re ready to launch your card program, we can help with the following:
If you have additional questions about how interchange works or how much you could earn, please reach out. Alternatively, check out our revenue calculator or start building now.
Originally published:
September 29, 2021
Check out our guides page to learn more about embedded finance
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