What is Interchange?

Interchange fees can feel like a complex part of the payments world, but they're a big deal for any business that accepts card payments. Simply put, an interchange fee is a transaction fee that a merchant's bank (the acquiring bank) pays to the customer's bank (the issuing bank) every time a card is used. This fee compensates the issuing bank for the costs and risks of providing a payment card, like running rewards programs, providing credit, handling accounts, and preventing fraud. This compensation also acts as an incentive for issuing banks to promote card usage, which in turn encourages cardholders to transact electronically, benefiting the broader payment network.

In South Africa, the interchange is determined by the South African Reserve Bank (SARB). The SARB periodically undertakes a project to evaluate and determine the interchange. In other African markets, issuing banks and card schemes have more flexibility and control of the interchange fee. 

Current interchange rates in South Africa are:

Calculating the Merchant Transaction Fee: A Breakdown for My Son 🤓

Imagine you're running your first online business, let's say "Luke's Cool Gadgets." A customer buys a drone for R1,000 using a credit card.

You don't directly pay the interchange fee. Instead, you pay a single, all-inclusive fee to your payment processor. This fee is known as the Merchant Service Charge (MSC) or Merchant Discount Rate (MDR). 

The MDR can vary a lot and a number of factors help acquirers and PSPs determine this pricing:

1. Merchant category: Retail, Betting & Gaming, Travel, Insurance etc.
2. Value of transactions per month
3. Average transaction value
4. Transaction flows: 3D Authenticated vs not authenticated, In-person vs e-commerce and so on

Let’s assume your MDR is 2.5% for credit cards. Now Interchange as defined by the SARB in South Africa is 1.68% for 3D Authenticated transactions. So this means that for your R1000 order you pay:

2.5% @ 1000 = R25. From the R25, 1.68% or R16.80 is paid to the issuing bank. That leaves 2.5% - 1.68% = 0.82%  for process costs to be divided amongst the various participants in the merchant acquisition chain, namely:

1. Card Schemes Margin
2. Acquirer Margin
3. PSP Margin

South African Perspective 

In South Africa, the payment ecosystem is mature and highly regulated. The South African Reserve Bank (SARB) plays a direct role in setting and revising interchange fees through its ongoing Interchange Determination Project (IDP), ensuring a fair and efficient National Payment System. This unique regulatory environment provides a level of stability and fairness for merchants.