Interchange Fees

In a credit/debit card transaction, the card-issuing bank (i.e. the bank that issued the card to the Payer) deducts the interchange fee from the amount it pays the acquiring bank that handles the credit or debit card transaction for a merchant. The acquiring bank (U.S. Bank) then passes the interchange fee along to the merchant (state agency).

Interchange/association fees are set nationally by Visa/MasterCard, and they are non-negotiable.  Governmental entities receive a special, lower interchange fee than most businesses.  For fiscal year 2015, the average Visa/MasterCard interchange fees paid by all state agencies was 1.60%.

The Enterprise Banking Services Contract includes merchant acquiring services.  These services are billed to the State using an "Interchange Plus" pricing methodology.  State agencies are billed the nationally-set interchange/association fees (averaging 1.60% for fiscal year 2015), plus $.04/transaction (U.S. Bank's acquiring/processing fee).

Interchange fees are negotiated directly with Discover and American Express.  Currently, the Discover interchange rate is 1.75%, and the American Express interchange rate is 2.10% (the lowest rate currently available to any state in the U.S.).

Here is a flowchart showing the transfer of interchange fees within the credit/debit card transaction processing:

Transfer of Fees in a Credit/Debit Card Transaction