What is interchange?

The fee, and the fee inside it

When a shop accepts a card, it does not receive the full amount. A small percentage is deducted, and that deduction is split between several parties. The largest share, usually, is interchange: it goes to the customer's bank, the issuer.

Not to the shop's bank. Not to the network. To the institution that gave the customer the card.

The dial that inverts everything

Interchange is not a single rate. It varies by card type, and the crucial fact is this: premium rewards cards carry higher interchange than basic cards.

Read that again, because it reverses the intuition. Your rewards are not your bank sharing its profits with you out of goodwill. They are a rebate, funded by a larger fee charged to every shop you visit. The rewards card is a toll-collecting machine that splits the toll with the driver.

On a 2,000 rupee purchase, the difference between a basic card and a premium rewards card can be several rupees of additional cost to the merchant, on every single transaction, forever.

Who actually pays

Shops do not absorb the fee. They price it in. Card acceptance costs are baked into shelf prices, for every customer, whether or not that customer uses a card at all.

Which produces an arithmetic that is rarely stated plainly: everyone pays the card-inflated price, and only premium cardholders receive the rebate. When regulators in Europe capped interchange, rewards programmes there became noticeably less generous almost immediately. That is fairly conclusive evidence about where the points were coming from.

It is a group dinner where the bill is split evenly, but one person's meal came with a voucher funded by everyone's share.

Where you meet it

In the annual fee you do or do not pay, in the points you collect, and in the price of everything you buy. If you run a shop, in the gap between your sales and your deposits.