Here’s the Real Reason Interchange Rates Are at Risk

Merchants are right to dispute what they pay for card transactions. Technology has an answer—if the networks will listen.

Interchange is the foundation of branded-payments theory: Remove friction at the register for increased sales traffic, at the risk of higher fraud. Yet, despite decades of fraud-fighting tech and policy wins, interchange rates remain defiant and unchanged. Now, given the abundance of alternative payment choices available today, the dominance of branded payments may be on the verge of a systemic shift.

The interchange model has been around for more than a century. Early examples included American Express and Western Union. Arguably, the first modern credit card was created by Diners Club in the 1950s. All of these cards were based on the premise of engaging more merchants with more consumers.

By the 1970s, balanced against fraud losses, credit risk, customer service costs, and settlement float, credit card issuers had settled into the classic 1.5% interchange rate for card-present transactions. By the early 90’s, the market was still dealing with call-center approvals and card numbers jotted on Post-It notes, so that rate remained justifiable.

That was then. Today, it’s EMV, tokenization, and semi-integration. These technologies have slashed card-present fraud by at least 70%. Globally. So why haven’t interchange rates followed suit?

Since the EMV liability shift in the U.S. market in 2015, card-present fraud at physical point-of-sale terminals has dropped significantly. According to Visa, counterfeit fraud at EMV-enabled merchants fell by three-quarters within the first five years, as chip cards rendered traditional card-cloning techniques ineffective. Some estimates put current issuer losses on EMV transactions at 10 basis points at most. EMV quickly proved especially effective as a fraud deterrent, yet card-present interchange rates didn’t budge.

The fraud didn’t go away, it simply shifted channels to e-commerce, further validating the effectiveness of EMV. And still, card-present rates didn’t budge.

Now, in 2025, EMV has become effectively ubiquitous. Network tokens and smart-phone wallets are rendering card numbers moot. Yet, still, card-present rates haven’t budged.

The Magstripe Enigma

You can’t talk about EMV and not talk about the magstripe. That U.S. policies continue to allow the acceptance of magnetic stripes remains an unavoidable contradiction. It’s a bit like installing a deadbolt on your front door while leaving the key under the mat.

Australia, the European Union, and Canada have all been under EMV mandates for a decade or more, with magstripe fallback severely sanctioned if not forbidden outright. Brazil went all in from the start, mandating chip & PIN more than two decades ago. Their aggressive approach to EMV has resulted in some of the lowest fraud rates planetwide.

Both Mastercard and Visa have announced long-term plans to phase out the magstripe, Mastercard in 2021, Visa following suit shortly thereafter. Both plans have a 10-year duration that ultimately will put U.S. card-present fraud controls at the same level as other regions.

Neither network has displayed any significant action so far. That’s significant, given the striking difference between this industry migration and others. Real EMV penetration took years because it required merchant investment in new hardware. Magstripe acceptance doesn’t require any new hardware, or even software for that matter. Issuers would simply stop printing a magstripe on the back of their cards and also stop accepting magstripe fallback during authorization. Just like they’re already doing in other regions.

From any perspective, it’s a strategy that’s tough to argue with. The issuer saves money on fraud losses by saving money on physical card issuing costs.

Until issuers and the networks fully embrace EMV and abandon magstripe outright, outdated and obscure fraud assumptions will remain the justification for bloated interchange rates. Simply put, it’s difficult to reduce card-present risk when a fraud vector is printed on every card.

Alternative Rails

As merchants increasingly chase cost savings through alternative payment methods, this is not the time for Visa and Mastercard to assume they remain the go-to solution for all things payments. Many of these alternative rails come with cheaper transaction costs and ignore traditional interchange models. For merchants, this can be especially effective in arenas where instant authorization is not necessary, such as recurring and business-to-business payments.

Classic automated clearing house transactions—and more recently FedNow, RTP, and wallet-based account-to-account methods—are all enjoying growth from merchants converting from branded payments to these more practical solutions. PayPal and Zelle have been gaining traction for years, and continue to enjoy positive growth.

It shouldn’t be ignored that change is coming from within as well. The very banks that make up the branded networks are readily embracing the more intimate bank-to-bank rails that skirt network regulations and overhead.

Even cryptocurrencies are becoming increasingly viable, as a number of stars have finally aligned for decentralized payments:

• Importantly, the introduction of stablecoins has eliminated the funds volatility that has throttled any real commercial adoption of cryptocurrency;
• Similarly, the dollar-for-dollar simplicity of USDC and similar stablecoins removes operational complexity for merchants, easing the decision to implement;
• From a development and integration standpoint, the rails are already in place, since crypto runs on standardized protocols that most systems already speak;
• Given that major platforms like Stripe, Shift4, and Block already support Bitcoin and Ethereum, enabling USDC and other stablecoins is less about new code and more about adjusting configuration parameters and risk policies;
• Consumer-to-merchant interaction is via QR code, presenting no more friction than an EMV tap, and many POS devices are already QR-capable, mitigating hardware adoption challenges;
• The current administration is crypto-friendly, which should minimize regulatory challenges and further ease merchant hesitation.

And a resurgence of closed-loop payment solutions is yet another threat to interchange processing. Major retailers including Amazon, Walmart, and Target are increasingly building or expanding closed-loop payment systems and embedded-finance offerings. Starbucks and Apple Pay Cash are proving how non-card payments can become deeply embedded. Proprietary wallets, buy-now-pay-later (BNPL), and even bank-like services add customer stickiness, and lessen merchants’ dependence on branded payments.

A threat to interchange greater than merchant pushback may emerge from consumers themselves. Surcharging is raising eyebrows as consumers learn it will cost money to use their credit cards. Merchants are figuring out quickly that, while pushback doesn’t always work, passing on costs does.

Talk about friction at the register. Giving consumers and merchants good reasons to use alternative payment methods is a potent threat that the networks should be concerned about. The potential for rising inflation in the coming years can only exacerbate this challenge.

Challenging the Rulemakers

Until the networks reassess and reassign card-present interchange rates, merchant economies have no choice but to opt for change. Large retailers and trade groups are escalating demands for legislative scrutiny and network fee audits. Increasingly, merchants are implementing routing alternatives like ACH & RTP, closed-loop systems, and other out-of-band solutions.

The more volume that is diverted or publicly challenged, the greater the pressure on issuers and networks to justify outdated, unscrutinized interchange rates. Like it or not, the path of least resistance always wins.

To avoid the risk of becoming an alternative payment themselves, card networks need to abandon the one-size-fits-all interchange model and embrace a dynamic, risk-based approach that reflects real fraud exposure. Precedents for this already exist: enhancing Level III transaction detail earns lower rates; regulated debit rates acknowledge capped risk.

Flat pricing models have proven effective in more than just ACH frameworks, and hybrid models are proving effective at removing intermediary friction. Future rate models must reward security and transparency. The status quo must be exposed for its archaic reasoning, so interchange can evolve into a system that charges based on actual risk and real value.

As with any revolution, it’s the downtrodden that challenge the rulemakers. Merchants, independent sales organizations, and independent software vendors are already leading the charge against legacy interchange rates—because the networks have chosen inaction. Technology has solved for fraud. What’s left is to solve for the cost of that security.

—Cliff Gray is principal at Gray Consulting Ventures LLC