What is card interchange and who decides the fee amounts? Read on to find out…
The Four Participants.
When a purchase is made on a debit or credit card, for example, Visa or Mastercard, these people or organisations are involved:
• The cardholder – Making the purchase.
• The cardholder’s bank – Activates the transaction payment.
• The retailer – Processes the payment.
• The retailer’s bank – Also known as the “acquiring bank,” the cardholder’s bank sends payment to them.
Both banks act to process the payment and transfer funds ensuring security and prompt delivery for which a small fee is retained.
When a retailer’s bank issues payment to the retailer it deducts a fee called a Merchant Service Charge which includes the interchange fee and covers the cost of the technology and security involved. It is a very common misconception that the card companies benefit from interchange fees but they actually receive no monetary benefits.
Why does interchange exist?
You may believe that this is just one more way in which financial institutions can maximise profits, however, there is a very strong case to be made for interchange being a vital component of the banking world because the fees taken fund the operation of the card services, systems and technology maintenance and call centres. The interchange fee is funding to fight fraudulent activities too. If the practice of taking an interchange fee was discarded this revenue would be lost and subsequently innovation, performance, technology and security would be compromised. The worst case scenario would be the withdrawal of card services altogether or an increase in fees for card services, neither of which would be desirable for any of the parties involved.
Who determines how high the interchange fee is?
The interchange fee rate is negotiated and agreed between the retailer and their bank. Again, the card company is not consulted. In many cases the fee is determined as a small percentage of the transaction amount.
This is regulated and within the European Union a fee cap is applied to most purchases. Factors including the type of transaction, whether it is sending funds between countries and the product or sector are taken in to consideration and the banks and card companies work with the European Parliament to establish the legitimate percentages for the interchange fee using the Interchange Fee Regulation.
Some people question whether it is a hidden tax but as the consumer does not pay, it’s not hidden and it’s not a tax the argument is lost. Merchants can negotiate their rates rather than being told what to charge and they may offer discounts for cash or cheque payments.
It has been alleged that interchange fees have risen greatly, the reverse is true, interchange fees have risen at a rate far lower than inflation. It’s the total value of interchange fees that has risen as more locations choose to use electronic payments.
We hope that this article has made interchange fees understandable and credible to consumers and cardholders.