Interchange fees are charges applied during credit card payments, with the bulk paid by retailers to customer banks. These fees are higher due to anti-competitive practices, and most consumers are unaware of their importance to credit card companies. The fees contribute to higher prices for customers, and there is controversy over their increase despite decreasing technology costs. Companies argue that fees are necessary for the card business and encourage more card issuers.
Interchange fees are a particular type of fee that is applied during the handling of a credit card payment. It is a fee charged by the customer’s bank to the retailer’s bank. This fee makes up the bulk of the fees paid by retailers in exchange for card services. It has been claimed that the fees are higher than they might otherwise be thanks to anti-competitive practices in the card industry.
Many consumers are unaware of interchange fees or how important they are to credit card companies. Consumers are generally aware of the fact that card companies make some money by charging interest, applying late payment penalties, and in some cases charging an annual fee to cardholders. What is not well known is that, in most cases, this produces much less money for card companies than interchange fees.
When a customer pays for an item with a credit card, the merchant gets about 98 percent of the purchase price, with the rest deducted in fees. What is not as widely understood is that most of these deductions are taken by the cardholder’s bank, not the retailer’s bank, even though the retailer’s bank provides the card services. In most cases, the cardholder’s bank takes somewhere in the region of 1.75 to 1.8 percent of the purchase price. The card company being used takes what is usually a minor part of the deduction. The retailer’s bank usually keeps the smaller part of the deduction.
Strictly speaking, the interchange fee is not imposed directly on the retailer. Instead, the cardholder’s bank takes it as a deduction on the money they pay to the retailer’s bank. In reality, the retailer still ends up with less money from the purchase, and the interchange fee contributes heavily to the deductions. In turn, the fees mean that retailers charge customers higher prices than they could if the deductions were lower.
There has been a lot of controversy about interchange fees, especially complaints that they have generally increased even as the technology costs involved in card processing have decreased. This has prompted accusations that the companies involved had unfairly colluded to keep the rates high. This suspicion has been further fueled by the fact that some carriers are secretive about how fares are calculated, while known details show that fee structures are extremely complicated. The companies involved generally argue that fees are a necessary part of the card business and encourage more companies to issue cards, thus giving consumers more choice.
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