Product Code Database
An interchange fee is a fee paid between banks for the acceptance of card-based transactions. Usually for sales/services transactions it is a fee that a merchant's bank (the "acquiring bank") pays a customer's bank (the "issuing bank").
In a credit card or debit card transaction, the card-issuing bank in a payment transaction deducts the interchange fee from the amount it pays the acquiring bank that handles a credit or debit card transaction for a merchant. The acquiring bank then pays the merchant the amount of the transaction minus both the interchange fee and an additional, usually smaller, fee for the acquiring bank or independent sales organization (ISO), which is often referred to as a discount rate, an add-on rate, or passthru. For cash withdrawal transactions at ATMs, however, the fees are paid by the card-issuing bank to the acquiring bank (for the maintenance of the machine).
In the US, card issuers now make over $30 billion annually from interchange fees. Interchange fees collected by Visa and MasterCard totaled $26 billion in 2004. In 2005 the number was $30.7 billion, and the increase totals 85 percent compared to 2001.
Interchange fees are set by the payment networks such as Visa and MasterCard.
Situations when, for cash transactions, the interchange fee is paid from the issuer to the acquirer, are often called reverse interchange.
Interchange rates are established at differing levels for a variety of reasons. For example, a premium credit card that offers rewards generally will have a higher interchange rate than do standard cards. Transactions made with credit cards generally have higher rates than those with signature debit cards, whose rates are in turn typically higher than PIN debit card transactions. Sales that are not conducted in person (also known as card-not-present transactions) such as by phone or on the Internet, generally are subject to higher interchange rates, than are transactions on cards presented in person. This is due to the increasing risk and rates of fraudulent transactions. It is important to note that interchange is an industry standard that all merchants are subject to. It is set to encourage issuance and to attract issuing banks to issue a particular brand. Higher interchange is often a tool for schemes to encourage issuance of their particular brand. A 2022-proposed change in Interchange fees, by encouraging use of multiple card networks, was criticized as likely to reduce fraud detection.
For one example of how interchange functions, imagine a consumer making a $100 purchase with a credit card. For that $100 item, the retailer would get approximately $98. The remaining $2, known as the merchant discountMerchant account and fees, gets divided up. About $1.75 would go to the card issuing bank (defined as interchange), $0.18 would go to Visa or MasterCard association (defined as assessments), and the remaining $0.07 would go to the retailer's merchant account provider. If a credit card displays a Visa logo, Visa will get the $0.18, likewise with MasterCard. Visa's and MasterCard's assessments are fixed at 0.1100% of the transaction value, with MasterCard's assessment increased to 0.1300% of the transaction value for consumer and business credit volume on transactions of $1,000 or greater. On average the interchange rates in the US are 179 basis points (1.79%, 1 basis point is 1/100 of a percentage) and vary widely across countries. In April 2007 Visa announced it would raise its rate .6% to 1.77%.
According to a January 2007 poll by Harris interactive, only about a third of the public had heard of interchange fees; once explained to them, 90% said that the United States Congress "should compel credit card companies to better inform consumers" about the fee.
The Merchants Payments Coalition is fighting for a more competitive and transparent card fee system that better serves American consumers and merchants alike.how? Because swipe fees are hidden, consumers are unable to weigh the benefits and costs associated with choosing a particular form of payment. Eliminating hidden swipe fees is advocated as a means to realize an open market system for electronic payments. Merchant Payment Coalition About Us Retrieved June 6, 2015
In December 2013, U.S. District Court Judge John Gleeson approved a settlement for $7.25 billion.(2013-12-17). "Court approves controversial interchange fee settlement" . Bank Credit News. Retrieved 2014-01-14. The settlement reduces interchange fees for merchants and also protects credit card companies from lawsuits over the issue in the future again.(2014-01-10). "EPC: NRF appeal of interchange settlement a “political ploy” . Bank Credit News. Retrieved 2014-01-14.
In March 2007, MasterCard announced it was changing its rate structure, splitting the lower, "basic" tier for credit cards into two new tiers. The Wall Street Journal reported MasterCard Alters Fee Structure, Wall Street Journal, March 1, 2007. Retrieved May 22, 2007. that the document outlining the shift "makes it difficult to determine if the new rates, on average, are rising." MasterCard spokesman Joshua Peirez said the new structure "allows us to have a more sophisticated way to break up our credit card portfolio," while National Retail Federation general counsel Mallory Duncan said, "They are pricing each tier at the absolute most they can so they can maximize their income."
On July 19, 2007 the House Judiciary Committee antitrust task force held the first hearing to study the specific issue of interchange fees. NRF's Duncan testified, as did representatives from the credit card industry. Subcommittee chairman John Conyers, leading the panel, said, "While I come into the hearing with an open mind, I do believe the burden of the proof lies with the credit card companies to reassure Congress that increasing interchange fees are not harming merchants and ultimately consumers." U.S. lawmaker wants proof credit card fees don't harm Reuters, July 19, 2007. Retrieved July 20, 2007.
On October 1, 2010, the Durbin Amendment came into effect as a last minute addition to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. As a result, banks have begun to limit the incentives offered with their checking account products, and some have announced that they would begin to charge their customers a fee for the use of the cards.
In the same month, Visa and MasterCard reached a settlement with the U.S. Justice Department in an antitrust case focused on the issue of competitiveness in the interchange market. The companies agreed to allow merchants displaying their logos to decline certain types of cards, or to offer consumers discounts for using cheaper cards.
In January 2007, the European Commission issued the results of a two-year inquiry into the retail banking sector. The report focuses on payment cards and interchange fees. Upon publishing the report, Commissioner Neelie Kroes said the "present level of interchange fees in many of the schemes we have examined does not seem justified." The report called for further study of the issue.
On December 19, 2007, the European Commission issued a decision prohibiting MasterCard's multilateral interchange fee for cross-border payment card transactions with MasterCard and Maestro branded debit and consumer credit cards. The Commission concluded that this fee violated Article 81 of the EC Treaty that prohibits anti-competitive agreements. MasterCard has appealed the Commission's decision before the EU Court of First Instance; while the appeal is pending MasterCard has temporarily repealed its multilateral interchange fees.
On March 26, 2008, the European Commission opened an investigation into Visa's multilateral interchange fees for cross-border transactions within the EEA as well as into the "Honour-All-Cards" rule (under which merchants are required to accept all valid Visa-branded cards).
The antitrust authorities of EU member states other than the United Kingdom are also investigating MasterCard's and Visa's interchange fees. For example, on January 4, 2007, the Polish Office of Competition and Consumer Protection fined twenty banks a total of PLN 164 million (about $56 million) for jointly setting MasterCard's and Visa's interchange fees.http://www.uokik.gov.pl/en/press_office/press_releases/art72.html and also re the Hungarian investigation at http://www.gvh.hu/gvh/alpha?do=2&st=2&pg=154&m129_doc=4413
In March 2015, the European Parliament voted to cap interchange fees to 0.3% for credit cards and to 0.2% for debit cards, which was subsequently enacted under Regulation (EU) 2015/751 with effect from 8 June 2015. The caps apply only to personal cards where there is an intermediary, not to cards issued to businesses or to cards issued by American Express.
That same year, the Revised Payment Services Directive banned merchant surcharges, although it did not enter into force until 2018.
In 2006, the New Zealand Commerce Commission issued proceedings against Visa and MasterCard, alleging that interchange fees constitute price fixing and result in a substantial lessening of competition. COMPETITION POLICY AND CREDIT CARD INTERCHANGE FEES IN NEW ZEALAND - Dr. Stephen Gale and Ben Gerritsen Shortly before the court case was due to start in Autumn 2009, the suit was settled out of court; the "no surcharge rule" was prohibited, allowing retailers to pass on the cost of MasterCard and Visa transactions to the customer, and card issuers were allowed to set their own interchange fees, within a maximum limit set by Visa or MasterCard. Commerce Commission and Visa reach agreement to settle credit card interchange fee proceedings - Commerce Commission, 12 August 2009 All issuers of MasterCard cards in New Zealand announced they would be charging the maximum rate. Mastercard New Zealand: Understanding Interchange - retrieved 8 March 2015 The Commission released a report in 2013 reviewing the outcome of the settlement, showing that many merchants were paying higher fees for accepting credit cards than before the settlement. Evaluation of the 2009 interchange and credit card settlements: Research report - Commerce Commission, Date: 19 December 2013 In 2020, the New Zealand Government announced plans to regulate the bank payment system to lower merchant service fees on debit and credit card fees, to bring them further into line with those in other countries, in particular Australia. Lower card fees to benefit Kiwis and small businesses - NZ Government press release, Date: 10 December 2020
|
|
