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Every country in the world has experienced an increase of electronic payment processing within the last few years.  Credit and debit cards continue to charge forward rapidly as the preferred method of consumer payment.

Several controversies surround credit and debit interchange fees.  Over the past few years, discussions about interchange have heated up.  In some countries, such as the US, interchange has increased.  In Australia, interchange has decreased.  Debates over interchange continue to rage in countries throughout the world.

For acquiring banks interchange is a cost of providing services to merchants.  For issuing banks interchange is a fee obtained for providing their services to cardholders

An increase in the interchange fees means an increase in the fee issuers receive for every card transaction their customers undertake.  An increase in the interchange fee leads to an increase in acquirers’ costs for every card transaction processed.  Therefore, acquirers ultimately respond to an increase in the interchange fee by increasing their merchant fees.   The merchants, of course, pass the cost on to buyers in the form of increased price of goods.

If interchange decreases, issuing banks receive less money.  Issuers seek to make up lost revenues through other means.  For example, an issuing bank may reduce card holder benefits associated with a card.  Or, the bank may begin to charge cardholders additional fees.

No matter which way interchange goes, banks make money.  And consumers pay the costs.

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A merchant said he had a sales rep approach him, show him the card not present rate on on interchange table and told him that’s what he would be charged for all internet transactions.  It looked like a pretty good deal to him.  What the sales agent didn’t tell the merchant is that there are over 90 interchange rates.

And, the sales agent didn’t reveal to the merchant that interchange is based in large part on the type of card that is used to make a purchase.  That is, what card the buyer is using.  There are endless types of cards that people use to make payments online.  Lots of people use rewards cards.  A rewards card is lined to accruing airline miles, cash back, or other types of rewards that the issuing bank offers in order to encourage buyers to use a particular card.  And the interchange rates for rewards cards are much higher than cards that are not linked to any reward.   In addition, corporate cards are also assessed higher interchange fees.

One of the complaints merchants have been griping about for years is that the card brands and banks are essentially subsidizing card reward programs through the use of higher interchange rates.  And there is certainly validity to that argument.

Instead of looking at interchange rates, merchants should look at the effective rate of processing.  This simple mathmatical calculation yields a much more useful number in determining how much is really be charged for processing.

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To provide an incentive for issuing banks to issue more cards and acquiring banks to add more merchants and thus expand the network, the bank card brands established interchange.  Interchange allocates the costs and revenues of the completed transaction between the issuing bank and acquiring bank.

Interchange fee is essentially a compensation vehicle.  It helps ensure the cooperation and participation of the various parties in the payment processing system by balancing the incentives to increase the base of merchants accepting the card and the base of consumers using the card.  The value of the card to cardholders is higher if more merchants take the card and the value of the card to merchants is higher if more cardholders use the card.

Interchange fees are subject to increasingly intense legal and regulatory scrutiny worldwide which may have a material adverse impact on revenue, prospects for future growth and overall business.

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Interchange fees are a percentage of each credit or debit card transaction paid by the merchant’s bank and paid to the card user’s bank Interchange makes up most of the fees that merchants pay to their banks for processing card transactions.

Issuing banks frequently use a portion of interchange fee revenue to encourage card use by offering cardholders rewards, such as cash rebates, airline miles, or other incentives. The more the card is used, the more rewards can be earned by card holders.

As payments by debit and credit cards have increased and become the preferred method of payment for most buyers, interchange fees have increased. As a result, merchants, essentially subsidize the issuing banks that make money both on interchange and from charging cardholders fees to use the cards.

For years, merchants have complained that interchange fees are unfair. Merchants allege that interchange allow banks, which would normally compete on fees, collude on fees instead.

Banks say if merchants do not want to pay interchange fees, merchants can chose not to offer cards as a payment option. Merchants counter that not accepting cards is no longer a viable option because buyers expect to cards to be accepted everywhere. As a result, merchants claim interchange rates can be set artificially high leading to excessive profits for the card issuing banks and are punitive to the merchants footing the fees.

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