What are Interchange Fees?

John Lister

Interchange fees are a particular type of fee 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 return for card services. There have been claims that the fees are higher than they might otherwise be thanks to anticompetitive practices in the card industry.

Interchange fees make up the majority of fees paid by retailers who accept credit cards.
Interchange fees make up the majority of fees paid by retailers who accept credit cards.

Many consumers are not aware of interchange fees or how important they are to credit card companies. Consumers are generally well 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 isn't as well know is that in most cases, this produces far less money for card companies than interchange fees.

When a customer pays for an item with a credit card, the merchant gets around 98 percent of the purchase price, the remainder being deducted in fees. What isn't so widely understood is that most of these deductions are taken by the cardholder's bank, not the retailer's own 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 that is used takes what is usually a smaller share of the deduction. The retailer's own bank is then usually left with the smallest share of the deduction.

Strictly speaking, the interchange fee is not imposed directly on the retailer itself. Instead it is applied by the cardholder's bank as a deduction on the money it pays to the retailer's bank. In reality, the retailer still ends up with a lower amount of money from the purchase and the interchange fee contributes heavily to the deductions. In turn, the fees mean retailers charge higher prices to customers than they might do if the deductions were lower.

There has been a lot of controversy over interchange fees, most notably complaints that they have generally risen even when the technological costs involved in card processing have fallen. This has prompted accusations that the companies involved had unfairly colluded to keep fees high. This suspicion has been further fueled by some companies being secretive about the ways fees are calculated, while what detail is known shows the fee structures to be extremely complicated. The companies involved generally argue that the 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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