subject: Interchange Fee - What's It All About? [print this page] When a merchant accepts a credit card for payment, an involved process is required to complete the transaction. Entities are involved that need to be paid for their services. A fee that an acquiring bank submits to an issuing bank in an instance of credit card use with a merchant is called an interchange fee. The bank that has issued the credit card takes the fee out of what it pays to the merchant's bank, also referred to as the acquiring bank. That bank then pays the merchant after deducting the fee and what is known as an additional assessment for their services.
The interchange fee is set by the credit card associations. They are the largest of the myriad of fees taken by banks from the sales of the merchant. There is a complicated structure of pricing. This structure is based on the kind of card, the size of the merchant and the transaction situation. Usually there is a flat fee that is complimented by some percent of the price of the purchase. This typically translates to about 2% of the value of the transaction as a whole.
The history of the interchange fee is somewhat debatable. It is commonly accepted that they developed as a way to make this type of electronic payment method attractive for banks. It is also a well accepted theory that they developed as a means for banks to circumvent Truth in Lending laws. The issuing bank is usually the one that receives the majority of the fees. There is little profit in customers who pay their bills in a timely manner so this is a way for money to be funneled to the bank via charges to the merchant.
There is some controversy that goes along with the interchange fee. Investigations have been undertaken to assess the fairness and ethics of its use in the credit card industry. Merchants claim the fees are not staying competitive with costs that are changing elsewhere. The merchants argue that they are being harmed by banks for accepting credit cards. They have even gone so far as to allege price fixing and collusion among the network of banks involved in the process. Naturally, the banks do not agree. They claim they are necessary to have incentives for issuing banks to be a part of the network. Consumer benefits are also touted by the banks. Rewards programs and reduced instances of fraud help the consumer benefit, they claim.
