Since the early days of credit card payments, merchants continue to pay banks to accept credit card payments from cardholders. A term coined by banks; Interchange is the fee term used in the payment processing industry. It describes a fee paid to banks for the approval of card-based processing. In the US, card issuers now make over $30 billion annually from interchange fees.
Interchange rates are established at differing levels for a variety of reasons. For example, a premium credit card that offers rewards will have a higher interchange rate than do standard cards. Transactions made with credit cards have higher rates than signature debit cards, whose rates are in turn typically higher than PIN debit card transactions. Sales that are not conducted in person such as by phone or on the Internet, 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 brand.
How Interchange Functions.
A consumer makes a $100 purchase with a credit card. For that $100 transaction, the retailer would get approximately $98. The remaining $2, known as the merchant discount and fees, is divided. About $1.75 goes to the card issuing bank (interchange), $0.18 goes to Visa or MasterCard association (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 $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 1.8% although many small retail businesses see average rates from 2% to as high as 4%. A small business can expect to pay, for every $10,000 processed, around $300. If your business averages $50,000 in monthly sales, you will pay, on an average, $1,000 to $1,500 every month you are in business.
Price-fixing
Regulators in several countries have questioned interchange rates and fees as potential examples of price fixing. Merchant groups, including the U.S.-based Merchants Payments Coalition and Merchant Bill of Rights, also claim that interchange fees are much higher than necessary, pointing to the fact that even though technology and efficiency have improved, interchange fees have more than doubled in the last 10 years. Issuing banks argue that reduced interchange fees would result in increased costs for cardholders and reduce their ability to satisfy rewards on cards already issued. Rewards? Yes, cash back rewards, airline points and other rewards cardholders collect when making card payments are paid out of higher interchange rates charged to merchants. Therefore, banks don’t pay for the incentives to get more cards in the market, businesses pay. Bottom line? Businesses pay for their customers vacations, not the card issuing bank, every time a customer uses their rewards card.
In 2015, the European Parliament voted to cap interchange fees to 0.3% for credit cards and to 0.2% for debit cards. Yet interchange rate in the U.S. still average 1.79%. U.S. banks continue to make billions from high interchange rates and cardholders make money every time they use their cards. And American businesses pay for it.
A fundamental change in approach.
The current approach to payment processing is that the cost is paid by merchants was set by the banking industry. Decades of increasing interchange rates have driven the cost of credit card processing higher and higher, Hard fought battles by merchant organizations now make it compliant and legal for businesses to no longer have to pay for credit card processing. Pricing programs are available that shift the high cost of merchant services away from merchants over to those that are rewarded when paying with a card. Businesses can now reduce overhead, increase profit, and invest more money into growing their business by eliminating the cost of processing payments without raising overall prices to cover payment processing costs, only the card price.
The program switches high credit card processing costs paid by merchants to none while giving customers the choice of a cash price or a credit price. Cardholders can still receive rewards as a rebate if choosing to pay by card. Payment processing equipment is available that quickly calculates the cash or credit prices at checkout. Cash or credit programs have been in place in many businesses for several years. Customers have accepted the practice when making a purchase. When shopping, the majority of customers frequent a business for the product and service, not to save money.
The time has come to make fundamental changes in how businesses are paid. Banks can provide checking accounts, but for the most part, banking services do not free up money to invest in business, those services make banks more profit. A change in how credit card processing costs are paid is now available to all businesses. A fundamental change that puts thousands of dollars back into small businesses helping them sustain and grow in these urgent times.