All businesses get a price for the goods and services they provide, and the electronic payments business is no exception. As one element of the cost of card acceptance, interchange is a very small fee in relation to the enormous value merchants receive for accepting credit card payments.
For over 40 years established default interchange fees have proven to be the most effective way to balance costs in the system and promote a strong, competitive payments industry that benefits cardholders, merchants and financial institutions.
Over 25,000 financial institutions provide the cards and services that allow hundreds of millions of consumers and over 25 million merchants around the world to benefit from the convenience and security of electronic payments.
Exactly What Is Interchange?
Interchange was created as an incentive for banks to issue payment cards and merchants to accept those cards. The small fee is paid by a merchant’s bank (also known as the acquiring bank) to the cardholder’s bank (the issuing bank) and compensates the issuing bank for a part of the risks and costs it incurs to maintain cardholder accounts. Costs include finance costs for the interest free period between the time a consumer makes a purchase and pays their bill, credit losses, fraud protection and processing costs.
By balancing some of the cost of the payment system from issuers and their cardholders to acquirers and their merchants, a system operator like Visa or MasterCard can encourage greater utilization of its cards. This is often referred to as “balancing the system” and makes the system more efficient and valuable to cardholders and merchants.
When a sale is made with a payment card, the acquiring bank pays the issuing bank an interchange fee to help offset a portion of these costs. The acquiring bank will eventually collect this fee from the merchant as a component of the merchant discount fee.
The industry is bringing transparency to the interchange system. All U.S. interchange rates and operating rules that apply to merchants are posted on the issuer’s websites along with comprehensive information to help merchants understand the rates and how they apply. These steps are intended to help foster an ongoing dialogue with merchants, acquirers and others about interchange rates and disclosure.
Interchange Means Benefit For The Merchants
Payment cards help merchants operate more successfully. Electronic payment transactions are faster at checkout and merchants who comply with issuers’ security guidelines are guaranteed to receive payment for these transactions. With less cash on hand, merchants are less vulnerable to theft and can provide safer workplaces for their employees. Electronic payments also save time and money by easing payment reconciliation.
Accepting payment cards provides merchants with incredible benefits at a fair price.
The benefits to merchants of accepting credit cards are significant and include increased sales, as more people are attracted to stores that accept their card of choice, management of lending losses, fraud and the costs of complying with regulations.
Interchange enables merchants to participate in a payment system that is far more cost effective for them than issuing their own proprietary card or some other form of credit.
Interchange Means Consumers Benefit
Interchange allows choice, innovation and security which are all vitally important to today’s consumer. By providing incentives for card issuers, interchange encourages banks to innovate and develop new payment options, broaden the range of card programs available to consumers and invest in cutting edge security and fraud prevention measures. Interchange helps to spur new types of card programs to meet different consumer needs and a wide variety of payment card reward and incentive programs that help people get more out of every dollar they spend. These programs increase card usage, which ultimately benefits merchants.
Interchange Causes A Competitive Payments Industry
Interchange rates have proven to be the most efficient way to balance costs in the system and promote a strong competitive payments industry.
Moreover, the courts and regulators in the U.S. have found interchange to be legal, efficient, and an essential component to the operation of an issuer’s payment system. Interchange promotes competition and more cards in circulation, thus benefiting every participant in the system – cardholders, merchants and financial institutions.