Interchange fee
Encyclopedia
Interchange fee is a term used in the payment card industry to describe a fee paid between banks for the acceptance of card based transactions. Usually it is a fee that a merchant's bank (the "acquiring bank") pays a customer's bank (the "issuing bank") however there are instances where the interchange fee is paid from the issuer to acquirer, often called reverse interchange.
In a credit card
or debit card transaction, the card-issuing bank in a payment transaction deducts the interchange fee from the amount it pays the acquiring bank that handles a credit or debit card transaction for a merchant. The acquiring bank then pays the merchant the amount of the transaction minus both the interchange fee and an additional, usually smaller fee for the acquiring bank or ISO
, which is often referred to as a discount rate
, an add-on rate, or passthru.
For cash withdrawal transactions at ATMs
, however, the fees are paid by the card-issuing bank to the acquiring bank (for the maintenance of the machine).
These fees are set by the credit card networks, and are the largest component of the various fees that most merchants' pay for the privilege of accepting credit cards, representing 70% to 90% of these fees by some estimates, although larger merchants typically pay less as a percentage. Interchange fees have a complex pricing structure, which is based on the card brand, regions or jurisdictions, the type of credit or debit card, the type and size of the accepting merchant, and the type of transaction (e.g. online, in-store, phone order, whether the card is present for the transaction, etc.). Further complicating the rate schedules, interchange fees are typically a flat fee plus a percentage of the total purchase price (including taxes). In the United States, the fee averages approximately 2% of transaction value.
In recent years, interchange fees have become a controversial issue, the subject of regulatory and antitrust investigations. Many large merchants such as Wal-Mart have the ability to negotiate fee prices, and while some merchants prefer cash or PIN-based debit cards, most believe they cannot realistically refuse to accept the major card network-branded cards. This holds true even when their interchange-driven fees exceed their profit margins. Some countries, such as Australia, have established significantly lower interchange fees, although according to a U.S. Government Accountability study, the savings enjoyed by merchants were not passed along to consumers. The fees are also the subject of several ongoing lawsuits in the United States.
On June 8th, it was announced that the amendment pushed by Sen. Jon Tester (D-Mont.) that would have delayed implementation of a law that caps the fees banks can charge merchants for swiping debit cards picked up 54 votes, with 45 voting against. It fell six short of the 60 needed to break a filibuster.
In the US Card issuers now make over $30 billion annually from interchange fees. Interchange fees collected by Visa and MasterCard totaled $26 billion in 2004. In 2005 the number was $30.7 billion, and the increase totals 85 percent compared to 2001.
The origins of the interchange fee are a matter of some controversy. Often they are assumed to have been developed to maintain and attract a proper mix of issuers and acquirers to bank networks. Research by Professor Adam Levitin of Georgetown University Law Center, however, indicates that interchange fees were originally designed as a method for banks to avoid usury and Truth-in-Lending laws. Typically, the bulk of the fee goes to the issuing bank. Issuing banks’ interchange fees are extracted from the amount collected by the merchants when they submit credit or debit transactions for payment through their acquiring banks. Banks do not expect to make a significant amount of money from late fees and interest charges from creditworthy customers (who pay in full every month), and instead make their profits on the interchange fee charged to merchants.
Interchange rates are established at differing levels for a variety of reasons. For example, a premium credit card that offers rewards generally will have a higher interchange rate than do standard cards. Transactions made with credit cards generally have higher rates than those with 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, generally are subject to higher interchange rates, than are transactions on cards presented in person. It is important to note that interchange is also 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 particular brand.
For one example of how interchange functions, imagine a consumer making a $100 purchase with a credit card. For that $100 item, the retailer would get approximately $98. The remaining $2, known as the merchant discount and fees, gets divided up. About $1.75 would go to the card issuing bank (defined as interchange), $0.18 would go to Visa or MasterCard association (defined as 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 the $0.18, likewise with MasterCard. Visa's assessment is fixed at 0.1100% of the transaction value and MasterCard's assessment is fixed at 0.0950% of the transaction value. On average the interchange rates in the US are 179 basis points (1.79%) and vary widely across countries; in April 2007 Visa announced it would raise its rate .6% to
1.77%.
According to a January 2007 poll by Harris Interactive, 32% of the public had heard of the interchange fee; once explained to them, 91% said Congress "should compel credit card companies to better inform consumers" about the fee.
However, in 2009, the U.S. Government Accountability Office (GAO) examined the issue of interchange fees in the U.S. and concluded that any remedies for reducing these fees have risks that may end up costing consumers more money than they pay today. Notably, the GAO report examined the experience after the Reserve Bank of Australia regulated interchange fees in that market, and concluded that retailers did not reduce prices to reflect their reduced interchange fees, something the Merchants Payments Coalition has suggested would occur if interchange fees were regulated in the United States.
among the bank card networks and their card issuing banks, in violation of antitrust laws. Bank card networks disagree, claiming interchange fees represent an effort to balance incentives to issuing banks to issue more cards with better rewards against the need to bring an optimum number of card-accepting merchants into their credit card systems. They also claim that the interchange fees bring consumer benefits such as more rewards, reduced fraud, lower interest rates and system innovations.
Senate hearings in the United States have focused on the secrecy surrounding interchange fee schedules and card operating rules. In 2006 Visa and MasterCard both released some fee schedules and summary reports of their card rules, though pressure continues for them to release the full documents. In January 2007, Senate Banking committee chairman Chris Dodd cited interchange fees at a hearing on credit card industry practices and again in March the fees were criticized by Sen. Norm Coleman
. In January 2007, Microsoft chairman Bill Gates
cited high interchange fees as a significant reason Microsoft believes it can be competitive in online micropayments.
In March 2007, MasterCard announced it was changing its rate structure, splitting the lower, "basic" tier for credit cards into two new tiers. The Wall Street Journal reported that the document outlining the shift "makes it difficult to determine if the new rates, on average, are rising." MasterCard spokesman Joshua Peirez said the new structure "allows us to have a more sophisticated way to break up our credit card portfolio," while National Retail Federation general counsel Mallory Duncan said, "They are pricing each tier at the absolute most they can so they can maximize their income."
On July 19, 2007 the House Judiciary Committee antitrust task force held the first hearing to study the specific issue of interchange fees. NRF's Duncan testified, as did representatives from the credit card industry. Subcommittee chairman John Conyers
, leading the panel, said, "While I come into the hearing with an open mind, I do believe the burden of the proof lies with the credit card companies to reassure Congress that increasing interchange fees are not harming merchants and ultimately consumers."
Reps. John Conyers
(D-MI) and Chris Cannon
(R-UT) introduced the "Credit Card Fair Fee Act" on March 6, 2008. which would create a panel of judges, appointed by the Department of Justice
Antitrust Division
and Federal Trade Commission
to oversee interchange fees.
In October 2010, Visa and MasterCard reached a settlement with the U.S. Justice Department in an antitrust case focused on the issue of competitiveness in the interchange market. The companies agreed to allow merchants displaying their logos to decline certain types of cards, or to offer consumers discounts for using cheaper cards.
On October 1, 2010, the Durbin Amendment came into effect as a last minute addition to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. As a result, banks have begun to limit the incentives offered with their checking account products, and some have announced that they would begin to charge their customers a fee for the use of the cards.
exempted Visa’s multilateral interchange fees from Article 81 of the EC Treaty that prohibits anti-competitive arrangements. However, this exemption has expired on December 31, 2007. In the United Kingdom, MasterCard has reduced its interchange fees while it is under investigation by the Office of Fair Trading.
In January 2007, the European Commission issued the results of a two-year inquiry into the retail banking sector. The report focuses on payment cards and interchange fees. Upon publishing the report, Commissioner Neelie Kroes
said the "present level of interchange fees in many of the schemes we have examined does not seem justified." The report called for further study of the issue.
On December 19, 2007, the European Commission issued a decision prohibiting MasterCard's multilateral interchange fee for cross-border payment card transactions with MasterCard and Maestro branded debit and consumer credit cards. The Commission concluded that this fee violated Article 81 of the EC Treaty that prohibits anti-competitive agreements. MasterCard has appealed the Commission's decision before the EU Court of First Instance; while the appeal is pending MasterCard has temporarily repealed its multilateral interchange fees.
On March 26, 2008, the European Commission opened an investigation into Visa's multilateral interchange fees for cross-border transactions within the EEA as well as into the "Honor All Cards" rule (under which merchants are required to accept all valid Visa-branded cards).
The antitrust authorities of EU Member States other than the United Kingdom are also investigating MasterCard's and Visa's interchange fees. For example, on January 4, 2007, the Polish Office of Competition and Consumer Protection fined twenty banks a total of PLN 164 million (about $56 million) for jointly setting MasterCard's and Visa's interchange fees.
required that interchange fees be dramatically reduced, from about 0.95% of the transaction to approximately 0.5%. One notable result has been the reduced use of reward cards
and increased use of debit cards. Australia also removed the "no surcharge" rule, a policy established by credit card networks like Visa and MasterCard to prevent merchants from charging a credit card usage fee to the cardholder. A surcharge would mitigate or even exceed the merchant discount paid by a merchant, but would also make the cardholder more reluctant to use the card as the method of payment. Australia has also made changes to the interchange rates on debit cards, and has considered abolishing interchange fees altogether.
As of November 2006, New Zealand
is considering similar actions, following a Commerce Commission lawsuit alleging price-fixing by Visa and MasterCard. In New Zealand, merchants pay a 1.8% fee on every credit card transaction.
In a credit card
Credit card
A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...
or debit card transaction, the card-issuing bank in a payment transaction deducts the interchange fee from the amount it pays the acquiring bank that handles a credit or debit card transaction for a merchant. The acquiring bank then pays the merchant the amount of the transaction minus both the interchange fee and an additional, usually smaller fee for the acquiring bank or ISO
ISO 8583
ISO 8583 Financial transaction card originated messages — Interchange message specifications is the International Organization for Standardization standard for systems that exchange electronic transactions made by cardholders using payment cards...
, which is often referred to as a discount rate
Discount rate
The discount rate can mean*an interest rate a central bank charges depository institutions that borrow reserves from it, for example for the use of the Federal Reserve's discount window....
, an add-on rate, or passthru.
For cash withdrawal transactions at ATMs
Automated teller machine
An automated teller machine or automatic teller machine, also known as a Cashpoint , cash machine or sometimes a hole in the wall in British English, is a computerised telecommunications device that provides the clients of a financial institution with access to financial transactions in a public...
, however, the fees are paid by the card-issuing bank to the acquiring bank (for the maintenance of the machine).
These fees are set by the credit card networks, and are the largest component of the various fees that most merchants' pay for the privilege of accepting credit cards, representing 70% to 90% of these fees by some estimates, although larger merchants typically pay less as a percentage. Interchange fees have a complex pricing structure, which is based on the card brand, regions or jurisdictions, the type of credit or debit card, the type and size of the accepting merchant, and the type of transaction (e.g. online, in-store, phone order, whether the card is present for the transaction, etc.). Further complicating the rate schedules, interchange fees are typically a flat fee plus a percentage of the total purchase price (including taxes). In the United States, the fee averages approximately 2% of transaction value.
In recent years, interchange fees have become a controversial issue, the subject of regulatory and antitrust investigations. Many large merchants such as Wal-Mart have the ability to negotiate fee prices, and while some merchants prefer cash or PIN-based debit cards, most believe they cannot realistically refuse to accept the major card network-branded cards. This holds true even when their interchange-driven fees exceed their profit margins. Some countries, such as Australia, have established significantly lower interchange fees, although according to a U.S. Government Accountability study, the savings enjoyed by merchants were not passed along to consumers. The fees are also the subject of several ongoing lawsuits in the United States.
On June 8th, it was announced that the amendment pushed by Sen. Jon Tester (D-Mont.) that would have delayed implementation of a law that caps the fees banks can charge merchants for swiping debit cards picked up 54 votes, with 45 voting against. It fell six short of the 60 needed to break a filibuster.
Overview
Interchange fees are set by the card scheme themselves.In the US Card issuers now make over $30 billion annually from interchange fees. Interchange fees collected by Visa and MasterCard totaled $26 billion in 2004. In 2005 the number was $30.7 billion, and the increase totals 85 percent compared to 2001.
The origins of the interchange fee are a matter of some controversy. Often they are assumed to have been developed to maintain and attract a proper mix of issuers and acquirers to bank networks. Research by Professor Adam Levitin of Georgetown University Law Center, however, indicates that interchange fees were originally designed as a method for banks to avoid usury and Truth-in-Lending laws. Typically, the bulk of the fee goes to the issuing bank. Issuing banks’ interchange fees are extracted from the amount collected by the merchants when they submit credit or debit transactions for payment through their acquiring banks. Banks do not expect to make a significant amount of money from late fees and interest charges from creditworthy customers (who pay in full every month), and instead make their profits on the interchange fee charged to merchants.
Interchange rates are established at differing levels for a variety of reasons. For example, a premium credit card that offers rewards generally will have a higher interchange rate than do standard cards. Transactions made with credit cards generally have higher rates than those with 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, generally are subject to higher interchange rates, than are transactions on cards presented in person. It is important to note that interchange is also 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 particular brand.
For one example of how interchange functions, imagine a consumer making a $100 purchase with a credit card. For that $100 item, the retailer would get approximately $98. The remaining $2, known as the merchant discount and fees, gets divided up. About $1.75 would go to the card issuing bank (defined as interchange), $0.18 would go to Visa or MasterCard association (defined as 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 the $0.18, likewise with MasterCard. Visa's assessment is fixed at 0.1100% of the transaction value and MasterCard's assessment is fixed at 0.0950% of the transaction value. On average the interchange rates in the US are 179 basis points (1.79%) and vary widely across countries; in April 2007 Visa announced it would raise its rate .6% to
1.77%.
According to a January 2007 poll by Harris Interactive, 32% of the public had heard of the interchange fee; once explained to them, 91% said Congress "should compel credit card companies to better inform consumers" about the fee.
Controversy
Regulators in several countries have questioned the collective determination of interchange rates and fees as potential examples of price-fixing. Merchant groups in particular, 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 has 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. The Merchants Payments Coalition argues that consumers pay more than they should because of "hidden" interchange fees and that reducing these fees would result in lower retail prices.However, in 2009, the U.S. Government Accountability Office (GAO) examined the issue of interchange fees in the U.S. and concluded that any remedies for reducing these fees have risks that may end up costing consumers more money than they pay today. Notably, the GAO report examined the experience after the Reserve Bank of Australia regulated interchange fees in that market, and concluded that retailers did not reduce prices to reflect their reduced interchange fees, something the Merchants Payments Coalition has suggested would occur if interchange fees were regulated in the United States.
United States
Merchant lawsuits claim that interchange fees in the U.S. are out of line with falling technology costs and similar fees charged outside the United States, resulting in higher prices, lower profits and harm to the consumer. The lawsuits allege that these high fees represent collusion and price fixingPrice fixing
Price fixing is an agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given level by controlling supply and demand...
among the bank card networks and their card issuing banks, in violation of antitrust laws. Bank card networks disagree, claiming interchange fees represent an effort to balance incentives to issuing banks to issue more cards with better rewards against the need to bring an optimum number of card-accepting merchants into their credit card systems. They also claim that the interchange fees bring consumer benefits such as more rewards, reduced fraud, lower interest rates and system innovations.
Senate hearings in the United States have focused on the secrecy surrounding interchange fee schedules and card operating rules. In 2006 Visa and MasterCard both released some fee schedules and summary reports of their card rules, though pressure continues for them to release the full documents. In January 2007, Senate Banking committee chairman Chris Dodd cited interchange fees at a hearing on credit card industry practices and again in March the fees were criticized by Sen. Norm Coleman
Norm Coleman
Norman Bertram Coleman, Jr. is an American attorney and politician. He was a United States senator from Minnesota from 2003 to 2009. Coleman was elected in 2002 and served in the 108th, 109th, and 110th Congresses. Before becoming a senator, he was mayor of Saint Paul, Minnesota, from 1994 to 2002...
. In January 2007, Microsoft chairman Bill Gates
Bill Gates
William Henry "Bill" Gates III is an American business magnate, investor, philanthropist, and author. Gates is the former CEO and current chairman of Microsoft, the software company he founded with Paul Allen...
cited high interchange fees as a significant reason Microsoft believes it can be competitive in online micropayments.
In March 2007, MasterCard announced it was changing its rate structure, splitting the lower, "basic" tier for credit cards into two new tiers. The Wall Street Journal reported that the document outlining the shift "makes it difficult to determine if the new rates, on average, are rising." MasterCard spokesman Joshua Peirez said the new structure "allows us to have a more sophisticated way to break up our credit card portfolio," while National Retail Federation general counsel Mallory Duncan said, "They are pricing each tier at the absolute most they can so they can maximize their income."
On July 19, 2007 the House Judiciary Committee antitrust task force held the first hearing to study the specific issue of interchange fees. NRF's Duncan testified, as did representatives from the credit card industry. Subcommittee chairman John Conyers
John Conyers
John Conyers, Jr. is the U.S. Representative for , serving since 1965 . He is a member of the Democratic Party...
, leading the panel, said, "While I come into the hearing with an open mind, I do believe the burden of the proof lies with the credit card companies to reassure Congress that increasing interchange fees are not harming merchants and ultimately consumers."
Reps. John Conyers
John Conyers
John Conyers, Jr. is the U.S. Representative for , serving since 1965 . He is a member of the Democratic Party...
(D-MI) and Chris Cannon
Chris Cannon
Christopher Black "Chris" Cannon was a member of the United States House of Representatives, for the Republican Party, representing the third district of Utah from 1997 - 2009....
(R-UT) introduced the "Credit Card Fair Fee Act" on March 6, 2008. which would create a panel of judges, appointed by the Department of Justice
United States Department of Justice
The United States Department of Justice , is the United States federal executive department responsible for the enforcement of the law and administration of justice, equivalent to the justice or interior ministries of other countries.The Department is led by the Attorney General, who is nominated...
Antitrust Division
United States Department of Justice Antitrust Division
The United States Department of Justice Antitrust Division is responsible for enforcing the antitrust laws of the United States. It shares jurisdiction over civil antitrust cases with the Federal Trade Commission and often works jointly with the FTC to provide regulatory guidance to businesses...
and Federal Trade Commission
Federal Trade Commission
The Federal Trade Commission is an independent agency of the United States government, established in 1914 by the Federal Trade Commission Act...
to oversee interchange fees.
In October 2010, Visa and MasterCard reached a settlement with the U.S. Justice Department in an antitrust case focused on the issue of competitiveness in the interchange market. The companies agreed to allow merchants displaying their logos to decline certain types of cards, or to offer consumers discounts for using cheaper cards.
On October 1, 2010, the Durbin Amendment came into effect as a last minute addition to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. As a result, banks have begun to limit the incentives offered with their checking account products, and some have announced that they would begin to charge their customers a fee for the use of the cards.
European Union
In 2002 the European CommissionEuropean Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....
exempted Visa’s multilateral interchange fees from Article 81 of the EC Treaty that prohibits anti-competitive arrangements. However, this exemption has expired on December 31, 2007. In the United Kingdom, MasterCard has reduced its interchange fees while it is under investigation by the Office of Fair Trading.
In January 2007, the European Commission issued the results of a two-year inquiry into the retail banking sector. The report focuses on payment cards and interchange fees. Upon publishing the report, Commissioner Neelie Kroes
Neelie Kroes
Neelie Kroes is a Dutch politician of the People's Party for Freedom and Democracy . She served as a Member of the House of Representatives from 3 August 1971 until 28 December 1977 when she became State Secretary for Transport, Public Works and Water Management from 28 December 1977 until 11...
said the "present level of interchange fees in many of the schemes we have examined does not seem justified." The report called for further study of the issue.
On December 19, 2007, the European Commission issued a decision prohibiting MasterCard's multilateral interchange fee for cross-border payment card transactions with MasterCard and Maestro branded debit and consumer credit cards. The Commission concluded that this fee violated Article 81 of the EC Treaty that prohibits anti-competitive agreements. MasterCard has appealed the Commission's decision before the EU Court of First Instance; while the appeal is pending MasterCard has temporarily repealed its multilateral interchange fees.
On March 26, 2008, the European Commission opened an investigation into Visa's multilateral interchange fees for cross-border transactions within the EEA as well as into the "Honor All Cards" rule (under which merchants are required to accept all valid Visa-branded cards).
The antitrust authorities of EU Member States other than the United Kingdom are also investigating MasterCard's and Visa's interchange fees. For example, on January 4, 2007, the Polish Office of Competition and Consumer Protection fined twenty banks a total of PLN 164 million (about $56 million) for jointly setting MasterCard's and Visa's interchange fees.
Australia and New Zealand
In 2003, the Reserve Bank of AustraliaReserve Bank of Australia
The Reserve Bank of Australia came into being on 14 January 1960 as Australia's central bank and banknote issuing authority, when the Reserve Bank Act 1959 removed the central banking functions from the Commonwealth Bank to it....
required that interchange fees be dramatically reduced, from about 0.95% of the transaction to approximately 0.5%. One notable result has been the reduced use of reward cards
Loyalty program
Loyalty programs are structured marketing efforts that reward, and therefore encourage, loyal buying behavior — behavior which is potentially beneficial to the firm....
and increased use of debit cards. Australia also removed the "no surcharge" rule, a policy established by credit card networks like Visa and MasterCard to prevent merchants from charging a credit card usage fee to the cardholder. A surcharge would mitigate or even exceed the merchant discount paid by a merchant, but would also make the cardholder more reluctant to use the card as the method of payment. Australia has also made changes to the interchange rates on debit cards, and has considered abolishing interchange fees altogether.
As of November 2006, New Zealand
New Zealand
New Zealand is an island country in the south-western Pacific Ocean comprising two main landmasses and numerous smaller islands. The country is situated some east of Australia across the Tasman Sea, and roughly south of the Pacific island nations of New Caledonia, Fiji, and Tonga...
is considering similar actions, following a Commerce Commission lawsuit alleging price-fixing by Visa and MasterCard. In New Zealand, merchants pay a 1.8% fee on every credit card transaction.