by: Bret Morrison - posted (or last updated): 8th, January 2009

Interchange fee is a term used in the credit card processing industry and it describes a percentage fee that a merchant account bank (the bank that provides a merchant account for a business - also called “acquiring bank”) pays a cardholder’s bank (the “issuing bank”). This fee is paid each and every time a merchant takes an online payment for its products and services from an Internet shopper.

When merchants accept cards like Visa or MasterCard for purchases, the issuing bank (the bank that issued the credit card to the Internet shopping using that card) deducts the interchange fee from the amount it pays back to the acquiring bank that handles a credit or debit card transaction for a merchant. For more description on this, refer to Accepting Credit Cards online.

The acquiring bank then pays the merchant the amount of the transaction minus both the interchange fee and any additional fees that it charges for its own services which is usually much smaller fee for the acquiring bank.

While credit card purchasing in the United States currently exceeds $1.5 trillion annually, the number of banks issuing credit cards have been reduced dramatically due to takeovers, acquisitions and mergers.

The top five credit card issuing banks now control more than 90% of all credit card accounts and earn more than $40 billion annually from interchange fees, an increase of 90% since 2001.

The Interchange fees are set by the credit card associations such as VISA or MasterCard, and are by far the largest component of the various fees that banks deduct from merchants' credit card sales, representing about 80% of these fees.

These fees are also the subject of several ongoing lawsuits in the United States.

Interchange fees are based on the credit card brand, the type of credit or debit card, the type and size of the accepting merchant, and the type of transaction (e.g. Internet, Retail, MOTO, Hotel, Airline, etc.).

To make the rates schedules even more complex, 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 other countries the Interchange fees are substantially lower.

0.44% - Australia
0.80% - EU Cross Border
0.80% - Denmark
0.80% - UK
0.92% - Italy
0.90% - Sweden
0.95% - New Zealand
1.05% - Honk Kong
1.00% - Brazil
1.15% - Singapore
1.17% - Malaysia
1.38% - Belgium
1.60% - Greece
2.00% - United States
0.44% - Australia
0.44% - Australia
0.44% - Australia

Interchange fees are indeed a controversial issue and have been the subject of regulatory and antitrust investigations by the U.S. Federal government. Only very large merchants have the leverage to negotiate these fees and in some cases the Interchange-driven prices exceed the small retailers' profit margin.

Merchant Account Discount Rate

Visa and Master card merchant account discount rates should be TOTAL of 2.1%. This is broken into Interchange fee (1.9%) for the issuing bank and the Plus fee (0.2) for the acquiring bank. What seems to unfair to me is the the issuing bank really doesn't do anything other than issue a credit card. It is the Acquiring bank that takes on all the risk associated to the transaction on behalf of the merchant and it only ends up with 0.2% of the sale.

There are currently investigations being performed by various agencies to establish validity of merchants' accusations that the Interchange fees represent “price fixing” by VISA and MasterCard associations like a “cartel” .

Consumer that pay with cash are also uneasy about this since the merchant costs increase due to the Interchange fees and hence customers who pay with cash or checks end up subsidizing purchases by card users.

Also a very important point is the the Interchange fees are way too high in the United States compared to most Western and industrialized nations elsewhere in the world. There is no justification for this difference especially since the U.S. is the pioneer of the VISA and MasterCard Associations and card technology).

It is also quite unfair and against fairness in market economy when few merchants like Wal-Mart can negotiate an exception to the Interchange fees but smaller businesses cannot.

Finally, the rising fees association to the Interchange pricing structure is by no means reasonable as the every cost of payment processing, networking, infrastructure developing, borrowing, fraud prevention, chargebacks, and banking costs have declined consistently over the last 10 years.

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