Most credit users think that they are aware of all of the fees and charges that they pay for the convenience of using credit cards for their purchases. After all, federal law requires that their credit card agreement disclose all costs of use. These charges and fees typically include an annual fee, finance charges and any charges for late or delinquent payments. However, these charges are only the direct charges to the cardholders. What about the charges that merchants pay for credit card use? This article will discuss one such charge that merchants have to pay banks for the privilege of accepting your credit card – the so-called “interchange fee”.
In the credit card industry, the interchange fee is the payment processing fee that the merchant’s bank pays to the cardholder’s bank, with a share paid to the card issuer (usually Visa or MasterCard). In 2007, the average interchange fee in the United States was approximately 1.8% of the purchase price, or $1.80 per $100 item. This means that the merchant accounts of the seller receives only $98.20 of the $100 purchase price, with the card issuer and cardholder’s bank receiving the rest.
Interchange fees have become controversial in the United States in recent years, with merchant associations challenging the high fee rates and alleging that the credit card companies were fixing the prices of payment processing interchange fees in violation of federal antitrust laws. As a result, Congress passed legislation to regulate interchange fees in October 2010, causing lower profits for banks that induced them to cancel many incentives for checking accounts. The debate over interchange fees received wide media attention, with many financial institutions lobbying against the change.
As a result, many consumers see the interchange fee as a hidden, indirect cost to credit card use. Some merchants, particularly those that sell high-value items where the interchange fee could be substantial, have capitalized on this perception by offering a dual pricing structure for their products with different prices for cash and credit purchases.
These merchants want to remain competitive by offering low prices, but can only do so in cash transactions where the interchange fee is not charged to merchant accounts. Business owners can use this heightened awareness of interchange fees to offer discounts to customers paying with cash or debit cards.