Both merchants and consumers gain value from being able to make transactions using debit and credit cards. These cards allow consumers to have immediate access to their savings and credit in order to make purchases, while merchants are able to quickly and easily verify payment for services and goods. Once a payment is initiated, the merchant’s bank sends the request across the network system to the consumer’s bank, the consumer’s bank then informs the card network whether to approve or decline the transaction and this information is transferred back to the merchant’s bank and ultimately to the merchant.
Interchange is composed of the debit and credit card processing services provided by the merchant’s bank, consumer’s bank and the card network. Every debit and credit card transaction then has an interchange fee attached to it based upon the type of risk associated with the transaction. Credit cards are considered more risky than debit cards, and verification by signature is considered more risky than verification by pin. Therefore, debit card transactions that are verified with a pin number have the lowest interchange fees associated with them, while credit cards verified with a signature have the higher fees.
The interchange fees are collected by withholding a small percentage of the purchase price from merchant accounts during the sales transaction. This means that merchants receive less than the total price of goods and are pressured to increase prices in order to recover lost revenue. On the other hand, consumers often receive points or cash back for using their cards, which acts as an incentive to increase card purchases. Advocacy groups, such as the Merchant Payment Coalition, started lobbying for regulation over interchange fees due to the increasing costs of accepting credit and debit cards.
In 2010, the Durbin Amendment was passed as part of the Dobb-Frank financial reform legislation. This amendment allowed the Federal Reserve to create rules dictating the payment structure of certain debit card transactions. For non-exempt financial institutions, those with total assets over $10 billion, debit card interchange fees are set at 21 cents plus 5 basis points of the total transaction, as well as an additional one cent for institutions that demonstrate compliance with new fraud detection and prevention standards. While the current rules only relate to debit card transactions, there is some expectation that there will eventually be rules capping credit card interchange fees as well.