How Would One Define Interchange?
Does everyone really know all the true costs of owning and using a credit card when they sign up for one? All too many people skip the fine print and go for a card that sounds good on the surface, then get slammed with surprise charges later on. Even if a person does not want to read all the information with every card they apply for, they should at least know the different charges common with credit cards.
One great rule of thumb is to never get behind on payments and never skip a month’s payment. Define Interchange, and most of the costs are covered. Merchants must also be careful to read what their costs will be for accepting credit and debit cards.
So, What Is Interchange?
This is the money paid between banks when a credit card sale happens. Why should the customer care? This rate helps determine the ultimate cost to the cardholder. There are two banks involved in each credit card transaction, the acquiring bank and the card-issuing bank. Then, there is the credit card associations that are responsible for setting the transaction rates for processing cards. To Define Interchange one must explain all of these entities and their relationship to the card holder.
- Merchant Service Providers (MSP) are the acquiring banks that represent the merchant.There is always a set rate that the MSP pays the issuing bank, and that is what is referred to as the interchange rate. This amount is affected by the cost each bank incurs for the card. It is also affected by the special extras or benefits to the card holder such as rewards, airline miles, or points. Cards with fewer costs to recoup have lower interchange rates.
- The Card Issuing Bank represent the customer or the card holder. This is the bank that actually issued the credit card to the card holder using it. The issuing bank is the one getting paid the interchange fee.
- The third entity is the Credit Card Association. This includes entities such as Visa, Discover, or MasterCard. This entity sets the interchange rates or the rate for the transaction process.
How The Process Works
When a cardholder makes a purchase at a business or withdraws money from an ATM, the business has a cost that is ultimately passed on to the customer. The first way this works is when a cardholder pays a bill or makes a purchase. In this case, the business accepting the credit card pays a price. The merchant’s bank pays a fee to the customer’s bank or issuing bank. The merchant receives an amount that has had the interchange fee and any additional fees subtracted. The merchant is paying a price for the privilege of accepting credit cards as payments for their products.
When a cardholder uses the credit card for a cash withdrawal from an ATM, the interchange rate is reversed and the fees are paid to the acquiring bank by the card-issuing bank. This is for the maintenance of the machine.
The fees paid by merchants for accepting credit cards are mostly (70% to 90%) made up of the fees set by the credit card networks. Larger merchants such as Wal-Mart may negotiate fee prices, and this has led to controversy. Interchange fees have become the subject of antitrust and regulatory agency investigations and several in-process lawsuits in this country. The problem is that merchants feel they must accept credit cards even if they feel the fees are unfair and cut into their profit margins. In some countries, these fees are thought to be the subject of price fixing.
What Is The Origin Of The Interchange Fee?
Two theories about the origin of interchange fees are most common. The first assumption is that interchange fees were developed to encourage and maintain a good mix of issuers and acquirers to bank networks. The second theory, based on research, is that interchange fees came about as a way for banks to avoid usury and Truth-in-Lending laws.
How Do Banks Profit From Credit Card Use?
The issuing bank gets most of the interchange fee. They collect the fee from the amount collected each month from merchants when they submit their debit card and credit card transactions for payment though the acquiring banks. The banks don’t expect to make a lot of money from good credit customers who may pay the full balance every month or from late fees and interest charges. Instead, they make their money from these interchange fees charged to merchants accepting the cards. The interchange rates charged the merchant are hard to predict because many factors can affect them. But, basic fees card associations charge are in in two parts of approximately 0.12% of the monthly volume and $0.02 per transaction. Merchants must consider all of these fees as underlying costs of credit card transactions. Card holders must read the fine print for the credit card to learn what fees they will be charged.
To Define Interchange is to do research into the whole credit card process. For more information, go to associated websites.