What are interchange fees?
Interchange fees are fees paid by the merchant’s bank (the acquirer) to the customer’s bank (the issuer) for each card transaction. The purpose of these fees is to cover the costs and risks of the issuers associated with their card issuing programs as well as to incentivize usage of a specific card network.How interchange fees are determined?
Interchange rates are established by the card networks: Visa, Masterсard, Discover etc. These rates are not static - Visa
usually update them twice a year , other networks - annually. The calculation of interchange fees is rather complex and depends on various factors, such as:
- Card brand
- Card type
- Region of the issuer, acquirer and the merchant
- Merchant's business type
- Transaction type
- Identity of the cardholder (individual or legal entity)
- Security protocol used
The volume of transactions of a particular issuer, acquirer or a merchant is also taken into regard. Big merchants like Amazon or Walmart, for example, negotiate lower interchange fees which vary based on what is being sold, where, how and to whom. Furthermore, it should be mentioned that there are dozens of "smaller" fees that make up the overall interchange commission for each particular transaction, therefore transparency is often an issue.Regulated and unregulated interchange
In some countries, card networks can solely determine the size of the interchange fee. In other countries, the interchange may be regulated by the Central Banks or other authorities. In Europe, for example, The Interchange Fee Regulation
caps interchange fees on EEA domestic and EEA cross-border consumer debit and credit transactions and the Schemes set interchange fees on these transactions in compliance with the Interchange Fee Regulation. Similar approach is also applied in Australia
. Where not regulated, the Schemes set interchange rates basing on their own judgement.High interchange fees - good or bad?
Generally, it may be said that higher interchange fees lead to higher revenues for the issuing banks. Lower interchange fees, in their turn, contribute to lower prices for the merchants and ultimately the consumers. At the same time, there are several factors that should also be considered in this regard:
IC++ pricing VS blended pricing
- The higher the interchange fees are, the more space is created for the development of alternative payment methods, which may be cheaper
- If the issuing banks do not cover the costs of their card programs with interchange fees, the quality of their card offering may become lower
Interchange++ is a type of pricing, which breaks down the acquiring fees of a merchant on three components:
- The Interchange fee that goes to the issuing bank
- The scheme fee that goes to the Schemes (first +)
- The acquirer fee (second +)
Although this approach is more transparent for the merchants, its calculation and accounting is way more complicated as multiple factors should be taken into account and in many cases the merchant is unable to know the price for one or another transaction before it actually takes place. In order to resolve this problem, many acquirers use blended pricing (for example, 2.9% + fixed fee for each transaction). Generally, it may be said that blended pricing is more convenient for the startups and SMBs, while IC++ pricing works better for large businesses and corporations, which can use various mechanisms to save costs and make wider and smarter data-driven decisions when accepting payments.