Examining interchange fees' influence on merchants
In the ever-evolving world of digital payments, one topic continues to spark debate: interchange fees. These fees, paid by merchants' payment service providers (PSPs) to card-issuing banks each time a customer uses a credit or debit card, have been a contentious issue for many years.
Historically, interchange fees were established to compensate issuing banks for the risks and costs associated with providing cards to consumers, and to incentivize card use. Over time, as cashless transactions have become more common, reaching 50-70% of merchant turnover or more, the fees have grown significantly, rising from about 0.8-1.8% of transaction value in the early 2000s to roughly 1.5-2.3% more recently [1].
This growth has led merchants to push back, putting pressure on card networks like Visa and Mastercard to reduce these fees or increase transparency [1][4]. The complexity of interchange fees has also increased, with the number of interchange fee categories nearly doubling since 2020, leading to calls for simplification and standardization of fee schedules [4].
Governments and regulators have taken notice, aiming to set cost-based benchmarks and revisit what costs interchange fees should cover. For example, the Reserve Bank of Australia (RBA) adopted such a benchmark in 2002 and recently questioned whether merchants should continue funding interest-free periods via interchange fees—a practice card networks defend by citing increased card use and consumer spending value [2].
The debate between merchants and card networks, such as Amazon and Visa, is a common source of tension. Merchants argue that interchange fees are excessively high, particularly foreign transaction fees, sometimes three times the domestic fees, and seek to negotiate or challenge these costs to reduce their overall payment processing expenses [2]. Visa contends that such fees have been relatively stable recently and that lower fees or caps could undermine incentives for card issuance and use, which benefit all parties in the payment ecosystem [5].
Recent trends include a move toward more transparent pricing models like Interchange++, which breaks down fees into interchange fees paid to issuers, scheme fees paid to networks, and markup fees retained by payment processors. This transparency can help merchants better understand and control costs [3].
Two types of interchange fees exist: bilateral and multilateral. Bilateral interchange rates are directly agreed between an issuing and an acquiring bank, while more common is multilateral interchange, where rates are agreed by multiple parties. It's important to note that the card schemes, like Mastercard and Visa, determine the rate of the interchange fee and charge and collect these fees on behalf of the banks [3].
The Merchant Service Charge is the money paid by a merchant to their acquiring bank for card services and processing technology. This charge, along with the interchange fee and the processing fee charged by the payment processor for processing the transaction, make up the bulk of the charge incurred by merchants [3].
In the UK, a class action lawsuit against Mastercard and Visa related to interchange fees has been given the go-ahead to advance. Negotiating bilateral agreements is impractical for most merchants, especially small ones, making the standardised rates set by card schemes a crucial aspect of the payments industry [3].
As the payments industry continues to evolve, the debate over interchange fees will undoubtedly persist. The balance between encouraging card use, covering issuer costs, and controlling merchant payment expenses will remain a key concern for all parties involved.
Businesses in the financial sector, such as merchants and payment service providers (PSPs), are highly concerned about interchange fees in the digital payment realm. The complexity of these fees, which are paid by PSPs to card-issuing banks each time a customer uses a credit or debit card, has increased significantly over time due to the growth of cashless transactions and the variety of interchange fee categories. This complexity is a cause for concern, as it leads to calls for simplification and standardization of fee schedules. Moreover, the debate between merchants and card networks, including entities like Visa and Mastercard, continues to be a point of contention, with disagreements persisting around the perceived excessive nature of interchange fees, particularly foreign transaction fees.
