Visa And MasterCard’s Role In The Interchange Fee Debacle

Interchange fees have been a hot topic among merchants for some time now. Although consumers are not aware of it, whenever they use credit or debit cards to pay for purchases, the merchants get charged interchange fees for it. Generally, the cost of these interchange fees are passed on to the consumers, even those who do not use credit cards

The amount of interchange fee a merchant has to pay the bank depends on what the credit processing network dictates. Credit processing networks are companies that handles the details of the transaction whenever a credit card holder slides his or her credit card at the checkout counter. The company takes care of processing the necessary virtual information so that the bank can verify the purchase for the merchant.

The major credit processing networks currently operating in the U.S. are Visa and MasterCard. These companies survive usually by collecting small fees which average at around $0.05 to $0.06 for every transaction. Although that may seem small, considering the number of credit card transactions that these companies handle in a day, that adds up to quite a lot. For example, Visa sees 40 billion transactions by the end of the financial year last June. Banks also pay these credit processing companies licensing fees which is based on volume.

For merchants, the biggest controversy is the large interchange fees that credit processing companies makes them pay. Generally, merchants have to pay interchange fees amounting to 1% to 3% of every credit card purchase that they accept. These fees are not taken into the payment network but are instead passed on to the bank of the credit card holder. Bank holders see this fees as compensation for their costs and as profits. More importantly, these fees also encourage credit card companies to issue more cards using their preferred payment processing company which goes back to that company as more profits.

Because of the relationship between banks and payment processing companies, it comes out that the higher the interchange fees the payment processing company dictates, the more attractive they are to banks. Since a lot of the profits that these payment processing companies see depend greatly on how many credit cards use their network, it is in their best interest to raise the interchange fees to as high as they can so that banks who use their networks see more profits and make them their preferred payment network.

The high interchange fees that merchants are seeing have resulted in many merchants raising lawsuits against the major payment processing companies. The Justice Department is also currently investigating payment networks to determine if the rules that they are imposing on merchants regarding what is termed as “various payment forms” are anticompetitive.

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