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Interchange Fees and What They Represent

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This article was last updated Oct 09, 2017, but some terms and conditions may have changed or are no longer available. For the most accurate and up to date information please consult the terms and conditions found on the issuer website.

The interchange fee is an important term you've probably heard a lot of chatter about in the past. What is that number? Why is it that just swiping a credit card and performing what seems to be a simple, electronic transaction charging you a fee? While it may seem like this all-electronic process should be free, there is actually a reason why you will pay those fees even if they are well hidden in your fee schedule.

What Are Interchange Fees

In the 1960's, companies began using a four-party payment system. The addition of this system allows virtually any bank to link its customers to any other bank. This makes making payments simple and seemingly instantaneous. Without it, it would be nearly impossible to make transactions take place as fast as they do.

The interchange fee is the fee for this benefit of instant purchase. This fee is paid by the merchant's bank to the bank of the cardholder. This fee is meant to compensate the merchant's bank for the risk and the costs it takes on because of the transaction.

The Facts and Myths Surrounding Interchange Fees

There has been a lot of talk about reducing or eliminating these fees. From a consumer's point of view, it makes sense that cutting them will in fact help you to save money. Nevertheless, it is important for consumers to understand how they work and what is really happening with them.

  • Myth – Consumers pay these fees. They do not. In fact, this fee is paid by the merchant's bank and while, ultimately, it is calculated into the service charges the lender offers, cutting them will not affect the consumer's actual payment.? It is thought that reducing or eliminating these fees will allows businesses to pass the savings to the consumer, which is extremely unlikely to happen.
  • Myth – They are not needed or necessary payments. According to MasterCard, these fees help to facilitate the global electronic payments system. Without them, it would be difficult to manage things like card security, guaranteed payment, speed of service and card acceptance on such a large scale.
  • Fact – They are not anything new. In fact, they have been in place for four decades. Since that time, they help to reduce costs and risks an improve rewards for all cardholders as well as issuing banks and merchants. Without these small fees, there would be increased risk and higher costs in the form of interest rates paid by all participating members.
  • Myth – There is no competition in the industry, thus rates continue to rise. What's true is that there is a great deal of competition in payment arenas which have kept the fees at the same rates for quite some time.

The Purpose of Interchange Fees

Interchange fees help to protect the ability to make purchases across the world. Without them, charges from individual banks would be higher or there would be no way to manage security of such payments. While some laws continue to challenge the process, these fees are somewhat of a built in necessity.

Yes, interchange fees can hurt the growth of a business because it's another 1% – 3% they lose in order to accept credit card payments but if a business is on the brink of bankruptcy because they cannot afford to pay these fees, it's probably not that sound of a business model in the first place.? Interchange fees are here to stay

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