Credit Card Interchange

Credit card interchange is the term for the process through which different processes involving credit cards (i.e. management, processing, settlement of transactions, clearance, assessment, distribution of fees, and collection) are distributed to different parties or companies.

This process basically allows distribution of labor to avoid inconvenience. With this set-up, however, a transaction fee called the credit card interchange fee, will be charged to the cardholder. In plain English, this is the fee that the customer’s bank (bank that issued the credit card) asks from the merchant’s bank (acquiring bank) when the merchant accepts cards from Visa and MasterCard. The credit card interchange fee is deducted by the customer’s bank from the total amount that is charged to the credit card. Then, the merchant’s bank pays the merchant the total amount of transaction minus the credit card interchange fee. An additional fee known as the add-on rate or discount rate is also added to the fee taken from the total amount.

A credit card interchange fee is also required when a withdrawal is made at an ATM of another bank. This time, it is the customer’s bank that pays the fee to the acquiring bank for ATM service and maintenance.

The exact structure of how the credit card interchange fee is determined is very complex since a lot of factors including the brand, type, and location of the card will be considered, not including the type of transaction and the size and type of the merchant. In the United States, credit card interchange fees usually take up to 2% of the total amount of the purchase swiped on the credit card.

Who sets credit card interchange fees? Credit card associations are considered to be the receiving end of the credit card interchange process. Since they handle all the services that make a credit card transaction hassle-free to the cardholder, they take up to 90% of the fees that cardholders are paying every month. These credit card associations consist of institutions that run MasterCard and Visa. It is said that these companies earn billions of dollars from credit card interchange fees alone. The latest number is $30.7 billion in 2005.

The controversy of the credit card interchange fee is their effect on small retailers since they always seem to increase within the previous years. A lot of merchant groups have raised awareness on the increasing rate of interchange fees despite technology getting less expensive. Though most credit card companies insist that lowering credit card interchange fees will result in higher costs for cardholders and less chances for them to introduce rewards credit cards, they have restructured their method of setting interchange fees, hopefully, for the better.


Source: Credit Cards For People With Bad Credit Rating

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