WHAT IS INTERCHANGE?
Retailers that choose to accept electronic payments — such as credit and debit cards, or mobile payments — do so for the opportunity for higher sales, a larger customer base, reduced risk associated with handling cash, reduced bounced checks, and guaranteed payment. For this valuable service, retailers pay a small fee to their bank or card processor, known as the “Merchant Discount Fee” (MDF), which is a blended rate inclusive of amounts that go to all parties of the electronic payments network
Interchange revenue covers customer service, system operations, protection of customer data, card production costs, and much more.
Interchange is the portion of that cost that the retailer’s bank pays to the cardholder’s bank or credit union. Interchange revenue is critical to running a card program, partially reimbursing banks and credit unions that issue the cards for the float on the funds, the risk of nonpayment or fraud, and other services that have made these products so valuable and popular among consumers and retailers alike.
For example, the MDF that merchants pay on a $50 credit purchase averages around $1 — and less for debit.
- The “interchange” portion of this fee would be about 82 cents for a $50 credit card transaction. Because of the Durbin amendment, as of October 1, 2011, debit interchange is capped for transactions (21 cents, plus 5 basis points (.05%), plus an additional penny for issuers that qualify for fraud) for debit cards issued by banks and credit unions with $10 billion in assets or more. For smaller banks and credit unions, debit interchange remains at about 0.8% to 1.1% of the transaction.
What Costs Does Interchange Cover?
Interchange revenue covers a wide variety of costs for card-issuing banks and credit unions, including customer service, system efficiency and convenience, the costs of online transactions, protection of customer data, and card production costs, among many others.
In the moment that the card is run for payment, the transaction is instantaneously authorized, cleared and settled — but to make that possible, there are operational costs for software, hardware, equipment, labor, network processing fees, and transaction monitoring. These costs as well as billing and collection, data processing, fraud prevention, card replacement, and customer inquiries and customer service are incurred by card issuers. They also bear the substantial majority of the risk for fraud and insufficient funds.
The safe, instantaneous and secure system we enjoy today took decades and billions of dollars in investment to build. The maintenance and system operations require constant — and expensive — regular upgrades to maintain the latest in technology and cyber-security.