What is interchange?
The term ‘interchange’ usually refers to a location where two things meet. In the credit card business, however, it is a term used to describe a fee paid between banks for the authorization of card transactions. It is mostly the fee the merchant’s bank pays to the customer’s bank.
With regards to a credit card transaction, the bank that produces the card in a transaction will subtract the interchange fee from what it pays the merchant’s bank handling credit or debit card transactions for that merchant. Then, the merchant’s bank pays the merchant the amount of the transaction minus the interchange fee.
It is a fact that banks do not make a substantial amount of money from interest charges and late fees from those valued customers who pay in full each month. Instead, they earn a profit on the interchange fee charged to the merchants.
It’s important to remember that merchants pay ‘merchant discounts’ to their financial institution, not interchange fees. There is a very distinct difference. Visa, for example, uses interchange reimbursement fees as transfer fees between financial institutions for stability and growth.
What about the ATM?
When it comes to ATM’s however, the card issuing bank pays the fee to the acquiring bank for maintenance of the machine.
Do they vary?
Indeed. In the US, the average fee is approximately two percent of the transaction value. In the last few years, however, these interchange fees have become a subject of controversy because they have an intricate pricing configuration. In fact, on June 8th, 2011, the announcement was made that the amendment to delay implementation of the Durbin Amendment that would cap these fees fell six short of the sixty needed to break a filibuster.
Then on June 29th, Wednesday, a final ruling was established by the Federal Reserve creating a sensible and proportional criteria for a debit interchange fee. Issuers are required to include two debit networks (non-affiliated). This is for the purpose of routing. Details are available at: Durbin Amendment.