Exploring Interchange Fees and Convenience Fees

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					         Exploring Interchange Fees and Convenience Fees

M          any businesses have concerns about the
           interchange and convenience fees
           associated with credit card payments,
and what initially scares small business owners
away from accepting credit cards. Without an
                                                       companies as operators of the phone lines and
                                                       networks over which calls are made. The use of
                                                       their networks comes with costs, which are paid
                                                       for in a complex way. Every time a customer pays
                                                       with plastic, the merchant pays a fee to the bank or
understanding of interchange fees, you will not        credit union that issued the card. The fee typically
know completely if your merchant account is            ranges between 1% to 3% of the purchase amount.
priced competitively. For example, picture yourself      Visa and MasterCard don't get a direct cut of this
walking into a bank to get a loan without having       fee. But they make money through separate deals
any concept of how interest rates are set or what      with the 16,000 or so banks and credit unions that
the prime rate is. How would you know if you are       issue cards.
being offered a good rate? You would not, and the      So on one side of the battle line, you have card
same is true for interchange and merchant accounts     issuers and payment processors such as Visa,
when it comes to processing credit cards, and the      MasterCard and American Express arguing that
fees associated with them.                             plastic is convenient for businesses and helps drive
                                                       up sales — a perk they should pay for. On the
What are interchange fees?                             other side are merchants who say they're paying
  Aside from being a source of headaches and           too much and should be allowed to steer customers
confusion for many business people, interchange        toward payment options that cost them less.
fees are the basis for credit card processing
expenses. Think of them as the wholesale prices        Who sets interchange fees?
charged to process various types of credit card          Interchange reimbursement fees are set by Visa
transactions. Before it is important to understand     and MasterCard, or more accurately, by their
what issuing and acquiring banks are and how they      stakeholders - both Visa and MasterCard are public
are crucial players in the credit card processing      companies. Not surprisingly, banks that issue
scenario.                                              credit cards and merchant accounts are the main
  First up is the issuing bank. As the name implies    stakeholders in both companies’; JPMorgan Chase
an issuing bank issues credit cards to consumers.      is currently the largest issuer.
Most people (consumers) send their payments each
month to their issuing bank. Bank of America and       What does the Justice Department's
JPMorgan Chase are examples of large issuing           settlement with Visa and MasterCard mean
banks.                                                 for merchants?
  Acquiring banks are on the side of the credit card     Recently, Visa and MasterCard agreed to let
transaction. Businesses open merchant accounts         merchants offer incentives for customers to use a
through acquiring banks, or companies backed by        card from a particular network. So, for example, a
acquiring banks. Because acquiring banks are           retailer might offer a discount to anyone who pays
where businesses go to open a merchant account,        with a Discover card, which tends to have lower
they are often referred to as merchant banks.          interchange fees. Merchants can also state
Merchant banks are also the institutions that          preferences for specific cards within a brand, such
deposit funds from credit card sales into a            as basic Visa cards versus rewards Visa cards,
merchant's business bank account.                      which tend to have higher interchange rates. The
  Contrary to popular belief, Visa and MasterCard      changes are part of a settlement Visa and
don not issue credit cards; they run the networks      MasterCard made with the Department of Justice
that process transactions made using those cards. If   over allegations the companies were trying to
it was the cell phone universe, think of the           insulate themselves from competition with their
policies. The Justice Department on Monday,             of their own home and avoid waiting in line. By
October 4, 2010 sued the three largest U.S. credit      charging a convenience fee on credit cards, you are
card companies for anticompetitive practices and        still giving your customers the option of avoiding
reached a proposed settlement with two of them,         the fee by selecting another payment method, such
MasterCard and Visa. Under the settlement, Visa         as mailing in a payment or making a payment in
and MasterCard agree not to prohibit merchants          person. Another way to pass on transaction fees is
from offering customers discounts or rebates for        to offer your customers different payment options.
using a particular kind of card. Visa and                 It is a violation of the merchant agreement with
MasterCard also must allow merchants to express         many credit card companies to charge a
preferences for the use of low-cost card within a       "convenience fee" or any other surcharge because
network or other form of payment.                       the customer selected this method of payment. Any
  American Express plans to fight the federal suit.     retailer found violating these rules may pay heavy
Note that retailers can already state a preference      fines or have their credit account suspended or
for debit card purchases, which come with lower         terminated. For example, VisaUSA, Rules for
interchange fees of about 1%, versus an average of      Merchants, Page 10: "Always treat Visa
1.6% for credit cards. So on a $10 purchase, 10         transactions like any other transaction; that is, you
cents would go to the card issuer with a debit card     may not impose any surcharge on a Visa
payment. With a credit card payment, 16 cents           transaction."
would go to the card issuer.                            Regardless, in the same way cardholders pay
This is why merchants prefer debit cards over           interest rates and annual fees and cannot defer card
credit cards.                                           use fees to the merchants with which they transact
                                                        business, merchants pay interchange fees that
Does this mean merchants will stop                      cannot be passed on directly to individual
accepting credit cards, or maybe rewards                consumers.
cards,      because        they      have     higher    _________________________________________
interchange fees?
  No. Visa and MasterCard can still require             This article prepared by Samuel L. Papas and Katrina
merchants that use their networks to accept all their   Samoylov.
branded cards. It's just that retailers can now offer
incentives for lower-cost cards.
  Merchants already have the right to refuse
acceptance of cards from an entire payment
network, of course. American Express and
Discover for example, aren't as widely accepted as
Visa and MasterCard. But Visa and MasterCard
are so universal that merchants generally agree to
these companies' terms and conditions relating to
credit cards.

What are different ways to pass on
transaction fees for accepting credit cards
to customers?
  One way to pass on a large part of your
transaction fees to the customers is by charging a
“convenience fee”. You could only allow credit
card users to use their credit cards when there is a
situation in which cash or checks cannot be used,
such as payment via telephone or online.
Customers paying with credit cards are receiving a
benefit in that they can pay from the convenience