Here’s how the interchange fee system works:There is a complex series of steps involved with the processing of each card transaction, but for the purpose of simplicity they can be summarized as a four-party system: the cardholder (that’s you); the card-issuing bank (the bank that issued your card); the merchant (retailer); and the merchant’s bank. Let’s follow the steps for a $100 transaction:
- The cardholder provides debit or credit card information for the $100 purchase.
- The merchant passes this information to the merchant’s bank.
- The merchant’s bank processes the payment.
- The card-issuing bank obtains $100 from the cardholder’s (debit card or credit card) account.
- The card-issuing bank sends $98.50 to the merchant bank and keeps $1.50 as an interchange fee.
- The merchant bank adds $98 to the merchant’s account and keeps $.50 as a processing fee.
Why is this a big deal?On the banking side, these fees are considered a legitimate cost of doing business. They are providing a service that is crucial for making the card payments system work properly while also covering the cost of fraud protection. This seems to be a fair argument. However, much of the money collected from interchange fees goes directly to the banks’ profits, and some of it is used to buy the stuff people can get with their credit card points.
So if you follow the money more closely, the fees are used to reward (and entice!) the biggest credit card spenders—spending that is good for the banks, but not for consumers.