Exploring interchange fees' influence on merchants' profits
The payment card industry has been grappling with the issue of interchange fees since the 1970s. Originally introduced by Bank of America to cover processing costs and credit risks, these fees are charged by the card-issuing bank to the merchant's payment service provider [1].
Interchange fees typically range between 1% and 3% of the transaction value. However, for foreign cards, fees can be significantly higher due to the increased risks and costs associated with cross-border transactions [2]. These fees represent a substantial revenue source for issuing banks, yet they are a contentious issue for merchants who argue that they are too high and not always justified [2].
One of the most high-profile disputes regarding interchange fees involves Amazon and Visa. While specific details about this dispute are not readily available, it has been reported that Amazon has pushed back on Visa’s interchange fees, seeking to limit cost increases and occasionally restricting Visa transactions to negotiate lower costs [1][2]. This friction underscores broader tensions in the payments industry where merchants aim for lower interchange fees to reduce costs, while card networks and issuing banks rely heavily on these fees as revenue [1][2].
In the U.S., federal regulators have attempted to cap debit card interchange fees, for example, to 21 cents plus 0.05% per transaction. However, these attempts have faced judicial challenges, reflecting ongoing conflict over interchange fee regulation and market power [4][5].
Merchants, like Amazon, are taking action to challenge what they see as prohibitively high interchange fees. The card schemes, such as Mastercard and Visa, charge and collect these fees on behalf of the banks [1]. It is important to note that while interchange fees are not directly paid by consumers, they can often be passed on through things such as FX margins [2].
The interchange fee controversy is a complex interplay between the payment networks’ fee structures, merchant cost burdens, and legal frameworks. As the industry continues to evolve, it will be interesting to see how these dynamics unfold in the future.
[1] European Commission (2021). Interchange fees in the EU. Available at: https://ec.europa.eu/info/business-economy-euro/banking-and-finance/payment-and-transfers/interchange-fees_en
[2] Stripe (2021). Understanding interchange fees. Available at: https://stripe.com/en-gb/payments/fees/interchange-fees
[4] Federal Reserve System (2021). Durbin Amendment. Available at: https://www.federalreserve.gov/supervisionreg/durbin-amendment.htm
[5] National Retail Federation (2021). Merchants Sue Over Swipe Fees. Available at: https://nrf.com/media-center/press-releases/merchants-sue-over-swipe-fees
Businesses, particularly merchants like Amazon, are fighting against what they perceive as excessively high interchange fees, and technology plays a crucial role in this battle. These fees, charged by card networks such as Mastercard and Visa on behalf of issuing banks, can significantly impact the revenue of merchants, with some arguing that they are not always justified.
