Understanding Interchange
Interchange fees
Interchange fees are at the heart of the UK card payment market - they are a way of balancing costs and optimising the system by encouraging as many retailers, consumers and banks as possible to participate.
What are interchange fees?
Interchange fees are paid between banks when consumers make a payment using a credit or debit card.
They are a way of correcting the imbalance in costs incurred by each party in a four-party card payment system such as MasterCard or Visa in order to optimise the network to the benefit of all.
With 142 million credit and debit cards in issue in the UK compared to around 1.1 million point-of-sale terminals, being part of a payment scheme is typically more expensive for card issuing banks than for banks providing services to retailers.
For every transaction a small payment is made by the retailer’s bank (the merchant acquirer) to the consumer’s bank (the card issuer) to compensate the latter for their higher costs. The exact fee paid between banks depends on the type of transaction being conducted.
Four-party card payment models have served the UK economy well, helping to promote a strong, innovative and competitive industry and encouraging as many merchants, consumers and banks to as possible to participate.
What does interchange pay for?
Being part of a card payment scheme is typically more expensive for card issuing banks than for banks providing services to retailers. Views on the costs that interchange fees cover can be subtly different between card schemes and between national markets but such fees tend to cover the following cost categories:
· Funding the interest-free period (the period between when a cardholder spends on their account and when they pay off their balance);
· The payment guarantee covering both fraud and credit losses (given that the retailer receives their monies from their bank long before the cardholder has to pay their bank);
· Fraud prevention;
· Processing costs; and
· Innovation
More information on the regulation of interchange fees
