In February Amazon and Visa announced that they had resolved their dispute over credit card fees following a threat by the ecommerce giant to stop accepting Visa credit cards in the UK due the “continued high cost of payments”. Amazon’s size may enable it to negotiate better fees, but smaller merchants don’t have this sway, with a group of US merchants recently writing to regulators over the same issue.
However, behind the headlines, interchange fees, the cause of these costs, remain complex, and poorly understood. Here’s a brief overview of what they are and why they matter.
What are interchange fees?
The interchange fee is a component of the overall Merchant Service Charge, which merchants pay to their (acquiring) banks for card services and technology provided for processing transactions. The Merchant Service Charge (paid by a merchant to their acquiring bank) includes three components:
- Interchange fees (go to the issuing bank)
- Scheme fees / Network fees (go to the card networks)
- Other fees (go to the acquiring bank)
Interchange fees make up the largest component of the Merchant Service Charge.
Despite banks being the recipient of interchange fees, these fees are charged and collected by card networks such as Visa and Mastercard on behalf of banks. Card networks are also the ones determining the interchange fees.
Theoretically, merchants can negotiate these costs with their acquiring banks, while similarly issuing (cardholder) and acquiring (merchant) banks can negotiate bilateral fees. However in reality, while a massive entity such as Amazon can negotiate, this is impractical for most, particularly smaller merchants with less bargaining power.
According to the European Commission, interchange fees comprise 70% of the total price charged by payment service providers (PSPs) to merchants. Given this sizeable proportion, both small and large retailers have a lot at stake and, where possible, will seek to negotiate better terms. But unless they look to take collective action, smaller players will inevitably have less power to push down fees.