Credit Card Payments: If you are a credit card user, you have probably heard many financial terms and fees. But are you familiar with the term interchange fee? It is one of the most important and least-understood fees in the world of credit card transactions. Every time you purchase something using a credit card, an interchange fee is charged to the merchant’s bank account. The merchant’s bank (acquiring bank) deducts this fee from the amount owed to the merchant.
This fee, which is transferred between banks for credit card transactions, covers the costs associated with the cardholder’s bank (issuer)’s credit line and fraud prevention costs. Typically, the interchange fee is 2% of the transaction amount for credit card transactions. However, it is only 0.3% for debit cards. In most developed countries, such as the European Union and Australia, it ranges from 0.3% – 0.5%.
The interchange fee depends on several factors. These include the type of card (credit or debit), the type of merchant, the nature of the transaction (online or physical), and the region where the card is used. These fees help banks maintain the payment network, manage the risks associated with processing transactions, and also help them find the cost of rewards programs for customers.
Interchange fees are usually a percentage of the transaction amount. For example, if you buy something worth Rs 10,000 and the transaction’s interchange fee is 2%, the merchant will not receive the full amount. In this case, the merchant will receive Rs 9,800 after deducting Rs 200. This Rs 200 interchange fee is shared by the card issuing bank, the payment network, the merchant’s bank (acquiring bank), and the point of sale or payment gateway. The card-issuing bank receives the majority of this fee (70%-80%) because it provides credit for the transaction and takes the risk of collecting the money back from the customer.
Merchants pay this fee to their acquiring bank. This amount is then transferred to the card-issuing bank. Most merchants cover this fee themselves to encourage transactions. However, some merchants avoid accepting credit cards because the fees are lower for debit card payments. Some merchants also add this fee to the customer’s bill and pass it on.
Interchange fees can vary for each transaction. Card-issuing banks charge based on the merchant category code. Credit cards that offer more rewards have higher interchange fees than regular cards. These fees are often used to fund rewards programs. In addition, direct transactions (those made with a card) have lower interchange fees than online and mobile transactions. This is because there is a higher risk of fraud and data errors in online transactions.
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