interchange fees

What are interchange fees and do we need to worry about avoiding them on our debit cards?

In a world of increased spending on debit cards, are interchange fees something that people should care about?

Interchange fees aren't usually part of the fees you see outlined in your fee structure for your account, but can play a big role in determining the amount you pay for goods. Interchange fees are specific to the card payment industry and refer to the fees paid by merchants, banks and financial services for processing transactions between each other.

These fees are also known as swipe fees and many consumers think this fee has nothing to do with them. But, interchange fees can impact consumers if they are built into the price of goods.

Case study: Where interchange fees matter

manJack visits one of his favourite surf stores and makes a purchase for $10 using his Visa debit card issued to him by his bank, NAB. The debit card purchase is processed by a merchant terminal from Elavon. The surf store receives an amount of $8 in its business account at Commonwealth Bank of Australia.

In this simple case study, the interchange fees add up to $2. The fees were exchanged at the moment the purchase was made because money had to be allocated from Jack's account to the surf store's merchant account. But, first of all, the parties have different banks, and secondly, there were financial services like Visa (offers debit card service) and Elavon (offers merchant service) involved to make the transaction possible. The interchange fee or swipe fee of D$2 in this situation is therefore divided (in different measures) between the three parties that made the transaction possible, the two banks, Visa and Elavon.

Some banks offer the service that Elavon (merchant services) offers and could, therefore, take on the role of receiving the money from the purchase. In such a case, the surf store's bank would take a cut from the interchange fee instead of Elavon.

This illustration shows where interchange fees occur in debit or debit card transactions.

Why should you care about interchange fees?

Interchange fees can impact the prices consumers pay. If interchange fees continue to rise over time, despite innovation and advances in financial services, many merchants will increase the prices of goods and services that they sell as a way of coping with the fees. This means that people will pay even more for goods and services, on top of expected factors like inflation.

Do we avoid interchange fees or embrace them?

If interchange fees continue to grow, it may make sense for customers to avoid them by seeking out alternative payment methods. That said, as long as interchange fees are capped and professionally regulated, they can empower both merchants and consumers by enabling better transaction services. Merchant services that create systems for processing payments need to build revenue systems into their products. Well-constructed interchange fees will ensure merchant services companies can build better products and create better systems for consumers and retailers.

Shirley Liu

Shirley is finder.com.au's publisher for banking and investments. She is currently studying a Masters in Commerce (Finance) and is the author of hundreds of articles. She is passionate about helping Aussies make an informed decision, save money and find the best deal for their needs.

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