The debate over interchange fees
Interchange fees on debit card transactions are the fees merchants pay to card-issuing financial institutions. The interchange fee depends on various factors, including the type of transaction (card present or card not present), the industry of the business and the region where the transaction occurs. These fees are set by debit card networks and are typically a fixed amount, variable amount or a combination of both. The intention behind interchange fees is to cover the issuing financial institution’s costs and risks associated with debit card transactions and is a major decision for merchants when deciding how to route a transaction. It’s also at the center of a long-standing debate between merchants and card issuers for merchants who want to route to the lowest-cost network.
Routing choice and network costs
Merchants have long pushed for lower interchange fees because these fees are an expense to them. They argue that lower fees would improve their margins and could lead to better pricing for consumers. It’s why the fees and costs associated with the various debit networks are a primary consideration for merchants when routing a debit card transaction. The goal for most merchants, and their payment processor, is to minimize costs by routing transactions through the most cost-effective network available. Networks with lower interchange fees and processing charges are often preferred, as they can result in significant cost savings, especially for businesses with high transaction volumes.
The impact of volume deals
Networks with market dominance and pricing power have significant leverage in determining the interchange fees. These networks leverage their size by offering volume discounts as an incentive to large merchants to route transactions through their networks. This high-volume, low-margin approach potentially limits competition for smaller networks, while setting a new standard of a lower fee structure other networks must compete with.
Choosing the right debit card network
What can financial institutions do to maximize their interchange income? The first step is to partner with a second network that puts them first. Interchange incomes and expenses can vary greatly between the global and U.S. debit networks. Unlike the other networks that charge higher issuer fees and then reduce the interchange a financial institution can receive, SHAZAM considers all variables around rates and fees to increase a financial institution’s net income.
Additionally, it’s important financial institutions understand how and where their customers are using their cards. While a financial institution doesn’t have direct influence on the interchange paid, they can reduce expenses in other ways by better understanding usage. Which type of transaction pays higher interchange — dual message or single message? Which type of transaction is more secure — potentially reducing fraud loss? SHAZAM is dedicated to helping financial institutions better understand the interchange landscape. Contact me to learn more about how SHAZAM helps financial institutions earn more interchange income.
Matt Morrow
mmorrow@Shazam.net
Regional Director of Sales
SHAZAM
