Credit Card Charges Higher than the Debit Card Charges | Interchange Fees

Interchange Fees

The interchange fee is paid to the issuing bank for the following:

• to compensate the financial institutions for benefits the merchant receives as part of a credit card transaction.
• according to MasterCard, they claim interchange fee to merchants for the costs associated with processing credit card transactions.
• Visa says the interchange fee is for the sacrificed interest by the issuers resulting from a cardholder’s debt repayment grace period.

Thus it can be taken as a reimbursement to the issuing banks for issuing the payment cards and services that they provide like seeing to the cardholders’ accounts and the whole process.

Thus, overall, this is a charge on the merchant’s bank, that has to be paid to the card-issuing associations for the services they provide, and a cover for fraud and bad debt costs and the risk involved in approving the payment done through the Credit Card and Debit Cards.

It is generally a percentage based fee plus a fixed amount being charged. There are various other types of fees that the Credit Card issuing association charges, one of them is the Interchange fee. The interchange fees are decided by these Card Network Association.

They need to decide a balanced fee because if the fee is too high the Merchants would avoid that Card Network usage and if it is too low then the issuers would be reluctant in managing the Card Account and processes.

How is this Fee decided?

On the basis of a few aspects prevailing in the market like costs of moving money, the time value of money in terms of current interest rates, and the relative risk involved, the fee rates need to be kept on changing.

This also depends on all the parties involved in charging the fee, for example: if the credit card networks are increasing the fee percentage, the payment gateway also needs to increase the same which affects the merchant at the end. The major Card Brands VISA and Mastercard change twice annually, in April and October.

The per transaction interchange fee might differ depending on the type and the mode of the transaction:

• The card-not-present interchange per transaction fee would be more than the Card Present Transaction
• Debit Cards with a PIN generally have a lower interchange rate than the credit cards due to the risk involved in it. That is lesser the risk lower the fee.
• The types of merchants codes are categorised, as per that the fees differ. This is called the merchant category code.
• Also, it depends on the cardholder, if he is an individual, business, municipal agency, etc.
• The type of Credit Card or Debit Card would decide the rate. The Premium Credit Card would have a high rate, next would be the Standard Credit Card lower than that, the signature Debit Card comes next and then at the lowest the PIN Debit Cards.
• Depending on the Card Rewards and the Speciality Offers the fee might depend.

Transaction Process including Interchange Fee

• The issuer pays the acquirer the transaction amount with the interchange fee deducted.
• The acquirer pays this balance amount to the merchant after deducting other applicable costs (like the assessment fee for the network and the processing fee for the bank).

The Debit Card Fees are Lower than the Credit Card Fees — Why?

The risk and the parties involved in the debit card transactions are very few. Especially if the Debit Card is PIN protected. Also, with the debit card, mostly the payment would be done only if the balance exists in the bank otherwise the payment would be declined and not processed further. As discussed earlier, it has got fees associated with it but they are associated with various events like a fee on the Regeneration of debit card, an annual maintenance fee, replacement of debit card fees, replacement of lost/stolen debit card fee, charge on the regeneration of debit card PIN fee, etc. All these charges vary from bank to bank.

On the contrary, the credit card transaction works differently. Like a debit card, it has various fees like joining fees, annual fees, late payment fees, over-limit fees and bounced cheque. Apart from these, it also has the Interest which is charged on the outstanding amount if it hasn’t been paid by the due date. This interest would be applicable to the outstanding amount as well as the further payments made on that card. Apart from that, the difference between the interchange fee which is higher for the credit card than the debit card is already explained above.