Consumer spending using plastic as a mode of payment has been prevalent for many years.However, consumers have not yet fully understood what it takes to make this system work and all the behind-the-scenes work that happens to make these modes of payment work.In order to fully comprehend the interchange issue and its magnitude, one needs to fully understand the functioning of the card networks.
Debit cards and credit cards offer easy access to the money and is a convenient mode of payment for a consumer.The merchants also benefit due to these cards as their payment is guaranteed.Retailers will not have to worry about bounced checks or non-availability of funds.Instead the issuer manages the responsibility.Due to the widespread acceptance of debit and credit cards merchants have the opportunity to do business round the clock.
These are some of the key factors that have made credit cards and debit cards so popular. But all of these benefits come with a price.All these involve administrative costs, security measures, credit risks etc.Since retailers benefit a great deal from this arrangement while doing business, they are expected to pay the interchange fee, which is a portion of all these costs put together.
These interchange fees are literally the backbone of any financial institution and they are able to offer debit cards and credit cards due to this.In spite of this a rule has been implemented which is the Dodd-Frank Financial Regulatory Reform Package where there is a proposal to reduce the interchange fees by 70%.This would benefit the merchants, as they would be relieved of paying their fair share to support the debit card network.
While this provision of interchange fee was introduced, it was more of a pro-consumer initiative.The argument then, by the elected officials was that by lowering the interchange fee the consumer would also benefit from lower prices.However, some lawmakers are questioning this argument.In a joint letter addressed to the Federal Board some members of the Senate have expressed concern about the consumer benefits.They have stated that the amendment made a mention of how the retailers would be affected by the provision, but it does not mention how consumers would benefit from this. In fact, it has been predicted that the consumers might end up paying additional fees to the bank once the rule is implemented.