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Credit Card Applications » News » Other » Basics facts about the interchange fees

Basics facts about the interchange fees

November 04, 2010 | Updated on November 04, 2010
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The content is accurate at the time of publication and is subject to change.

The fee paid by the retailers/merchants to the credit card company is called the interchange fees. Do they really impact the consumer?

A recent lawsuit filed by the Justice Department against Visa and MasterCard has been settled with the decree issued against both the card companies, whereby there are claims that merchants as well as the customers would benefit. But Discover as well as AmEx have stated that this would really mean nothing for the consumers or the retailers, although the decision has been hailed by most of them. AmEx and Discover have not been party to the lawsuit though. Merchants wanted to levy charges for usage of the card and that does not seem to have changed as per the fresh laws applicable.

The issue about the high fees seems to have sidelined the fact that in a two-sided market, where there are merchants and consumers and are both end users, the both supplement and complement each other. That is the basics of economic theory. They need each other in order to function and one cannot function without the other. For instance, all of them (banks, merchants, and consumers) are interdependent. The costs can be reallocated amongst the three and thus maximizing the value for all three.

AmEx CEO, Kenneth Chenault has stated that lowering of prices for the customers would lead to a decrease in competition. Although his views may seem self-serving, he seems to have a point. For instance, Australia brought about several changes with regard to the charges that merchants levied for card usage. Though cardholders there pay much more, what they receive in return is much less. In fact, there seems to be no proof of customers who use other alternatives, benefitting from any of this. There seems to be no change in the improvement of the overall economic situation as well.

The jubilation by the merchants with regard to the decree that has been passed may be short-lived. Hotels might lose at many levels if they are discouraged to use cards that come with rewards. If individuals opt for cheaper cards with no rewards, they tend to lose out on the points. Hotels have always preferred customers who use AmEx cards. Alternatively, if customers use other payment options such as cash, they might end up spending lesser and this in turn might affect retailers and merchants in the long run. AmEx could be the best source for marketing information that could be put to use by the hotel merchants.

Disclaimer: This editorial content is not provided or commissioned by the credit card issuer(s). Opinions expressed here are the author's alone, not those of the credit card issuer(s), and have not been reviewed, approved or otherwise endorsed by the credit card issuer(s). Reasonable efforts are made to present accurate information, however all information is presented without warranty. Consult a card's issuing bank for the terms & conditions.
All rates and fees, and other terms and conditions of the products mentioned in this article/post are actual as of the last update date but are subject to change. See the current products' Terms & Conditions on the issuing banks' websites.
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