Merchants who accept card payments from customers are probably already familiar with the term "interchange." It’s one of the many fee categories appearing on their monthly credit card processing statements. Merchant services providers assess these to cover costs they're charged by issuing banks.
Yet business owners may feel like they are being taken advantage of and charged too much. This may be true. And while the credit card processing industry is largely unregulated, there are some regulations when it comes to interchange fees.
In 2010, the Durbin Amendment, which regulates interchange transaction fees associated with certain debit-card transactions, was passed.
As explained by the National Association of Purchasing Card Professionals (NAPCP), a membership-based professional association committed to advancing payment professionals, commercial card and industry practices, the Durbin Amendment became Public Law 111-203 in July 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Essentially “debit interchange regulation....it includes a variety of parameters and directs the Federal Reserve to be involved with establishing ‘reasonable’ rates,” states the group.
The Congressional Research Service, the public policy research arm of the U.S. Congress, expands on this definition, and its role, stating: “The Durbin Amendment allows the interchange fee to be adjusted for costs incurred by debit card issuers to prevent fraud. Debit card issuers with less than $10 billion in assets are exempt by statute from the regulation, which means that smaller financial institutions may receive a larger interchange fee than larger issuers.”
One year later, in June 2011, it continues, “the Federal Reserve issued a final rule implementing the Durbin Amendment by Regulation II, which includes a cap of 21 cents plus 0.05% of the transaction (and an additional 1 cent to account for fraud protection costs) on the interchange fee for large issuers.”
A 2015 study, however, indicates merchants were not seeing as much of a drop in costs as they were expecting. The reason? Because interchange rates are charged to credit card processing providers, and the providers can choose to either pass through interchange rates that they are charged to their merchant customers, or bundle them to make greater profits. It seems that many providers have used the Durbin Amendment as an opportunity to pay less for debit-related interchange costs while charging their customers more.
Interchange fee regulations are also present in other nations. The European Union developed legislation that came into effect at the end of 2015.
According to a March 2015 announcement by the European Commission, the European Parliament was going to vote on the Regulation on Interchange Fees for Card-Based Payment Transactions, which, it states, would “give more freedom of choice to retailers, enhance transparency for card transactions, and pave the way for innovative payment technologies to be rolled out.”
Similar to merchants in the United States, however, many European merchants aren’t experiencing many positive differences as a result of the new regulations. As discussed in a June 2017 article by the international nonprofit European Payments Council, which represents payment service providers on all European payment issues: “Most acquiring banks have not passed on the full interchange reduction to their small retailers. The largest merchants, however, have benefitted significantly from the reduced caps and lower costs.”
Transparency between a merchant services provider and its clients is key.
Even those who've established lifelong careers in this field must keep up with the changes. As a result, merchants may struggle to grasp the purpose behind each fee, why they vary, and how new regulations and standards affect their bills.
This is why working with a transparent, reliable merchant services provider can provide much-needed clarity. Rather than attempting to learn about the industry all on their own, business owners can consult a group of experts ready and willing to break down exactly what they’re paying for, and explain why they’re being charged that amount.
Find out some core qualities to look for in a merchant services company.