Jeffrey Tassey is Chairman of the board of the Electronic Payments Coalition.
Since the start of the Covid-19 pandemic, the payments industry has worked tirelessly to meet the rising demand of electronic payment usage from consumers, while upholding the safety and security standards merchants and customers rely on.
Contactless payment systems allow for credit cards and debit cards, as well as other devices like smartphones, to use radio-frequency identification or near field communication to make secure payments. Typically, there is an integrated circuit chip that allows users to purchase products or services without requiring a signature or PIN number. The rise in contactless and mobile usage over the past few months has been significant. In fact, 46% of surveyed consumers said they have switched to contactless payment methods since the Covid-19 outbreak, according to a study conducted by Mastercard. Seventy-four percent of those consumers said they intend to continue using contactless payment methods even after the pandemic subsides.
As the payments industry, as well as those of us who support it, responds to this paradigm shift, the need for reliability and security has never been more important. Interchange fees — a transaction fee merchants pay when a customer uses a debit or credit card to make a purchase from their store — play a significant role in supporting the system that allows consumers to shop at their favorite retailers safely and seamlessly. Interchange is driven by the balance between the value merchants receive for accepting cards and the cost of products required to meet consumer expectations as cardholders.
While many merchants understand the value of electronic payments and accept these fees as a cost of doing business, some merchant trade associations argue that interchange is too high and that the system has practices that restrict competition. It’s true that many merchants have a challenging business model for which fees can be an issue, but they still derive significant net value from accepting electronic payments over other forms of payment as discussed below.
Interchange fees enable businesses to facilitate sales at a time when digital commerce is on the rise and many consumers are switching to contactless and mobile payments in face-to-face transactions. In addition, these fees are critical to securing the payments ecosystem, protecting both merchants and consumers from fraud. The following helps to shed light on the importance of interchange and how it helps merchants and consumers.
Interchange promotes financial inclusivity.
The advancement we’ve seen from electronic payments and alternative forms of e-commerce has provided retailers and consumers with substantial benefits. According to a 2018 study from IHL Group, retailers on average spend over 9% of the value of their cash transactions on counting, auditing and depositing cash, which outweighs the cost of interchange fees.
In addition to the advantages to retailers, Americans across all income levels enjoy the benefits that come with owning rewards cards. Most consumers own at least one credit card, including 63% of adults who earn less than $40,000 per year, which means a great number of Americans are on the receiving end of the benefits that come with using a credit card. Customers also like the conveniences that cards enable, such as faster checkout times.
Interchange is cost effective, not cost prohibitive.
The cost of businesses supporting electronic payments is actually lower than the cost of handling cash, helping to reduce a business’s overall costs. Additionally, studies have proven that consumers spend more money per transaction when using cards than when using cash. This trend ultimately drives higher sales for merchants.
There are many misconceptions about interchange fees for merchants, and this needs to be addressed: Merchants are only charged an interchange fee when a sale is made. Of the total revenue garnered from a given sale, the merchant keeps approximately 98% of revenue paid by a credit card transaction. The remaining 2%, which is known as the merchant discount fee, represents the price the merchant pays to accept credit cards and for services provided by the merchant’s bank.
These fees have remained remarkably stable for years, allowing businesses time to factor in an interchange fee as a percentage of their sales. Electronic payment organizations reinvest interchange revenue to develop technology that better protects consumers from identity theft and fraud.
Interchange fees help keep consumers safe.
A large portion of interchange fees is allocated to security technology, such as EMV chips, contactless cards and biometric authorization, that protects consumers and merchants from fraud. Card networks have also recently started using fintech technology, which provides enhanced security protections and streamlines the online payment process.
The remainder of interchange fees are used to cover a wide array of costs for card-issuing banks and credit unions, including customer service, system operations, card production costs and more. Financial institutions are largely responsible for the innovations that drive the future of payments, including contactless technology that customers and merchants have relied on during the Covid-19 pandemic. Without these funds, many complementary tools users have become accustomed to probably wouldn’t exist.
Overall, interchange fees offer a host of benefits for all parties involved. Consumers are granted reliable security and financial inclusivity, payment organizations are given the resources needed to continue the advancement of electronic payment methods, and merchants are provided with opportunities to grow their sales. It’s time to acknowledge that the advantages interchange fees bring to the table far outweigh their cost.