How Interchange Fees Work

How Interchange Fees Work

By Samuel Phineas Upham

When customers want to swipe a debit or credit card to complete a purchase, the banks need to exchange funds in order to pay for that transaction. This sum is typically lumped in with the item price the customer pays, but the money is definitely there. The exchange is known as an “interchange fee” and it’s become an important aspect of our digital economy.

In a typical retail transaction, the customer has a debit card she wants to swipe to deduct money from her account and complete the transaction. The bank that handles the customer’s card deducts a certain amount from the money it transfers to the bank that handles the company’s merchant account. The merchant is paid after the bank deducts the transaction fee, and an additional fee known as a “pass thru” fee.

Even ATM withdrawals are governed by a fee structure, which the bank that issued the card pays the bank that owns the ATM machine. Your transactions are never fee free, you just don’t pay the fee upfront.

Fees are typically set by the credit card owners, and can represent some of the largest in fees that a business owner has to pay over the course of owning his business.

For most American business owners, that fee is going to cap out somewhere around 2%.

However, it’s been revealed recently that larger corporations like Wal Mart are able to negotiate their own fees. As a result, interchange fees have become controversial and the target of potential legislation meant to normalize pricing.

About the Author: Samuel Phineas Upham is an investor at a family office/ hedgefund, where he focuses on special situation illiquid investing. Before this position, Phin Upham was working at Morgan Stanley in the Media and Telecom group. You may contact Phin on his Samuel Phineas Upham website or Facebook.

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