Merchants large and small have fought against the cost of accepting credit cards for decades. There have been numerous legal battles between retailers of every size and the card brands or acquirers, all over merchant fees and interchange. Merchants of all shapes and sizes constantly work to lower their processing costs and return margin back to their businesses. Large retailers like Target, Walmart and Costco have all waged this battle on multiple fronts.

Today were going to talk about the largest expense for accepting credit cards, interchange. Interchange is generally charged and dictated by card brands such as Visa, MasterCard, Discover and American Express with revenues going back to the card holders issuing bank.

 

Avoiding the Card Brands

Retailers route consumer cards through their preferred(generally least expensive) debit networks. This allows retailers to negotiate with the debit networks directly, prompting  consumers for their PIN number as an alternative to their signature. Ever since the Durbin Amendment, card issuers must support more than one debit network, giving retailers multiple routing options. This transaction path has only been traditionally available for card-present transactions. The rise of “PINless debit” allows for debit cards to be used for online purchases, avoiding core interchange charges for eCommerce transactions.  Acquirers can also participate in the value chain; routing to preferred networks where merchants are often indifferent, unaware or unable, to access routing technology.

 

Interchange Breaks

Large merchants solicit the card brands directly for pricing breaks. Through lobbying, lawsuits and sometimes boycotts (See the Kroger Boycott) merchants with larger processing volumes are given pricing discounts. Merchants with large volumes, “Threshold Retailers” (See chart below)   generally employ most, if not all, of these strategies to limit their costs.

 

Interchange Rebates

The largest issuers often give discounts to enterprise merchants to entice them to accept and even promote their cards. Some companies are competing for both the issuing card holders and merchants services like CapitalOne Merchant Services, Wells Fargo Merchant Services and Bank of America Merchant Services. Large RFPs for “Threshold Merchants” can often include issuer rebates. American Express has long supported separate interchange costs for their enterprise customers.

Will it Change?

European merchants enjoy a capped interchange rate .30%, roughly 1/5 of what the average US merchant pays. Even with their lower interchange they are still able to drive and lead merchant innovation for EMV, 3D Secure and Contactless payments. I believe it will only be a matter of time before the US landscape will more closely reflect the European regulatory environment given the size and scope of the pressure exerted by US retailers.