Peter romanofsky

Interchange fee is a term used in the payment card industry to describe a fee paid between banks for the acceptance of card based transactions. Usually it is a fee that a merchant's bank (the "acquiring bank") pays a customer's bank (the "issuing bank"); however there are instances where the interchange fee is paid from the issuer to acquirer, often called reverse interchange.

In a credit card or debit card transaction, the card-issuing bank in a payment transaction deducts the interchange fee from the amount it pays the acquiring bank that handles a credit or debit card transaction for a merchant. The acquiring bank then pays the merchant the amount of the transaction minus both the interchange fee and an additional, usually smaller, fee for the acquiring bank or independent sales organization (ISO), which is often referred to as a discount rate, an add-on rate, or passthru. For cash withdrawal transactions at ATMs, however, the fees are paid by the card-issuing bank to the acquiring bank (for the maintenance of the machine).

These fees are set by the credit card networks, and are the largest component of the various fees that most merchants pay for the privilege of accepting credit cards, representing 70% to 90% of these fees by some estimates, although larger merchants typically pay less as a percentage. Interchange fees have a complex pricing structure, which is based on the card brand, regions or jurisdictions, the type of credit or debit card, the type and size of the accepting merchant, and the type of transaction (e.g. online, in-store, phone order, whether the card is present for the transaction, etc.). Further complicating the rate schedules, interchange fees are typically a flat fee plus a percentage of the total purchase price (including taxes). In the United States, the fee averages approximately 2% of transaction value.

In recent years, interchange fees have become a controversial issue, the subject of regulatory and antitrust investigations. Many large merchants such as Wal-Mart have the ability to negotiate fee prices, and while some merchants prefer cash or PIN-based debit cards, most believe they cannot realistically refuse to accept the major card network-branded cards. This holds true even when their interchange-driven fees exceed their profit margins. Some countries, such as Australia, have established significantly lower interchange fees, although according to a U.S. Government Accountability study, the savings enjoyed by merchants were not passed along to consumers. The fees are also the subject of several ongoing lawsuits in the United States.

Federal Reserve Rule

The rule that the Federal Reserve issued went into effect on October 1, 2011 and capped the interchange rate paid to non-exempt card issuers at 0.05 percent plus twenty-one cents. The rule also allowed these non-exempt card issuers to earn an additional one-cent fraud prevention adjustment for implementation of fraud prevention policies

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What is Basis Points? (& interchange)

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What are 'Basis Point (BPS)' ?

Basis point (BPS) refer to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% (0.0001), and is used to denote the percentage change in a financial instrument. The relationship between percentage changes and basis points can be summarized as follows: 1% change = 100 basis points, and 0.01% = 1 basis point.

Interchange fees are paid to banks by merchants for the privilege of accepting payment cards. Merchants and card-issuing banks have long fought over these fees. Prior to the Durbin Amendment, card swipe fees were previously unregulated and averaged about 44 cents per transaction.

Merchants lobbied heavily for a rule to limit debit card swipe fees. They accomplished this when the Durbin Amendment passed with the Dodd-Frank financial reform legislation on July 21, 2010. This was considered a major loss for banks, who receive billions of dollars a year in income from swipe fees.

The law applies to banks with over $10 billion in assets, and these banks would have to charge debit card interchange fees that are "reasonable and proportional to the actual cost"  of processing the transaction. The bill aimed to restrict anti-competitive practices and encourage competition, and included provisions which allow retailers to refuse to use credit cards for small purchases and offer incentives for using cash or another type of card.

The Durbin Amendment also gave the Federal Reserve the power to regulate debit card interchange fees, and on December 16, 2010, the Fed proposed a maximum interchange fee of 12 cents per debit card transaction, which CardHub.com estimated would cost large banks $14 billion annually. On June 29, 2011, the Fed issued its final rule, which holds that the maximum interchange fee an issuer can receive from a single debit card transaction is 21 cents plus 5 basis points multiplied by the amount of the transaction.  This rule also allows issuers to raise their interchange fees by as much as one cent if they implement certain fraud-prevention measures.   An issuer eligible for this adjustment, could therefore receive an interchange fee of as much as 24 cents for the average debit card transaction (valued at $38), according to the Federal Reserve. This cap—which took effect on October 1, 2011, rather than July 21, 2011, as was previously announced—will reduce fees roughly $9.4 billion annually, according to CardHub.com.   As a result of the government limiting their revenue from interchange fees, banks made plans to raise account maintenance fees to compensate

ss Law Section 518 Deemed Constitutional by Second Circuit

“Every time a consumer pays for goods or services with a credit card, the credit-card issuer charges the merchant a percentage of the purchase price. [Commonly referred to as ‘swipe fees’ or ‘merchant-discount fees.’] The typical fee is two to three percent of the transaction amount . . . [B]usinesses that chafe at these fees would like to pass them along to consumers while also making consumers aware of the charge in an effort to convince them to pay cash. Accordingly, they would like to charge more than their regular price to customers who use credit cards; that is, they would like to impose a ‘surcharge’ on credit-card users. Another way of passing the cost of credit along to customers is to offer a discount from the regular price to customers who use cash.” Expressions Hair Design v. Schneiderman, No. 13-4533 (2d Cir. 2015).
Section 518 of New York’s General Business Law provides that “[n]o seller in any sales transaction may impose a surcharge on a holder who elects to use a credit card in lieu of payment by cash, check, or similar means.” In Expressions Hair Design v. Schneiderman, the U.S. Court of Appeals, Second Circuit recently determined the constitutionality of this statute.
The Plaintiffs-Appellees were five businesses (a hair salon, an outdoor furniture company, a billiards company, an ice cream seller, and a liquor store) which collectively sued the State of New York. They claimed that Section 518 (1) violates the First Amendment’s Free Speech Clause and (2) is void for vagueness under the Fourteenth Amendment’s Due Process Clause. In 2013, the district court held for the Plaintiffs on both claims, enjoining the State from enforcing the law. On appeal, the Second Circuit reversed the district court’s decision, finding the law does not violate the Due Process Clause or First Amendment and vacating the injunction.
The Plaintiffs-Appellees utilized two different pricing schemes which the State alleges violate Section 518. In the first, the business wanted to post a set price for their product (the “regular price”), and then charge a higher price for credit-card users. In the second, the business posted two prices, referring to the higher price as a “surcharge” and indicating to customers that using credit costs more.


Expressions Hair Design v. Schneiderman, 581 U.S. ___ (2017), was a United States Supreme Court decision that held that price controls, when used to prohibit the communication of prices of goods with regards to a surcharge, was a regulation of speech and required an analysis of the First Amendment's protections for freedom of speech.


In contracting with credit card companies, retailers are typically assessed a fee whenever a credit card is used. In order to compensate for these losses in revenue, merchants are given two options: either charge the customer a surcharge based on their use of credit cards, or provide a discount to customers paying with cash. In regards to the former option—charging the customer a surcharge—the New York Legislature enacted a law, §518, which banned this practice, in that, "[n]o seller in any sales transaction may impose a surcharge on a holder who elects to use a credit card in lieu of payment by cash, check, or similar means." Additionally, the New York Legislature was not the only legislative body which had banned surcharges before. Congress passed a law in 1981 that banned the use of surcharges in pricing goods, but this ban expired in 1984.

The Attorney General of New York, Eric Schneiderman, argued that because price controls prohibit conduct—not speech—then there is no reasonable claim to a violation of free speech. On January 10, 2017, one-hour of oral arguments were heard, where Deepak Gupta appeared for the hairdressers, an assistant to the Solicitor General of the United States appeared as an amicus curiae is support of neither party, and a deputy solicitor general of New York appeared for that state.
“Section 518’s use of the word ‘surcharge’ assumes that a seller to which the statute applies will have a ‘usual or normal’ price that serves as a baseline for determining whether credit-card customers are charged an ‘additional’ amount that cash customers are not.” Expressions Hair Design v. Schneiderman, No. 13-4533 (2d Cir. 2015).
The statute forbids charging credit-card customers an additional amount above the regular price that is not also charged to cash customers, but permits offering cash customers a discount below the regular price that is not also offered to credit-card customers (commonly referred to as a “cash discount”). For example, if a gas station charges $3.00 per gallon (the “regular price”), it may not charge credit card customers $3.10 per gallon. However, if the gas station’s regular price for a gallon of gasoline is $3.10, it may charge credit card customers $3.10 and cash customers $3.00.
While this distinction may seem somewhat arbitrary to the ordinary consumer, the difference is one which every business owner must be aware of in order to remain compliant with Section 518 of the General Business Law (a violation of which calls for up to a $500.00 fine and up to a year in jail). Prosecutions under this statute are rare, however the New York Attorney General’s Office has reached settlements with numerous businesses following reported violations by customers and competitors.

On March 29, 2017, the Supreme Court delivered judgment in favor of the merchants, voting unanimously to vacate and remand to the lower court. Chief Justice of the United States John Roberts authored the opinion of the Court, joined by Associate Justice of the Supreme Court Kennedy, Thomas, Ginsburg and Kagan. The Court argued that, because §518 does not regulate the price that may be received by a business, as per usual price control, but rather the communication of prices, "§ 518 regulates speech."

Justice Stephen Breyer issued a concurrence in the judgement, arguing that while the statute does limit speech, all human interactions limit speech as well. However, Breyer argued that because the statute was effectually under state law, that it should be remanded to the Second Circuit.

Justice Sonia Sotomayor, joined by Justice Alito, issued a concurrence only in the judgement. She argued that it should be left to the Second Circuit to interpret and to certify the meaning of §518, which could be done on remand. The "complexity" of the case, she argues, could have been avoided had the lower courts decided to interpret the law.

Interchange fees are set by the payment networks such as Visa and MasterCard.

In the US Card issuers now make over $30 billion annually from interchange fees. Interchange fees collected by Visa and MasterCard totaled $26 billion in 2004. In 2005 the number was $30.7 billion, and the increase totals 85 percent compared to 2001.

The origins of the interchange fee are a matter of some controversy. Often they are assumed to have been developed to maintain and attract a proper mix of issuers and acquirers to bank networks. Research by Professor Adam Levitin of Georgetown University Law Center, however, indicates that interchange fees were originally designed as a method for banks to avoid usury and Truth-in-Lending laws. Typically, the bulk of the fee goes to the issuing bank. Issuing banks’ interchange fees are extracted from the amount collected by the merchants when they submit credit or debit transactions for payment through their acquiring banks. Banks do not expect to make a significant amount of money from late fees and interest charges from creditworthy customers (who pay in full every month), and instead make their profits on the interchange fee charged to merchants.

Interchange rates are established at differing levels for a variety of reasons. For example, a premium credit card that offers rewards generally will have a higher interchange rate than do standard cards. Transactions made with credit cards generally have higher rates than those with signature debit cards, whose rates are in turn typically higher than PIN debit card transactions. Sales that are not conducted in person (also known as card-not-present transactions) such as by phone or on the Internet, generally are subject to higher interchange rates, than are transactions on cards presented in person. This is due to the increasing risk and rates of fraudulent transactions. It is important to note that interchange is an industry standard that all merchants are subject to. It is set to encourage issuance and to attract issuing banks to issue a particular brand. Higher interchange is often a tool for schemes to encourage issuance of their particular brand.

For one example of how interchange functions, imagine a consumer making a $100 purchase with a credit card. For that $100 item, the retailer would get approximately $98. The remaining $2, known as the merchant discount and fees, gets divided up. About $1.75 would go to the card issuing bank (defined as interchange), $0.18 would go to Visa or MasterCard association (defined as assessments), and the remaining $0.07 would go to the retailer's merchant account provider​(I.S.O.). If a credit card displays a Visa logo, Visa will get the $0.18, likewise with MasterCard. Visa's and MasterCard's assessments are fixed at 0.1100% of the transaction value, with MasterCard's assessment increased to 0.1300% of the transaction value for consumer and business credit volume on transactions of $1,000 or greater. On average the interchange rates in the US are 179 basis points (1.79%, 1 basis point is 1/100th of a percentage) and vary widely across countries. In April 2007 Visa announced it would raise its rate .6% to 1.77%.

According to a January 2007 poll by Harris Interactive, 32% of the public had heard of the interchange fee; once explained to them, 91% said that the United States Congress "should compel credit card companies to better inform consumers" about the fee