Businesses pay fees in order to accept credit cards as a form of payment

Credit Card Processor

It is known by some, but not all, that businesses pay fees in order to accept credit cards as a form of payment. In fact, over 7 million merchants in the U.S. accept credit cards. During in a recent annual survey it was found that business owners collectively paid over 30 billion in credit card processing fees.

Despite the size of the industry, it’s a mystery to most who is pocketing all this money and how prices are determined and reported. We will provide some context about where credit card fees come from, who’s making the money, and how fees and rates are determined.

The financial institutions that issue credit and debit cards are the biggest benefactors.  Visa and MasterCard are membership associations owned by the issuing banks, and collectively own roughly 75% of the credit cards accepted in the marketplace. For example, Visa is a membership association of over 13,000 banks nationwide.

Accept Credit Cards

The frustration with credit card fees. Some merchants accept credit cards because they find them to be a easier and more efficient method of accepting money from customers. Most merchants however accept them because they have no other choice. Many merchants and advocacy groups have cried foul lately with Visa and MasterCard increasing ‘interchange’ fees over 117% in the past five years while maintaining over 75% market share.

What is interchange? Interchange is the portion of that cost that the retailer’s bank pays to the cardholder’s bank or credit union. Interchange revenue is critical to running a card program, partially reimbursing banks and credit unions that issue the cards for the float on the funds, the risk of nonpayment or fraud, and other services that have made these products so valuable and popular among consumers and retailers alike.

Credit Card Processing Life Cycle

Interchange has come under increased pressure lately A few years ago, Wal-Mart won a class action lawsuit against Visa and MasterCard. They claimed that debit card interchange was being improperly priced because it had the same interchange rate as credit cards. Among other things, they argued that debit cards should be have a lower interchange rate because money comes directly out of the cardholder’s account versus a credit card where there is 15 to 45 days between purchase and payment. The courts agreed and awarded Wal-Mart and other retailers billions of dollars in compensatory damages.

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Credit Card Processing, Credit Card Processing Fees, Merchant Account Providers, Merchant Services