Credit Card Rewards and Interchange Fees
Posted September 12th, 2010 and last modified June 1st, 2011
When you make a credit card purchase, the store will automatically pay your bank a fee for having accepted your credit card to facilitate their business transactions.
What Are Interchange Fees for Credit Card Reward Cards?
An interchange fee is the fee a retail store or merchant’s bank will pay to a customer’s bank each time that retailer or merchant accepts your credit card to pay for your purchases.
Imagine if you used your Westpac credit card at a supermarket to pay for your groceries. The supermarket’s bank would need to pay an interchange fee to Westpac that is charged as a percentage of the transaction amount, which is usually around 0.5% of the amount you spent.
This means you pay the supermarket the amount shown on the register for your groceries using your credit card, but the supermarket in this example has paid fees on that transaction and is now receiving 0.5% less than the amount you thought you’d paid. In most cases, big retailers will simply absorb this cost by either incorporating it into the cost of the items you buy, or they’ll write off the expense as part of business operating costs – usually both.
How Do Interchange Fees Affect Credit Card Rewards Cards?
As the banks charge interchange fees to the merchant’s bank, they make profits. The more interchange fees they’re able to charge can mean they’re also able to offer customers more in credit card rewards. If you knew your bank was offering you more rewards point for using your card more often, would you do it?
The follow-on effect of this is more customers will tend to use their cards more often to take advantage of the better credit card rewards, which in turn means the bank can charge even more interchange fees to merchant’s banks.
While it all sounds good for the consumer to earn more credit card rewards points for using a credit card to purchase things more often, there might be a catch.
In the long run, it seems as though the consumer is the person most likely to end up with higher fees being charged all round. While the merchant is paying interchange fees to the card issuer, the cost of those fees could be added to the price of the consumer goods.
However, as the credit card issuer charging those fees may have to cover the fees, charges and costs associated with credit card production, credit losses, funding costs, credit card fraud and other issues, this could cause them to raise the cost of their interchange fees to merchants, as well as increasing the card fees to the customer.
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