Where does my money go? Interchange fees explained

Rates and Fees verified correct on December 22nd, 2014
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Ever wondered about the fees and charges that get added to your transaction when you make a purchase with your credit card? Well, they’re interchange fees, and they’re the fee that banks charge for using their credit cards.

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While the interchange fees outlined in this article are charged by lenders, it’s up to individual retailers to pass on these additional charges. Merchants can charge consumers up to the ‘the reasonable cost’ of accepting card payments.

The RBA allows merchants to surcharge their customers to recoup transaction costs. There are changes to the cost of processing a card payment for merchants. Information about these changes will be detailed in the notification letter, which is sent directly to participating business with a point of sale terminal that allows card payments.

In 2013, the Reserve Bank of Australia’s reforms to credit card surcharges were introduced. They were designed to end the practice of excessive surcharges for paying by credit card. From 18 March, Visa and MasterCard are limited to the surcharges retailers are permitted to charge shoppers to the reasonable cost determined by the RBA.

There are guidelines for what is to be considered a reasonable cost, but it marks a another step towards finishing the work begun in 2003. It was then decided that card schemes like Visa and MasterCard should set their own interchange fees for different card categories, provided they met an average price weighting at specific dates of review.

The 2003 reforms had implications for cardholders that extended beyond charges at the point of sale. Banks and other institutions took it upon themselves to promote products that earn them more money and the industry cut back on the bells and whistles, like rewards, that encourage people to spend in the first place.

The average merchant service fees for 2013 | by RBA:

For a $100 purchase, the average fee determined by the RBA to process the payments is;

  • $0.85 for Visa and Mastercard
  • $1.81 for American Express
  • $2.08 for Diners Club

It seems that for the banks the age old adage, every time a door is shut, a window is opened couldn’t be more true. What long term effect the most recent changes to credit card interchange fees will be, remains to be seen; however, according to the RBA’s March 2012 ‘Personal Credit Market in Australia’ report, in the ten years since the first tweaking of the interchange fee system, the brunt of the cost of using a credit card has been passed down the chain to the cardholder: here’s how.

Your rewards points are not going as far

According to the RBA, it now takes $6,000 more dollars to get the same value out of a rewards program than it did in 2003. The RBA puts this down to a loss in interchange fee revenue which for the most part was used to fund the rewards programs. And compounding the hit, annual fees have also jumped 20% in recent years too.

Rewards are worth less since 2003

The loss of value from rewards schemes - how much you have to spend for an average $100 return

There are now more types of interchange fees than ever

There has been in an increase in interchange fee categories since the RBA reforms. Between November 2006 and 2009, the number of interchange categories jumped by more than five times the original amount.
The RBA lets card schemes set interchange fees for different types of merchant and product categories.
The fees must be at or below a specific benchmark at certain dates when the categories are reviewed, but now the fees must be at the level of what the Visa and MasterCard consider to be the reasonable cost of a merchant accepting a credit card as a method of payment.

For a bit of background. MasterCard and Visa have established a number of interchange fee categories based on factors such as the type of account (e.g. consumer or commercial), the type of card (e.g. standard or premium), the type of merchant (e.g. government, charity or service station) and the type of transaction (e.g. chip, non-chip or contactless).

The result has been that although interchange categories for standard cards have been reduced, for premium and super-premium cards, they have increased. And banks have been all too keen to push these products.

Visa and MasterCard interchange fees

Visa and MasterCard interchange fee categories

Do you like going platinum? You’re going to pay for it whether you know it or not

In 2006, both MasterCard and Visa brought in a new interchange categories for their premium and platinum cards that have a higher fee than their standard cards, up to 1.3%. Lenders replied to this by issuing more cards that they could take a larger cut from. Between 2010 and 2011, the number of standard and gold card products went down, while platinum and super premium card products increased.

Take this example: You get a Platinum card in the mail to replace your current gold card. You don’t pay any extra annual fee, there’s a chance you’ll earn rewards faster and you get access to a range of premium benefits. It seems like a win-win, only it’s not that clear cut.

Both the MasterCard and Visa schemes attract an interchange fee of 1.10% of the value of the transaction for Platinum cards, more than double that of a standard card. The higher interchange fee is passed onto the merchant and then to yourself in the form of a merchant service fee and credit card surcharge fee.

This means that the upgrade in card, regardless of whether you asked for that card in the first place, is costing you more for every swipe. The question you have to ask yourself is: ‘are the extra benefits and features offered by platinum and super-premium cards justified by the extra cost of using your card?’

What can we do about it?

Well, there’s only so much you can do about it. Interchange fees are a cost that credit cards users have to bear in some way or another. You can; however, choose a card that has a lower interchange fee category. If you can bear holding a standard card, they are a good way to go.

American Express and Diners Club have no interchange fees as they deal directly with the buying and selling parties, but you will pay an extra 1% every time you use one of these cards.
You can also sit back and let the RBA do the dirty work for you. While the fees and charges associated with using the bank’s money are here to stay, the RBA is currently in the process of reviewing these laws again and cutting back on the fees and charges that customers and business will be faced with. The RBA expects a new regulatory framework for the fee associated with electronic payment figured out by 2014.

Jacob Joseph

Jacob is a writer and video journalist with finder.com.au. Credit cards, personal loans and savings accounts are his bread and butter, and he likes nothing more helping people understand the sometimes overly complex world of personal finance.

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This page was last modified on 16 November 2014 at 1:12.

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4 Responses to Where does my money go? Interchange fees explained

  1. Default Gravatar
    Michael | July 17, 2014

    very few merchants, (if any to my knowledge) charge varied fees according to the category of card used. If they don’t how do they legally work out what fee to charge without the risk of being accused of price gouging or excessive fees?

    • Staff
      Shirley | July 17, 2014

      Hi Michael,

      Thanks for your question.

      There are regulations in place by the Reserve Bank of Australia – this mean retailers can only charge customers for the ‘reasonable cost’ of accepting electronic payment.

      For more information about credit card surcharges, please see this page.

      Cheers,
      Shirley

    • Default Gravatar
      Matt | October 6, 2014

      I don’t think that was the point that Michael was making: the article above suggests that merchants charge higher fees to customers with platinum cards than they do to customers with basic cards:

      “This means that the upgrade in card, regardless of whether you asked for that card in the first place, is costing you more for every swipe.”

      That’s simply not the case. I’ve never encountered a merchant anywhere in Australia who charges a different fee if you have a platinum card versus a standard credit card.

      Although it is quite common for them to charge a higher fee for AMEX/Diners versus Mastercard/Visa.

      So the reality is the reverse of what this article suggests: everyone’s paying more to fund these higher interchange fees, because it’s either factored into the price of the goods, meaning you’re subsidising platinum cards even if you pay cash, or — if there is a credit card surcharge applied to the customer — then the effect of the higher fees for platinum cards is averaged out amongst all credit card users who choose to pay the surcharge, even those with basic cards.

      As a customer, I can’t see a reason why I wouldn’t take the platinum card.

      Oh on the subject of: “this mean retailers can only charge customers for the ‘reasonable cost’ of accepting electronic payment.”

      I see no evidence of this being enforced whatsoever. A 3% surcharge on AMEX transactions still seems to be pretty common in my experience, despite this being nowhere near the ‘reasonable cost’ of accepting that card.

    • Staff
      Elizabeth | October 7, 2014

      Hi Matt,

      Thanks for your comment.

      While the interchange fees outlined in this article are charged by lenders, it’s up to individual retailers to pass on these additional charges. As you mentioned, this doesn’t always happen, as retailers may only have a surcharge in place for AMEX cards, etc.

      There has also been a lot of talk around the ‘reasonable cost’ that retailers must cover, especially when it comes to things like airline fees and the high credit card surcharges consumers pay. This may change in the near future, but for now, the ‘reasonable cost’ wording is all we have to go by.

      Thanks,

      Elizabeth

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