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In the News: Credit Card Interchange
How it Works and Current Issues
Many of you have noticed in the news that merchants and retailers are raising concerns about the interchange fees they pay, and asking congress to intervene in the market to lower rates that have traditionally been established through contracts. Interchange is a fee (about 2% per transaction) that merchants pay to card issuers (like UW Credit Union) in order to provide consumers with a safe and convenient way to pay for goods and services.
Merchant groups are stating that the fee is a "hidden tax" on consumers because it gets incorporated into the price of the good or service being purchased. One could argue that this expense is no more a hidden tax than any of their other operating expenses.
Efforts to introduce government regulation of interchange in other countries have shown that if the fee is lowered, retailer profits improve and consumers do not see lower prices.
Interchange Study and Pending Legislation
Now the U.S. Government Accountability Office has initiated a study on the use of credit by consumers and specifically, the effect interchange fees have on merchants and consumers. The result of these efforts may lead to a legislative push to decrease the interchange fees financial institutions recoup from retailers every time a consumer uses their credit card to make a payment. If this type of legislation would pass, UW Credit Union and similar financial institutions would be seriously disadvantaged.
Potential Impact to UW Credit Union
While recent legislation to curb anti-consumer practices in the credit card business was welcomed by UW Credit Union, it now appears that some merchant groups are moving to take advantage of the public sentiment against the big credit card companies. However, the fact is that many community banks and credit unions could not offer credit or debit card programs without interchange fees to help cover their costs. The reason is simple; the bulk of the expense of maintaining today’s credit card payment system is borne by banks and credit unions, rather than the merchants. This is one of the reasons that merchants first embraced this system.
The chart below outlines the responsibilities of card issuers and merchants, and the key benefits that credit cards, supported by interchange fees, provide to each.
|UW Credit Union
- 100% of Card Issuing Expense
- 100% of Card Operating Expense
- 100% of Fraud Losses
- Statement and Call Center Services
Benefits (to members):
- A safe and convenient way to pay for goods and services
- Zero liability on fraud
- Grace period for interest-free payment on all purchases
- Worldwide and universal acceptance
- Immediate and guaranteed payment
- Consumer convenience and safety
- Increase in goods and services purchased
- Lower costs handling checks, currency, and related losses
As this battle becomes more politicized, we may ask our members to voice their concerns to our elected representatives about the need to maintain a fair balance in card interchange. As a not-for-profit cooperative, it’s critical that local and national merchants provide a fair return for the business they receive from our members.
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