What is an interchange fee?
Published 14 September 2015 by Emily Bancroft
You pay an interchange fee whenever you use your card to make a purchase but new EU rules are set to change how they work.
Whenever you use your debit or credit card to pay for something, you’re probably only thinking about how much you’re paying for it. But you might not know that the entire cost of the item isn’t actually going to the retailer, as some of it is paid to your card provider. This is known as an interchange fee and you wouldn’t ever have noticed you’re paying it as it’s included into the price of the items you buy. These vary based on the card provider but can be around 0.8% of the total transaction value.
However, new EU rules surrounding interchange fees are due to come into force and this will affect purchases you make with your card. We’ll take a look at why the rules have changed and how you could be affected.
How does interchange work?
For a card payment to go through, your card provider needs to transfer the money from your account to the retailer’s bank account. When it does this, it takes a small fee to cover the costs of making the payment and maintaining your account, including operating your card and making sure your money is secure.
You don’t notice interchange fees because the retailers have allowed for these when they’re setting their prices and have already factored the cost of them in. However, we all pay them whenever we make any payments using a credit or debit card regardless of who you bank with.
Why has the EU capped these fees?
Back in March, the EU ruled that caps should be introduced for interchange fees. It was decided that these would be 0.2% of the value of whatever you’re buying when you pay with a debit card and 0.3% of the transaction value when you use a credit card.
The reason for these caps being brought in is to reduce the amount that retailers have deducted from each transaction. The thinking behind this is that if transactions are cheaper for retailers, they might consider lowering some prices. This is meant to offer better value for customers, as they should potentially be able to pay lower prices for some items.
How could it affect you?
However, there are some concerns that retailers won’t pass the savings onto customers and prices are likely to stay the same. This would mean that the cap in interchange fees wouldn’t actually help customers but would instead be a benefit for the retailers.
In fact, consumers could actually lose out because of the ruling. Some card providers, such as Capital One, have already cut the cashback deals they offer as they won’t be able to afford them anymore due to the reduced interchange fees. Other providers, like Tesco, have announced they’ll cut rewards that they offer and as the EU rules come into force, it’s quite possible that we’ll see even more card providers making similar decisions.