Sunday, June 04, 2006

Understanding Merchant "Interchange" Fees Is Onerous Challenge (

Few retailers and shoppers understand or are even aware they pay upwards of one-hundred separate fees when using credit and debit payment cards. And, it seems that is just the way the credit card companies want it to be.

Like all companies, our retail and national online boutique photo business understands and keeps track of every expense. For instance, we know the cost for paper and other supplies from the Eastman Kodak Company® and are able to choose from various vendors. But, like millions of other merchants, we too are forced to accept Visa® and MasterCard®.

Ultimately, it is the consumer who pays the $30-billion annual tab for these merchant interchange fees.

While the banks' merchant services units tell retailers they are forced to raise rates, few understand that thousands of banks own all of Visa® and a much of MasterCard®. Their member banks are the acquirers and issuers. They set the rates and they make it confusing. While Visa® shadows MasterCard® in size, the two card associations control nearly 85% of the world's payment services business.

Even Fortune Magazine® could not figure out how the merchant interchange fees work and issued a retraction within its May 31 issue. The business weekly had thought the $30-billion annual fee were revenues just to Visa® and MasterCard®. Not exactly. The retraction explained that MasterCard®, Visa USA® and Visa International® earn several billion dollars from these fees, but left it open for who earns the rest.

As independent issuers, American Express® and Discover Card® earn a portion, but a wide path of the remaining revenues makes a few hand changes, but then reverts back to the banks and payment merchant service companies. For instance, as one of the largest payment processors, Paymentech is owned by Chase. Collectively, that $30-billion annual fee is therefore divided by the same financial institutions; often they wear different hats, but the treasures flow to the same vaults.