I had a conversation with someone about credit cards recently and heard something that made me smile. “Credit card companies hate me. I use the card for everything and pay it off each month.”
I know what he was saying but he couldn’t be more wrong. Financial institutions make a lot of money from interest, especially when you see a rate around 18% and the consumer is only making minimum payments. Interestingly, I’ve gotten to glance at some revenue reports breaking down where card companies are making money. The bank, who will remain nameless, projected only 35% of their Credit Card Revenue coming from interest, the other 65% coming from interchange fees.
Interest is something most consumers are familiar with; however, interchange fees are not as talked about. I assume this is because it’s not a direct cost to the customer, although it is a cost passed on. Interchange fees, or swipe fees are charged for merchants accepting Visa, Mastercard and Amex.
Imagine a consumer making a $100 purchase with a credit card. For that $100 item, the retailer would get approximately $98. The remaining $2, known as the merchant discount and fees, gets divided up. About $1.75 would go to the card issuing bank (defined as interchange), $0.18 would go to Visa or MasterCard association (defined as assessments), and the remaining $0.07 would go to the retailer’s merchant account provider.
The new financial reform laws are trying to limit the interchange fees banks can charge. The question is, will merchants pass this new savings on the customers?