Interchange and Interchange Fee

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The vast majority of financial transactions that happen during e-commerce involve credit cards, especially those between consumers and companies that sell goods and services. The credit cards that consumers use are issued by one of many different card-issuing banks throughout the world, to which one must apply and be approved before receiving a card. In general, when credit cards are used to make purchases several different parties are usually involved. These include the cardholder, card-issuing bank, merchant, and the acquiring bank that handles credit card transactions for the merchant.

Interchange is the process by which a card-issuing bank transfers monies to a merchant's acquiring bank in order to cover a cardholder's purchase. During interchange, the card-issuing bank deducts an interchange fee for every transaction. The interchange fee eventually is passed along to the merchant, along with other "discount fees" that make it possible for acquiring banks to profit from the transactions. The income that card-issuing banks received by charging interchange fees was growing in the early 2000s, partly because interest income was decreasing. According to Credit Card Management, interchange income increased 28 percent during 1999, at which time it represented 14 percent of card issuers' revenues.

Interchange fees have been a source of controversy, especially in the area of anti-trust violations. Antitrust Bulletin argued that "interchange fees for modern payment card systems are part of a long historical line of vertical price restrictions that have reflected the exercise of market power. When new payment systems require the cooperation of large segments of the banking industry, it naturally gives rise to the concern that those banks will enact systems and rules that are not necessary to the success of the payment system, but that result in a significant reduction in the benefits that will flow to the public from the new technology."

In October 2000 the European Commission opened an investigation after receiving complaints about Visa's interchange fees from Eurotrade, a European retail industry association. The commission charged that Visa was acting like a cartel because of the way it determined and set fees. Visa denied the charges, arguing that interchange fees benefit both consumers and competition.


Britt, Phil. "Credit & Debit Cards: Can Community Banks Compete?" Community Banker, June 2000.

Chang, Howard H. and David S. Evans. "The Competitive Effects of the Collective Setting of Interchange Fees by Payment Card Systems." Antitrust Bulletin, Fall 2000.

Daly, James J. "Many Happy Returns." Credit Card Management, May 2000.

"Visa Hits Rough Waters Abroad." Credit Card Management, December 2000.

SEE ALSO: Acquiring Bank; Card-Issuing Bank; Transaction Issues