Recent MasterCard Ruling on Interchange Fees
The Times, They are Interchanging
What Does the Recent MasterCard Ruling on Interchange Fees Mean for You?
Last week brought in a big win for retailers in Europe as the European Court of Justice (ECJ) upheld the 2007 ruling by the European Commission that MasterCard has been charging “anticompetitive” rates for its interchange fees. This win can mean big changes in the retail sector as some of the decision making power, which has long been controlled by the credit card companies, has shifted back to the retail company. Instead of companies needing to compensate for these high rates by increasing consumer prices, a cap on interchange with stronger competition means less money taken out of the transaction before it reaches the retailer. This cap also makes it easier for retailers to know just how much their merchant account provider is charging, giving the retailer the opportunity to seek out the lowest rates available.
When a consumer makes a purchase, the entire price paid by the consumer does not go to the merchant. Instead, a portion of each purchase is split between the card issuing bank, the retailer’s bank, and the network provider such as Visa or MasterCard. This is called the interchange fee. Typically, the majority of the cost will go to the card issuing bank. This is called the interchange fee. The smallest amount will go to the retailer’s merchant account provider. This rate is different depending on the type of card and the banks involved. Network providers are always the one to decide what rate can be charged by the bank. These rates are standardized by country, region, and type of transaction. For example, when a consumer makes a payment online, the interchange fee will be higher than if the consumer made the payment in person with their card. Higher rates gave banks an incentive to issue cards from that company, but ultimately, the retailer and then the consumer were the ones paying the price.
The ruling by the ECJ, which was announced on Thursday of last week, will put a cap on interchange fees of 0.3% for credit and 0.2% for debit transactions. A market which has never been very transparent will suddenly have to become slightly easier to navigate as merchants will be able to decide for themselves whether the rate they are paying is fair or if they want to fight for a lower rate. Although this may seem like a daunting task, the payoff for a retailer taking advantage of the change can be quite large and could even make the difference for staying ahead of the competition.
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Be sure to stop by next time to discuss the big changes Apple Pay and other digital pay methods are bringing to the sector.