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How to Balance a CheckbookCredit Card Interchange Fees and Reward Checking Accounts
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ON BY Ken Tumin
There has been a lot of coverage on credit card interchange fees in the last few weeks. 7-Eleven has organized petition drives at its stores, and merchants are on the offensive trying to get Congress to pass legislation that would help them against these credit card fees. This New York Times article reviewed the issue of interchange fees and what the retailers are saying.
This can have an impact not only on credit card customers but also reward checking account customers. As I described in my post on the math behind reward checking accounts, the debit card usage requirement is a very important reason why banks can afford to pay the high interest. The New York Times article provides some more stats which show how much banks make on the interchange fees:
Another thing mentioned in the article is that more customers are using credit and debit cards for small purchases. Reward checking accounts are definitely encouraging this. The article didn't provide any numbers on the interchange fees of small purchases, but I was able to find numbers at MasterCard's Interchange Rates & Fees page. On the right of this page, they provide The MasterCard Interchange Rates and Criteria (PDF). The interchange rates vary by product and service. One example is on page 19 for the supermarket category. The interchange rate is 1.42% + $0.05. So it appears they add on 5 cents no matter the size of the purchase. So for a $1 purchase, the interchange rate would be almost 6.50%. For other categories like service stations an extra $0.10 is added. So for reward checking customers, we can feel good that we're helping our banks even when we make small purchases. However, merchants may not be too happy.
What will happen if Congress passes legislation to crack down on interchange fees? It may not be good for credit card customers and reward checking account customers who profit from the rewards. The NY Times article described what happened in Australia:
Thanks to the reader who mentioned this NY Times article.
This can have an impact not only on credit card customers but also reward checking account customers. As I described in my post on the math behind reward checking accounts, the debit card usage requirement is a very important reason why banks can afford to pay the high interest. The New York Times article provides some more stats which show how much banks make on the interchange fees:
Every time a consumer uses plastic, about 2 percent to 3 percent of the charge goes to banks and payment networks, which price the fee differently in different countries. Of that, the interchange fee is paid to the cardholder's bank, and at roughly 1.8 percent of each purchase in the United States, according to June report by J.P. Morgan, it is the largest and most controversial of these costs.
Another thing mentioned in the article is that more customers are using credit and debit cards for small purchases. Reward checking accounts are definitely encouraging this. The article didn't provide any numbers on the interchange fees of small purchases, but I was able to find numbers at MasterCard's Interchange Rates & Fees page. On the right of this page, they provide The MasterCard Interchange Rates and Criteria (PDF). The interchange rates vary by product and service. One example is on page 19 for the supermarket category. The interchange rate is 1.42% + $0.05. So it appears they add on 5 cents no matter the size of the purchase. So for a $1 purchase, the interchange rate would be almost 6.50%. For other categories like service stations an extra $0.10 is added. So for reward checking customers, we can feel good that we're helping our banks even when we make small purchases. However, merchants may not be too happy.
What will happen if Congress passes legislation to crack down on interchange fees? It may not be good for credit card customers and reward checking account customers who profit from the rewards. The NY Times article described what happened in Australia:
In Australia, where regulators required banks to cut the interchange rate for Visa and MasterCard purchases to 0.5 percent from 0.95 percent, the banks offset their loss by reducing rewards programs and raising annual fees, according to a 2008 report by the Government Accountability Office.
Thanks to the reader who mentioned this NY Times article.