January 4, 2007, 12:00 AM

E-retailers get short-changed on credit card interchange rates, study says

Retailers’ argument that Visa and MasterCard rates for accepting cards are too high is supported by a Diamond Management & Technology Consultants report. Transaction processing is only 13% of total interchange cost, the report says.

A recent report is giving credence to retailers’ argument that the interchange fees Visa and MasterCard charge for card acceptance are far higher than the benefits online retailers receive.

Interchange is the percentage of each transaction that a Visa or MasterCard credit card issuing bank collects from a merchant every time the bank’s credit or debit card is used for a purchase. The fee varies with type of merchant, transaction, and card-averaging about 2% of the sale. Online retailers typically pay the highest rate because their transactions are considered more vulnerable to fraud.

But the bulk of the interchange is used for purposes that don’t benefit retailers, according to the report from Diamond Management & Technology Consultants. The cost of processing transactions-one of the original reasons for interchange-has dropped to only 13% of total interchange cost, the report says.

Other costs covered by interchange are card issuer reward programs (44%), issuer transaction costs and profit margin (35%), network servicing (4%), network brand (3%) and network rewards (1%). Those programs benefit card-issuing financial institutions and the bank card networks, but offer little value to retailers, Diamond says.

“This report corroborates the message that merchants have communicated to lawmakers over the past year-that interchange fees are far, far higher than the actual benefits delivered to both merchants and the vast majority of consumers,” says Mallory Duncan, chairman of the Merchant Payments Coalition and general counsel of the National Retail Federation.

The coalition represents about 20 trade associations representing online retailers and other businesses that accept debit and credit cards.


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