Interchange fees are always present in card-based transactions. These are fees paid by the merchant to the cardholder’s bank (card issuer), where the fee is a percentage (normally 2 to 3% of the total purchase price) of each transaction made by the cardholder. Interchange fees serve as the fee charged by banks for handling and for the credit risk that comes with credit or debit card transactions. There have been debates on the existence of interchange fees between credit card companies and merchants, with merchants claiming that the interchange fees force them to increase the price of their goods or services.

This is why the European Commission (EC) decided to impose card fee caps in the form of the Interchange Fee Regulation (IFR). Interchange fees are now capped at 0.2% for debit card payments and 0.3% for credit card payments. The effect of the regulation on banks is that they are going to earn much less for each transaction, leading to lower revenues. Additionally, both positive and negative effects for merchants and consumers are expected as a result of the IFR:

Effects of IFR

  • Lower prices on merchants’ products and services. The European Commission’s aim by implementing this regulation is to redistribute the revenue from the issuing banks, to the merchants, and then to the consumers. The cap is expected to save merchants up to 687,192,000 USD a year. But this big savings comes with the expectation from the Commission that businesses are going to pass these savings onto consumers by offering them their goods and services at a lower price.
  • Access to high quality banking. The regulation on interchange fees is expected to make the banking sector more competitive, allowing consumers and businesses to gain access to high quality banking services and products.
  • Increased acceptance of cards. The IFR is one of the factors that will create an opportunity to increase acceptance of cards in areas where acceptance has been limited.
  • Possible increase in cardholder fees or decrease in cardholder benefits. There are, however, fears that the banks will make up for the effects of the regulation by increasing cardholder fees or decreasing the benefits to cardholders from the bank’s loyalty and rewards programs.

Along with lower prices, the IFR will increase the number of purchases that consumers make using their credit cards. Instead of resorting to cash, consumers will be more confident to use their card. And because the card acceptance rate is going to increase, more and more businesses will accept card payments, and consumers will have increased accessibility to products and services that they need.

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