Anytime you buy something with your MasterCard or Visa card, there are four parties always involved in the transaction -- you, your bank, the retailer's bank, and the retailer. Both banks involved take steps to ensure the payment is successfully processed and transferred safely to the retailer promptly. When your bank completes the payment process to the acquiring bank (retailer’s bank), it retains a small fee. This fee is known as an interchange fee. If this fee is paid to an acquirer by the issuer, the exchange is referred to as a reserve interchange.
In the case of ATMs, the card-issuing bank pays the interchange fee to the acquiring financial institution for the maintenance of the machine. The debit and credit card networks set the interchange fee through a complex pricing structure that is based on jurisdictions or region, type of debit or credit card, type of transaction (i.e. phone order, online, in store), and if the card is presented during the transaction. The interchange fee is often a small ad valorem percentage of the whole transaction amount, but it also be a flat rate plus the total purchase price including the taxes.
If your bank did not charge this fee, it would be hard to cover the costs incurred in operating the card services such as systems maintenance, customer calls service, and fraud prevention. If that were the case, the banks would not be able to afford innovation and would need to increase the fees for maintaining the cards or stop issuing the cards although. Some of the qualification factors that establish the interchange fee include the card type, card brand, and card owner. The card issuer, not the merchant, determines all these factors.
Uses of interchange fee
This fee is used to ensure the payment systems function securely and quickly. The fee also helps cover operating card service costs that the financial institutions would have otherwise passed to the customers. Banks use the money raised from these fees to invest in creating easy to use and secure electronic payment systems that the clients can expect and rely on, such as the PIN and the Chip. Both of these innovations have resulted in increased transparency and reduced fraud. The interchange fee also allows for investment in the maintenance and development of future systems that would be more secure, convenient, and faster that millions of consumers around the world can use.