How do credit card companies charge interest
What do credit card companies charge retailers?
Credit card companies have many avenues of income to support their money-lending practices. They charge customers fees for memberships and certain transactions as well as interest on balances owed. Another source of revenue for credit card companies is the charges from retailers.
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When a consumer uses a credit card to pay for a purchase, there are certain fees that the merchant pays the credit card companies. Called credit card interchange fees. some of these depend upon the dollar amount of the transaction and other fees are a set per-transaction amount.
Fees used to be much higher than they are now, thanks to a 2010 law pushed by Illinois Senator Richard Durban. Called the Durbin Amendment, it set out to cap the interchange fees that credit card companies and banks could charge retailers.
Why do credit card companies charge retailers fees?
According to the credit card company, the fees cover the cost of creating and maintaining the accounts of consumers. Having trained customer service representatives, keeping track of account activity and detecting fraud are all areas that fall under the umbrella of maintaining a customer’s account.
The Merchants Payment Coalition. a group of business association formed to lobby against interchange fees, argue that transaction fees were legitimate back in the 1960s when payment transactions had to be done by hand with paper and pencil; they contend that computers are able to conduct such transactions with very little human assistance.
What fees do credit card companies charge per transaction?
The fee that merchants rallied against the most was a percentage charged based on the amount of every credit card transaction. This fee was generally two percent. That meant for every dollar a consumer spent with a credit card, $.02 had to be paid by the retailer to the credit card companies. A $100 transaction would have resulted in a $2.00 fee for the merchant.
After the new law passed, going into effect October 1, 2010, total fees can only go as high as $.21 per transaction. Banks, credit card companies, and the financial sector decried the passage of the bill, arguing that it took precious revenue away from banks and credit card companies that was needed during the economic downturn.
Do credit card companies charge retailers any one-time or annual fees?
Some credit card companies charge additional fees to merchants who accept their credit cards. Some fees are charged for setting up the credit card machine and accounts; other fees are annual fees for participation or membership with the credit card provider.
Are the fees different for online or phone purchases versus a store retailer?
Used to be, credit card companies charged a higher percentage for transactions that did not take place face to face. If the merchant could be shown the card, such as through an online or phone transaction, then the credit card companies charged an even higher percentage on the transaction.
These kinds of purchases were charged more because there is a higher chance of fraud. The retailer could not look at the card to match a signature or photo to the person presenting it. Proponents of swipe-fee reform contend that if credit card companies were serious about preventing fraud, then they would use a PIN verification system rather than a signature system.
Do debit cards or rewards cards have similar fees?
Because debit cards are used and accepted in the same way as credit cards, most banks charge merchants the same kind of fees as credit card companies. Before the new legislation, debit card fees were slightly lower.
Also prior to the new legislation, rewards cards had associated interchange fees that were generally higher than the two percent charged by regular credit cards. According to the US PIRG (federation of state Public Interest Research Groups ), the percentage charged per transactions for rewards cards reached into the four percent range. However, the only ones exempt from the $.21 limit are small banks and credit unions.
Why does it matter if credit card companies charge fees to retailers?
Consumers should care about the fees credit card companies charge retailers because the additional cost is passed on to customers. Therefore, in essence, fees charged to retailers add up to an additional fee for consumers. Retailers will just raise the price of their products so that consumers are footing the bill from the credit card companies.
This increase in goods and gasoline also is passed on to customers who pay with cash, because they also have to pay a higher price for goods and services even though they are not creating the fees. The Durbin Amendment’s focus was to lower interchange fees for retailers so those savings could be passed on to customers.
How have credit card companies and banks reacted to the lower fees?
One type of retailer that has been unfairly affected by the lowering of credit card fees is those who have many transactions under $10. Credit card companies used to give a discount on fees for small transactions, but credit card companies have begun to charge the $.21 fee even if the same fee would have been less prior to the passing of the Durbin Amendment.
Coffee shops and dollar stores are actually seeing a rise in interchange fees and consequently have to pass the fee on to consumers.
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