Surcharges

What Are Credit Card Surcharges?

You might imagine banks make most of their profits on credit cards by charging the cardholder a high interest rate, but that accounts for only about half. More than a third comes from the "interchange fees". What are interchange fees?

When you buy something paying with your credit card, the retailer (known as the "merchant") passes the transaction to their bank (the "acquirer" or acquiring bank) for processing. The acquiring bank passes the transaction to the bank that issued your credit card (the "issuer" or issuing bank) for payment. Your bank pays up and puts the charge on your credit card bill.

The acquiring bank has to pay the issuing bank an "interchange" fee. The fee averages 0.95% of the value of the transaction. Assuming a 0.95%% interchange fee and a transaction of $100, the fee would be $0.95. But the actual administrative and other costs faced by the issuing bank are estimated to be about half that ($0.41). So the Commerce Commission argued that interchange fees were to high and wanted more competition between banks to lower them.

Next, the acquiring bank passes the interchange fee back to its customer, which is the retailer/merchant from whom you purchased the goods/services. In the process of doing this it adds an amount to cover its costs of processing the transaction plus a profit. But typical fees charged by the bank to the merchant ("merchant service fee") vary between 1% and 3.5%. So the merchant service fee paid by the retailer far exceeds the interchange fee and any reasonable expectation of actual administrative costs incurred by the bank. So are they fair and who's being ripped-off?

Most retailers have Merchant Account with their bank which permits them to accept credit cards. For the vast majority of retailers in New Zealand this Agreement prohibited the retailer from charging the customer a 'surcharge' for paying with a credit card. However there were exceptions that allowed retailers to charge other fees such as 'administrative' charges. The ability to now explicitly surcharge customers who pay with a credit card has come about following changes introduced by Visa and Mastercard and the major banks. This followed action by the Commerce Commission which investigated anti-competitive arrangements between the banks on the fees they charged to retailers for the card transactions.