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A seldom discussed consequence of the global shift to card payments is the cost to businesses. Interchange fees (IF) are a percentage based charge that a merchant must give up any time a customer pays by swiping a credit or debit card. Between North America and Europe, merchants typically surrender just under 1% of each sale to these IFs. Through the use of data from the Kansas City Federal Reserve Bank, we were able to cross-compare these rates in the United States, Canada, and 32 of Europe’s largest economies. Results showed that the average merchant in North America paid 83% more in fees than their counterparts in Europe.
- Canada had some of the highest interchange fees in the world – averaging 1.78%. The United States followed with a close second of 1.73%.
- French and Hungarian vendors were likely to keep the most of their sales, despite accepting credit cards – common IFs in these countries were 0.21% and 0.30% respectively.
- Poland had one of the highest average IF rates in Europe, at 1.53%, followed by Croatia with 1.48%.
- MasterCard branded credit cards were more expensive to accept over Visa, in both regions.
- E-merchants paid the most to accept credit card payments, despite having fewer alternatives. In the United States online vendors paid on average 2.13% of each transaction towards IFs.
North America vs Europe: Who Pays More?
American merchants pay, on average, 1.76% in interchange fees – compared to a 0.96% average in most European nations. Interchange fee rates in both the United States and Canada trump even the most expensive European nations. Compared to Europe, very little interchange fee regulation exists within North America. This could serve as one possible explanation for the large discrepancies in charges between the two regions.
Which Countries Pay the Highest Credit Card Interchange Fees?
While the average global interchange fee is around 0.99%, there exists wide variation from this figure, country to country. Canada’s rates, for instance, are 79% above the mean. Below you can find all the countries included in our study, listed alphabetically. To the left hand side of each country is its global ranking – how it performs compared to all the other nations listed here. A rank of 1 represents the lowest interchange fees, while 34 is the highest. On the right side of each country is it’s actual credit card IF, and the increase or decrease of that value from the global average.
% Change vs Average
Poland has, by far, the highest average interchange fees in Europe – a typical rate paid by merchants there is 1.53%. That is nearly 60% more than the mean rate in Europe. Businesses in Croatia and Romania paid the next highest rates, with averages ranging from 1.48% to 1.34%.
France, through the efforts and regulation from the European Commission, has an average interchange fee of 0.22% - the lowest in the study.
Mastercard vs Visa: Differences In Rates Paid
Interchange fees vary between different credit card networks. In this study, we examined IFs from Mastercard and Visa – the two companies with the largest global market share. According to a 2013 Nilson Report, 48.3% of all credit card transactions are realized through Visa, while 31.7% occur on the Mastercard network.
Mastercard transactions are more expensive for merchants, both in Europe (1.19% vs 0.79%) and in North America (1.84% vs 1.67%). Mastercard transactions appeared to be most expensive in Canada, averaging 1.89%, whereas the in Europe Poland and Croatia were the highest (1.73% each). The highest Visa interchange fees are found in the United States and Canada (1.67%). On the Visa end, Poland once again leads the way in high interchange fees with 1.34%, followed by Cyprus with 1.28%. All these variations are a combination of multiple factors, and are difficult to attribute to one particular reason.
Which Type of Merchants Pay the Most?
The type of transaction being preformed determines the interchange fee being charged. This study differentiated purchases into the following categories:
- Gas stations: sales of fuel/petrol.
- Grocery: stores which carry groceries (supermarkets, local grocers, etc.).
- E-Merchant: transactions which occur over the web, such as Amazon.com, or a store’s website.
- Sometimes referred to as "card-not-present" transactions.
- Retail Face-to-Face: all other purchases, not fitting the above categories, where the cardholder is present. This includes things such as department stores, restaurants, and movie theaters.
E-merchants paid the highest IFs, whether they were located in North America or Europe. The average credit card IF for online businesses located the U.S. and Canada is 2.13% - the highest average we came across for any group. Being an online merchant in Europe didn’t serve them much better, with an IF of 1.1%.Gas station transactions were the second most costly in North America, averaging an IF of 1.92% - which is 9% above the typical NA rate. In Europe, retail face-to-face transactions carried the second highest transaction fees, with 0.97%.
What Determines Interchange Fees?
Interchange fees are set by credit card networks (Mastercard, Visa, etc.), and are regulated by different governing bodies. To a large degree, market forces play a big role in determining these rates as well. If, for instance, Mastercard were to raise their rates too high, less merchants would be willing to accept those cards. At the same time, there exists upward pressure to raise these fees from issuing banks. If Mastercard were to set interchange fees too low, banks might prefer to partner their credit cards with Visa instead, in order to increase per-swipe profits.
IFs can differ from store-to-store as well. While small and medium-sized businesses have little to no power in what they pay, major retailers like Walmart, or Costco, can negotiate these fees directly with the networks. As a result, smaller businesses are often thought to pay the brunt of the interchange fees.
In addition to the above mentioned market forces, the government in some countries will set caps on interchange fees, applying more downward pressure on the rates. In Europe, the European Commission has been cracking down on these rates in countries like France and Spain – where the rates are currently some of the lowest. As of December 9th, 2015, the credit card interchange fees in the UK will be capped at 0.3%. Other EU members affected by the Parliament’s decision are expected to follow - though the dates when these changes will come into effect differ.
In the United States, there exists very little regulation relating to credit card interchange fees. IFs on debit card transactions were capped in 2011 by the Durbin Amendment, which left credit cards unscathed. This could be one potential reason for the above-average rates seen in the U.S.
The question of how to set these rates, and whether their regulation is a good or bad thing, has been the subject of much controversy. While Mastercard and Visa do not directly keep the profits coming from interchange fees (those get passed down to issuing banks, and merchant processors), they have been the most vocal about cutting down regulation. Their argument states that cutting down the interchange fees will simply pass the cost onto consumers. Regulating bodies and merchants argue that regulations will drive vendors to cut costs, which will end up benefiting merchants.