Educate Your Business Clients On The Value Of Interchange
Article contributor: Dan Kramer / Executive Vice President, Government and Community Affairs
From paying for groceries, to putting gas in their car, or going out to eat, cardholders across the country depend upon using their debit cards for everyday purchases. Retailers pay interchange to facilitate these types of payments made by customers. The fees, which are only a fraction of a cent per dollar transacted, cover the cost of facilitating the transaction.
The small costs have big benefits for merchants and their customers. These fees compensate the bank or credit union that issued the card for the costs of handling the transaction, making sure the merchant gets paid, the customer has enough money in their account to make the purchase, and protecting both parties from potential fraud.
Currently, interchange fees are calculated on the final purchase amount. However, lawmakers in several states have recently introduced legislation to ban the portion of credit and debit card transaction fees that apply to sales tax. The bills vary in each state on which items interchange would be prohibited, with most focusing on the taxes paid in grocery or convenience stores. North Dakota, Georgia, Tennessee, and Florida are a few states where lawmakers have proposed these types of bills in the past couple of years.
Proponents say the bill would eliminate a “tax on a tax.” Those who oppose these types of bills, including multiple bank and credit union groups on both the national and state level, say no tax is being eliminated, claiming retailers would be essentially asking to use a card issuer’s services for free on this portion of the transaction.
If one of these bills were ever to become law, not only would it directly impact the income your financial institution earns from your cardholders’ transactions, but it could also be costly to small businesses and consumers.
The technology required to calculate interchange on individual taxable items will be much more complicated than calculating interchange on a single bill. Point-of-sale systems are not currently programmed to accommodate what some state lawmakers are proposing. In fact, a payments system to determine information regarding the product, services sold, or the amount of sales tax collected does not currently exist.
The time, labor and hardware costs involved in developing software and replacing deprecated POS systems to become compliant would most likely fall on businesses. The extra expenses would force business owners to decide whether to take on the costs, resulting in less profits, or pass along the expense to their customers through higher prices. Larger businesses would theoretically be better equipped to eat the cost, but small businesses may be less fortunate.
The payments industry continues to be at the forefront of developing innovative payment solutions, providing merchants and accountholders safety, security, speed, and ease for transacting electronic payments, not to mention increasingly numerous options for doing so.
A ban on collecting interchange on the sales tax portion of electronic payment transactions, threatens innovation and system security, which is funded in part, through the collection of interchange.
I encourage you to have a conversation about this subject with your merchant customers where possible. If you have questions about interchange income or legislative activity that could impact your financial institution, please ask your regional director. They can explain the value of interchange to both the merchants and the issuers.