Why are Interchange Fees Paid to Issuers?
So why are card issuing banks not paying merchant acquiring banks or put another way, why are cardholders not paying merchants to use their card?
- The answer lies in properties of "network effects". To achieve greater growth of the payment system, the economics of network effects shows that in order to maximize the value of the payment card network, it is necessary to impose more of the costs on those participants who are least likely to stop using or accepting the card.
- By providing incentives for card issuers, Interchange fees encourage banks to innovate and develop new payment options, broaden the range of card programs available to consumers, and invest in cutting-edge security and fraud prevention measures
- Issuers bear cost of non payment (cardholder risk), financing the interest free period enjoyed by cardholders, and costs resulting from transaction processing