Some companies offering services that consumers get for free, such as those that provide card services, still need to make money. They do this through interchange fees. One example is Chime. It provides debit cards with special perks and helps consumers build their credit. It makes money by collecting some of the interchange fees charged by VISA.
The FED, which regulates the debit card interchange fee cap, is looking to decrease the existing cap on debit card interchange fees. This would have the effect of lower revenue for card processors and those who collect a percentage of those interchange fees as their main source of revenue. That includes a lot of fintechs such as Chime.
Currently, the FED caps interchange fees at 21 cents per transaction plus 0.05% of the value of the transaction. A $0.01 fraud prevention fee may apply in some cases as well. The interchange cap would increase the fraud prevention fee. The cap only applies to financial institutions (FIs) with $10 billion or more in assets. Smaller fintechs are exempt from the cap.
However, if the cap is lowered, you can see how this will impact fintechs indirectly. These larger FIs will collect less revenue in interchange fees, resulting in fintechs collecting smaller revenues as well.
How Does This Affect Credit Unions?
While consumer groups praise the cap rate change, organizations like CUNA and NAFCU, said the change would negatively affect their businesses. They outlined the following impacts that the change would have:
- Decrease cap from 21 cents per transaction to 14.4 cents
- Reduce the ad valorem component from 5 basis points to 4 basis points
- Increase the fraud-prevention fee from 1 cent to 1.3 cents
- Starting in 2025, the above three components would see an annual increase
How Does The Change Affect Merchants?
Merchants fall into the boat as consumers. If interchange fees come down, merchants will benefit. Due to interchange fees, some merchants add a surcharge for their services and products. A decrease in interchange fees may see many merchants remove these surcharges. This can mean higher revenues for merchants as consumers with debit cards no longer have a reason not to shop there.