Retailers have lobbied Congress against the interchange fee for years, complaining that the fee is too high.
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First, credit cards are not covered under the interchange fee regulations that went into effect on October 1.
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Revolution, an upstart, web-based card that charges no interchange fee, is gaining traction.
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Other banks will likely cut their rewards program if the Federal Reserve upholds the 12-cent limit on the debit card interchange fee.
Since American Express brings higher spending consumers to merchants, it can charge a higher commission (known as the interchange fee) on sales.
Something else that Durbin did not address is what will happen to the interchange fee when a purchase is returned by a customer.
The interchange fee is a stealth fee that receives little attention from the average consumer, but it provides important revenue to credit card issuers.
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October 1 marked the first anniversary since the debit card swipe fee regulations reduced the interchange fee that merchants paid to banks and card processors.
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Before the legislation, the interchange fee averaged 44 cents per transaction.
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The Debit Interchange Fee Study Act is up against sizeable opposition in Congress, though Bernanke and FDIC Chairwoman Sheila Bair expressed their doubts about interchange fee caps.
While the interchange fee varies depending upon the volume of the retail outlet, retailers still have to pay the banks approximately 2% of any credit card transaction, including tax.
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The Federal Reserve proposed rules at its board meeting on Thursday, December 16, 2010, to limit the interchange fee that banks charge retailers when the customer uses a debit card.
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The common explanation from banks is that they are losing billions of dollars in revenue from the Durbin Amendment which basically cut the interchange fee on debit card transactions in half.
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Senator Jon Tester, Democrat of Montana, recently introduced a bill calling for a two-year delay of interchange fee regulation, and a one-year study in that period of the effect of the proposed limits.
American Express, as well as Visa and MasterCard, are expectant of Federal Reserve regulation on credit card transactions which could limit their interchange fee, or their capacity to charge different fees to different vendors.
Credit unions would be especially vulnerable to the loss of interchange fee revenue: about half say that they will reduce or eliminate free checking and rewards debit cards, and almost 9% say they will consider reducing their staff.
The payment network charges the bank a very small transaction fee for using the network, but net they are essentially letting the bank make the most from the interchange fee, hence the banks are on the subsidy side.
This fee is the interchange fee.
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Every time a consumer makes a transaction using cards a transaction fee is charged to the merchant, a significant portion of which (the interchange fee component) is passed on to the card-issuing bank to compensate for the risk associated with lending and to fund membership reward programs.
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The cards will deduct the purchase from a customer's checking account, but skirt the interchange-fee network.
When a customer uses a credit card, the retailer is charged an interchange or swipe fee.
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