The main cost for merchants to accept credit cards is the interchange fee, a fee paid by merchants to the card-issuing bank each time a credit card transaction is processed.
This article covers the interchange fees associated with contactless payments compared to other credit card payment methods, such as online transactions and traditional swipe methods.
Understanding Interchange Fees
Interchange fees are an integral part of the payment processing system. These fees are usually a percentage of the transaction amount plus a fixed fee. The rates vary depending on several factors, including the type of card used (e.g., rewards cards typically have higher fees), the method of payment (in-person, online, contactless, etc.), and the merchant’s industry. Every country has its own set of interchange fees.
Interchange fees are meant to cover the costs incurred by the card-issuing bank for handling risks associated with the transaction, including fraud prevention, handling customer disputes, and maintaining the payment infrastructure.
Contactless Payments: The Rising Trend
Contactless payments have surged in popularity due to their convenience and speed. These payments involve tapping a credit card, smartphone, or wearable device equipped with near-field communication (NFC) technology on a payment terminal. The transaction is processed quickly, often within seconds, making it appealing for both consumers and businesses.
However, convenience often comes at a cost. Contactless payments can carry higher interchange fees compared to traditional card-present transactions like inserting a card into a chip reader. This is primarily due to the perceived higher risk of fraud, as the card is never physically handed over to the merchant. Despite this, contactless payments are often less expensive in terms of interchange fees than card-not-present (CNP) transactions, such as those made online.
Comparison with Other Payment Methods
Swiped Transactions
Traditional swipe transactions involve physically swiping the magnetic stripe on the back of a credit card through a payment terminal. This method is considered a card-present transaction and typically has lower interchange fees than contactless payments. The reason for this is that swipe transactions provide more security to the issuing bank, as the physical presence of the card reduces the risk of fraud.
Although swiping was once the most common method for in-person payments, it has become less popular with the advent of chip-and-PIN and contactless technology.
Chip-and-PIN Transactions
Chip-and-PIN transactions are another form of card-present payment. They involve inserting a credit card with an EMV chip into a reader and entering a PIN (Personal Identification Number) to authorize the transaction. These transactions are considered more secure than both swiped and contactless payments due to the additional authentication step, which reduces fraud risk.
As a result, chip-and-PIN transactions often have slightly lower interchange fees compared to contactless payments. However, they might be less convenient for consumers due to the additional step of entering a PIN, which can slow down the checkout process.
Online (Card-Not-Present) Transactions
Online payments are classified as card-not-present (CNP) transactions. These occur when a cardholder makes a purchase over the internet without physically presenting the card to the merchant. Due to the higher risk of fraud and chargebacks, interchange fees for online transactions are usually the highest among all payment methods.
When compared to contactless payments, online transactions typically carry a significantly higher interchange fee. This is because, in online transactions, there is a greater chance that the card could be used fraudulently, and the lack of physical verification increases the risk for the issuing bank.
Interchange Fees by Transaction Type
| Transaction Type | Interchange Fee | Notes |
|---|---|---|
| Chip-and-PIN Transactions | Low | These transactions are considered highly secure due to the use of EMV chip technology and PIN authentication. The strong security measures reduce the risk of fraud and chargebacks, resulting in lower interchange fees. |
| Contactless Transactions | Low to Moderate | Contactless payments that utilize EMV technology are secure but may not require a PIN or signature for lower transaction amounts. While they offer enhanced security over magnetic stripe transactions, the absence of a PIN can slightly increase the fraud risk compared to chip-and-PIN, leading to marginally higher fees. |
| Swipe Transactions | Moderate | Swiped or magnetic stripe transactions are less secure because the card data can be easily skimmed or duplicated. The higher fraud risk associated with these transactions results in higher interchange fees compared to EMV-based methods. |
| Onlne Transactions | High | Online or card-not-present transactions carry the highest risk of fraud since neither the card nor the cardholder is physically present. This elevated risk is reflected in the highest interchange fees among the payment methods listed. |
Factors Influencing Interchange Fees
Several factors influence the interchange fees associated with different payment methods:
Risk of Fraud: The perceived risk of fraud plays a major role in determining interchange fees. Methods with higher fraud risk, such as online transactions, have higher fees. Conversely, more secure methods like chip-and-PIN have lower fees.
Card Type: The type of card used also affects the interchange fee. Premium and rewards cards generally have higher fees due to the benefits they offer to cardholders.
Merchant Category Code (MCC): The merchant’s industry, described by an MCC (Merchant Category Code), can impact the interchange fee. Some industries, such as those in high-risk sectors like travel, may face higher fees.
Transaction Amount: Higher transaction amounts can lead to higher absolute fees, but the percentage fee may be lower.
