A recent article raised the question, should transactions be free to process, stating possible ways for this to happen. What Todd failed to understand are some key points in the processing chain. For starters, if they eliminated Interchange, that would highly discourage issuing banks to issue credit cards. Yes, they make a lot of profit off the card holders that carry a balance,but they do incur losses on the consumers that never pay. Interchange helps bring them a very small amount for the customers that never carry a balance. The price for handing the money isn’t a very big price. Banks wouldn’t be offering all these reward programs, which would in turn discourage all the consumers that use their cards solely for the rewards.
The second point he doesn’t understand is the merchant provider that must give that particular merchant an account to accept those credit cards. They assume risk for all transactions that merchant processes. If they go out of business or have too many chargebacks, the merchant provider is liable for all chargebacks and losses. There is a cost associated with this. Just like you can’t expect a bank to take on mortgage debt for free, you can’t expect a merchant provider to do the same.