The article discusses interchange fees, which are of personal and professional interest to myself. If you've never read my original diary on the subject, The Biggest Reverse Robin Hood Scheme You've Never heard Of, it explains the whole thing. More than a year later, it's still a fairly obscure subject, even with the Credit Card Fair Fee Act working its way from committee to the floor.

But with that relevance, the Valley News is explaining it to readers :

To shoppers, a credit card transaction seems simple: Swipe the card, the bank issuing the card (Capital One, Chase, Bank of America, etc.) pays the total, and the cardholder gets a bill at the end of the month.

But for transactions using Visa and MasterCard-- the two companies that make up around 80 percent of the market -- the purchase actually passes through a kind of triangle of associations between the cardholder's bank (the "issuing bank"), the card "network" (Visa and MasterCard), and the merchant's bank (known as the "acquirer.")

Every entity included in that triangle takes its own chunk of the fees levied on merchants, known as the "merchant discount rate."

This rate is actually a collection of several fees and is somewhat negotiable, as merchants can work with their "acquirer bank" to set things like processing fees. But the single largest component of the merchant discount rate -- called the "interchange" fee -- is set by Visa and MasterCard and is non-negotiable.

Indeed. The interchange fee dwarfs the other fees. Interchange may be part of that "merchant discount rate" but it's more correct to say that the cost of the merchant discount rate depends on the cost of interchange. Also, there is something hysterically Orwellian about the term "merchant discount" as it seems to imply that the merchant is saving money. As I've written before, the interchange fee is a burden on retailers too great to be justified as a simple cost of doing business.

I digress. With the above established, let's skip to the end

"The problem is the fees have gotten a lot higher and it's no longer a single-tier fee structure," [Georgetown law professor Adam] Levitin said in a recent telephone interview. "More and more, the cards being issued are these rewards cards. Everything gets shifted to the higher end of the fee scale."

In an e-mail, MasterCard spokeswoman Sharon Gamsin pointed out that "it's important to remember that merchants don't pay interchange; they pay a merchant discount fee that they negotiate with their acquirer." Interchange is something the merchant's bank pays to the cardholder's bank.

Wow. Really, wow. Let's get a few things straight: 1) The article has already established that the interchange fee is by far the largest part of the merchant discount fee/rate (I think they keep changing the name to confuse us). 2) Merchants definitely pay the merchant discount rate/fee. 3) Therefore, the cost of interchange is born by merchants (and of course consumers who pay the difference in higher prices) and arguing otherwise is a fiction. 4) The article has also previously established that the interchange fee is non-negotiable. 5) Remember, it's the biggest part of the fee by far. 6) Therefore, the merchant discount rate is largely non-negotiable.

The Wikipedia article is pretty clear on this:

In a credit card transaction, the card-issuing bank in a payment transaction deducts the interchange fee from the amount it pays the acquiring bank that handles a credit or debit card transaction for a merchant. The acquiring bank then pays the merchant the amount of the transaction minus both the interchange fee and an additional, smaller fee for the acquiring bank.

These fees are set by the credit card associations,[1] and are by far the largest component of the various fees that banks deduct from merchants' credit card sales, representing 70% to 90% of these fees.

70% to 90%! And the merchants "don't pay" it. Unbelievable. Or rather, I would say unbelieveable if it didn't track with everything I already knew about the credit card industry.

P.S. On a bonus note, if you haven't read Levitin's blog Credit Slips, it's must-reading on credit and bankruptcy issues.

(Cross-posted from Daily Kos)