Institutions face trade-offs between their own economic interests and their consumers’ satisfaction.
While the use of credit and debit cards provides convenience for consumers and collectability for the institution, it creates transaction costs that can be allocated only in a limited number of ways.
A payment with a card costs on average 2-3% to process, much of which goes to the bank that issues the card and funds rewards for cardholders. Different costs are associated with different card types: for example, debit cards cost significantly less to accept than cards with extensive rewards.
Many institutions choose to pass on a fee for processing when consumers make payments by card.
On the conventional approach, this service fee is assessed as a single, flat-percentage rate—such as 2.75%—for all credit cards and debit cards.
While this approach meets important economic interests for the institution, it also produces consumer affordability concerns. When a consumer absorbs an additional service fee, she effectively pays more for her education or her government services. Moreover, a flat-rate service fee forces a consumer with a low-cost card to subsidize a consumer with a more costly rewards card.