DETERMINANTS OF CARD INTERCHANGE FEE AND MERCHANT FEE IN TÜRKİYE AND ITS EVALUATION FROM THE PERSPECTIVE OF ISLAMIC FINANCE

The aim of this study is to indicate the structure of card interchange fee and merchant fee, and to investigate whether there is a relationship between the interest rate and these fees in Türkiye. Using the Central Bank of the Republic of Türkiye and Competition Board regulations and explaining the two-sided structure of card market, the source of the interchange fee and merchant fee is asserted. The study reveals that the interest rate is the main determinant of these fees through funding cost channel. On the other hand, the operational costs have a small share in these fees. The merchant fees vary depending on time and interest rate owing to the interest-sensitive structure. Also, the interchange fee is a significant component of the merchant fee in not-on-us transactions. The study demonstrated that, despite all banks being subject to the same regulations and using the same infrastructure, treating merchant fees solely as a service fee in Islamic banking is inappropriate. Furthermore, contrary to the assumption in Islamic finance literature, it appears that transferring the money owing to card transactions to the business’s account on the next day is not the obligation of the banks; however, it is a preference of the business. Therefore, a new perspective is needed to explain the source of these fees in Islamic finance. In current practices, if there is a suspicion of interest in terms of Islamic finance in the merchant and clearing fees, banks and merchants may need to change their business models and contracts. Finally, understanding the exact source of merchant fee may reduce the asymmetric information for merchants and may increase the bargaining in contracts.