Visa & Mastercard Interchange
Visa & Mastercard Interchange Rates and Fees
What is an interchange fee?
An interchange fee is a small fee typically paid by an acquirer to an issuer for a card purchase transaction. This fee partially reimburses issuers for activities they perform, enabling transactions and delivering major benefits to merchants and consumers. The interchange fee is retained by the issuer, not the network. For example, in the MasterCard network, card issuers-not MasterCard-receive the interchange fees.
Merchants pay merchant discount fees, or merchant service charges, to acquirers for card payment acceptance. Interchange is a cost that acquirers typically include in merchant service charges. Visa, American Express, Discover, JCB, China Union Pay, NYCE, STAR, Multibanco, Pagobancomat, Euro 6000, and Electronic Cash are also payment networks that employ interchange or some form of merchant service charge.
The interchange fee is retained by the credit card or debit card issuer, not the network. For example, in the Visa, Discover, American Express and MasterCard networks, card card issuers-not Visa, Discover, American Express and MasterCard get the interchange fees.
How are interchange fees established?
Each four-party system establishes a “default” interchange fee. A default fee is necessary because there are tens of thousands of issuing and acquiring financial institutions participating in the systems. Working out separate agreements among thou?sands of participants would be inefficient and woefully impractical. That said, issuers and acquirers are free to establish their own terms of exchange: their own bilateral interchange fee agreements. Interchange fees are set in a highly competitive environment, in which cardholders and merchants are free to choose among a wide variety of payment cards and networks. No one forces merchants to accept any payment product. When they accept cards, they choose to do so because they benefit. Fees vary as each payment system attempts to arrive at an optimum balance. Lower fees have been set for supermarkets, utilities, and conve?nience stores to encourage acceptance. In 2007, MasterCard capped interchange fees on petroleum sales, due to concerns that rising gas prices were disproportionately affecting the use of payment cards at gas stations.
In establishing interchange fees, a balance must be achieved between the needs of cardholders and those of merchants. If interchange fees are too high, merchants will not accept cards. If the fees are too low, there will be little in the way of benefits for consumers (such as grace periods and fraud protec?tion) on the spend side of the network. By incenting issuance, spend and acceptance, the goal is to enhance system value for all constituents, thereby maximizing card-payment transactions.
How do consumers benefit?
Convenience: Credit, debit, and prepaid payment products make it easier to access funds and pay for goods and services. As cards are accepted by more and more merchants, consumers can use them for buying virtually anything, from everyday items at convenience stores to emergency expenditures and services like medical care or car repairs. Consumers do not have to visit an ATM before making these purchases, and they can speed through checkout lines without the hassle of counting cash or writing checks. Payment cards give consumers the peace of mind of not having to worry about having enough cash to make critical and timely purchases.
Better Record Keeping: Cardholders receive convenient, detailed statements of payment activity. These statements allow cardholders to review transactions, manage their expenses, and retain transaction records.
Safety: Not only are cards more convenient than cash; they are more secure. A cardholder’s liability resulting from a lost or stolen card is limited. Indeed, many network brands, including MasterCard and Visa, generally offer “zero liability” protection for unauthorized use. Moreover, consumers may carry instant access to thousands of dollars in revolving credit, demand deposit accounts, and overdrafts in their wallets without worry-few would carry a comparable amount of cash.
John Hickman is a MasterCard Interchange specialist and assists firearms dealers companies.
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