Interchange fee” is a term used in the payment card industry to describe a fee that a merchant’s bank (the “acquiring bank”) pays a customer’s bank (the “issuing bank”) when merchants accept cards using card networks, such as Visa and MasterCard, for purchases. Although Visa and MasterCard determine Interchange rates, the fees are not retained by them. They only act as intermediaries between the members on either end of the transaction.
In nature we have the cycle of life – in card processing we have the life of a transaction. It is important to understand where the fees come from and know who all the players are.
- The process starts with the consumer making a purchase via a terminal or website.
- The merchant’s terminal transmits the transaction, via DSL or phone line, to the acquiring bank.
- The acquiring bank routes the transaction to a processor, and then to the card associations via Visa’s system (VisaNet) or MasterCard’s system (INET).
- The association’s system requests an approval from the issuing bank.
- The issuing bank sends back a response. If the card is approved, an authorization code is sent back to the association. The association sends the code to the acquiring bank, and then to the merchant’s terminal.
Issuing banks charge Interchange fees to the acquiring banks. These fees are part of the costs that merchants pay to their bank. Whether you are using a big bank or a smaller provider as your card processor, there is a markup on Interchange fees. This markup (basis points) pays for your application process, customer service, risk monitoring, and of course your sales rep.
Both acquiring and issuing banks are charged fees by the card associations. Assessment fees are Visa and MasterCard’s primary source of revenue. You may have seen these on your merchant statement as 0.0925% and 0.0950%. These are typically less confusing because they are standard and don’t vary based on criteria.
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