Credit Card Network Fee Structures

𝗪𝗵𝗮𝘁 𝗶𝘀 𝗶𝗻𝘁𝗲𝗿𝗰𝗵𝗮𝗻𝗴𝗲, 𝗮𝗻𝗱 𝘄𝗵𝗮𝘁 𝗳𝗮𝗰𝘁𝗼𝗿𝘀 𝗶𝗺𝗽𝗮𝗰𝘁 𝘁𝗵𝗲 𝗶𝗻𝘁𝗲𝗿𝗰𝗵𝗮𝗻𝗴𝗲 𝗿𝗮𝘁𝗲? Let’s dive in: Every time a consumer swipes a card to make a purchase, the merchant pays an interchange fee. Revenue from the fee gets divided among parties that facilitated the transaction: the banks that send and receive the payment, the card network, the payment processor, and—more recently—fintechs and businesses that embed payments. When you take the bird-eye view diagram below 👇 as an example: If a user swipes a card issued by a Neobank, $1.70 (interchange fee) goes to the issuing bank and the card network, $0.50 (acquiring fee) goes to the acquiring bank. Interchange fees are not always the same though. 𝗪𝗵𝗮𝘁 𝗳𝗮𝗰𝘁𝗼𝗿𝘀 𝗶𝗺𝗽𝗮𝗰𝘁 𝗶𝗻𝘁𝗲𝗿𝗰𝗵𝗮𝗻𝗴𝗲 𝗿𝗮𝘁𝗲? ► Credit vs. Debit Interchange rates on credit cards are significantly higher than those on debit cards. ► Rewards programs These benefits are financed through higher interchange rates, and have proven to be very popular with consumers. ► Online vs. Offline Online purchases are less secure than in-person purchases. ► Consumer vs. Commercial Cards associated with business or corporate accounts carry higher interchange rates than consumer cards. ► Merchant Category Code (MCC) Every merchant is categorized by the major card networks according to a Merchant Category Code (MCC). This means that there are different interchange rates depending on whether someone uses a card in a supermarket, a retail store, a gas station, or with some other form of merchant. ► The Card Network Different card networks charge different rates. Visa and Mastercard are known for charging lower rates. Other networks like AMEX are known for charging higher rates. ► Network partner programs Visa and Mastercard’s partner programs like VPP (Visa Partner Program) and MPP (Mastercard Partner Program) often give specific retailers interchange rates that are much lower than the networks’ published interchange rates. ► Size of the issuing bank (𝗢𝗡𝗟𝗬 in the US 🇺🇸) Larger banks are subject to a regulation called the Durbin Amendment that caps interchange rates on consumer debit transactions. Smaller banks are exempt. As a result, these smaller banks can earn more revenue from interchange rates—and that benefits the FinTechs and embedded finance businesses that partner with them. Find this helpful? [ 𝗿𝗲𝗽𝗼𝘀𝘁 ] Anything to add about this subject? [ 𝗶𝗻𝘃𝗶𝘁𝗲𝗱 𝘁𝗼 𝗰𝗼𝗺𝗺𝗲𝗻𝘁 ] Nice story, Marcel. Next! [ 𝗹𝗶𝗸𝗲 ]

In the complex world of credit cards, not all plastic is the same. While Visa and Mastercard are dominant, players like American Express and Discover have a different focus. Let’s take a look. A typical transaction involves several parties: 1.   The customer 2.   The customer’s bank (issuer), which is the party that has issued the credit card and holds the customer’s funds   3.   The merchant 4.  The acquirer, which is a licensed FS provider that manages merchant accounts, and enables merchants to accept hashtag#payments   5.   The card scheme that connects the two different ends (issuer, acquirer)   6.   A payment gateway, which is a hashtag#technology intermediary that captures and transmits transaction details The most common set-up in the card ecosystem is named after the 4 first players in the list and is called the “4-party model”. It is the model of Visa and Mastercard. Why only 4? The other two parties are seen as facilitators, establishing and maintaining the connections between the main participants. On the other hand, American Express and Discover follow a “3-party model”. What’s the difference? Look at a Visa or Mastercard credit card and you will realize it always has another logo on it: that of the issuing bank. By contrast American Express and Discover issue their own cards and act at the same time as both the issuer and acquirer. What are the practical implications of this difference? -   A simplified transaction flow under the 3-Party model because of less intermediaries -   A very different revenue model: both models are funded from merchant fees (known as merchant discount rate or MDR), however under the 4-Party model these are split among the issuer, the acquirer, and the scheme, whereas under the 3-Party model the scheme retains the entire transaction fee Why don’t Visa and Mastercard follow a 3-Party model as well and keep all the fees then? The catch is that setting up and operating your own payment network and issuing your own cards are complex and expensive tasks. Which also explains why Discover and American Express are smaller networks. On the other side, the closed-loop 3-Party model enjoys the benefit of controlling both sides of the market, having access to end-to-end data that include both consumers and merchants. Which translates into 1) the ability to offer better insights and build premium services 2) more commercial flexibility (subsidize one side of the business via the other). As a result, American Express and Discover cards tend to be more expensive for consumers and merchants due to: -   Higher network costs -   Higher credit risk: Under the 3-Party model the scheme holds the risk on its balance sheet and must actively manage it, whereas in the 4-Party model credit risk lies with the issuing banks (they take the hit for cardholder defaults) and Visa and Mastercard have only an indirect exposure -   Premium rewards and services Opinions: my own, Graphic sources: GBTA, Truevo

🔽 𝗕𝗿𝗲𝗮𝗸𝗶𝗻𝗴 𝗗𝗼𝘄𝗻 𝗣𝗮𝘆𝗺𝗲𝗻𝘁 𝗣𝗿𝗼𝗰𝗲𝘀𝘀𝗶𝗻𝗴 𝗙𝗲𝗲𝘀 🔽 Every time a business accepts card payments, multiple players take a slice of the pie: issuing banks, card networks, acquirers, payment processors, the list goes on. The question remains: 𝘞𝘩𝘢𝘵 𝘢𝘳𝘦 𝘮𝘦𝘳𝘤𝘩𝘢𝘯𝘵𝘴 𝘢𝘤𝘵𝘶𝘢𝘭𝘭𝘺 𝘱𝘢𝘺𝘪𝘯𝘨 𝘧𝘰𝘳? ___ 𝗞𝗲𝘆 𝗡𝘂𝗺𝗯𝗲𝗿𝘀 🔹Interchange Fees --> Typically range between 1.5% - 3.5% of the transaction value. 🔹Assessment Fees (Card Networks) --> Around 0.13% - 0.15%, depending on the card brand (Visa, Mastercard, etc.). 🔹Processor Markup --> Varies but can add an additional 0.5% - 2.0% or more. 🔹This adds up to 2.5% - 5.0% per transaction, significantly impacting businesses with tight margins. 𝗖𝗵𝗮𝗿𝗴𝗲𝗯𝗮𝗰𝗸𝘀 + 𝗣𝗿𝗲𝗺𝗶𝘂𝗺𝘀 ▪️Merchants are also responsible for paying chargeback fees if received. ▪️They vary broadly per country, for example China and Japan have chargeback rates of 0.18%, Brazil is more than 19x the cost at 3.48% ▪️For e-commerce, fees can climb higher due to higher fraud risk, often adding an additional 0.1% - 0.3% for risk management tools. 𝗘𝗺𝗲𝗿𝗴𝗶𝗻𝗴 𝗔𝗹𝘁𝗲𝗿𝗻𝗮𝘁𝗶𝘃𝗲𝘀 🔹Tokenization Services --> Modern tokenization solutions reduce fraud costs & PCI compliance costs by securely handling sensitive card data. 🔹Agnostic token vaults like VGS further assist in savings by allowing merchants to orchestrate & route payments to the most cost efficient processor. 🔹Account-to-Account (A2A) Payments --> Skip the intermediaries, reduce fees to as low as 0.1%, and settle in real time. 🔹Open Banking --> Platforms enabling open payments allow direct bank payments, offering transparency and cost savings. 𝗪𝗵𝘆 𝗦𝗵𝗼𝘂𝗹𝗱 𝗕𝘂𝘀𝗶𝗻𝗲𝘀𝘀𝗲𝘀 𝗖𝗮𝗿𝗲? ▪️Small Margins, Big Impact --> For a business processing $1M annually, a 0.5% difference in fees could mean $5,000 in savings or extra costs. ▪️Hidden Fees Add Up --> Monthly fees, PCI compliance costs, and chargeback penalties often go unnoticed but hurt profits. ___ As open finance, tokenization, and orchestration solutions evolve we might see standardized fees and direct-to-consumer payments gain momentum as businesses move away from legacy card systems. Sources: Volt.io, PYMNTS 🔔 Follow Jason Heister for daily #Fintech and #Payments guides, technical breakdowns, and industry insights.

Understanding the Payments Network: How Your Card Transactions Flow Behind the Scenes When you swipe your card for a $100 purchase, what seems like a simple transaction is actually a complex, multi-step process involving various financial institutions and fees behind the scenes. Let’s break it down: First, the Merchant Discount Rate (MDR) comes into play — this is the fee that merchants pay to accept card payments, which is a percentage of the transaction amount. The MDR isn’t a single fee but a combination of several costs: - Acquisition Fee: This is charged by the acquiring bank or payment processor for handling the transaction. It covers the cost of managing the payment infrastructure that enables merchants to accept card payments. - Interchange Fee: The acquiring bank (the merchant’s bank) pays this fee to the issuing bank (the cardholder’s bank) for every processed payment. The interchange fee compensates the issuing bank for the risk of fraud and the costs associated with authorizing and processing the transaction. Once the cardholder swipes their card, the transaction is submitted for authorization via a card network such as #Visa, #MasterCard, or #Discover. The Card Network acts as the intermediary, routing the transaction information between the acquiring and issuing banks. The Issuing Bank then reviews the transaction for approval, checking factors such as available funds and fraud risk. If approved, the issuing bank transfers the transaction amount to the acquiring bank, but it deducts network exchange fees along the way. This brings us to the next step: the Acquiring Bank pays the merchant the transaction amount, minus the MDR. Although the merchant receives the funds, a small percentage has been deducted to cover the cost of facilitating the payment. Meanwhile, the cardholder’s bank bills them for the $100 purchase. Once the cardholder settles the bill, the payment cycle is complete. #FinTech #Payments #CardPayments #ConsumerFinance