All parties benefit in the payment card transaction. Consumers exchange monetary value for goods or services with the convenience of a credit card. Merchants generate a profit from their margin for the sale of products or services. The issuing credit card bank receives a small slice of the transaction value for the risk of financing the consumer’s transaction; banks will also generate revenue if the purchase is not paid in full by the next billing cycle.
The merchant bank, which sponsored the seller into the payment scheme, receives a smaller slice of the transaction for acceptance and the associated risk. Processors, who provide the baseline technology to accept payments, receive fee income for their service. The networks which facilitate the flow of payments through their universal process do not earn interchange revenue; instead, they assess their franchised banks for the use of their system.
Interchange is the tariff used for the service. It gets generated as the transaction clears and settles through the network and is a foundational process of the payment system. The credit card process, which evolved from the banking system in the 1950s and 1960s, is similar in design to check processing and settlement. The difference, however, is that the payment card function uses real-time authentication and authorization processes that allow its participants to transact with confidence any time, any place, and online and offline.
It is a big deal when payment brands overhaul their interchange rates because it affects the whole ecosystem, for every transaction vertical, merchant type, and payment form. In some jurisdictions, such as the European Union, interchange limits are codified and limited by regulators. In the United States, they are set by the market.
Bloomberg reports today on Visa’s upcoming changes; Mastercard has not yet publicly reacted. Bloomberg points to a Visa document explaining the move.
- “The U.S. credit interchange structure has been largely unchanged for the past ten years,” Bloomberg quotes from an internal Visa memo.
- While the changes amount to just a few cents on a transaction, the pennies add up.
- Swipe fees are already a flashpoint between merchants, banks, and payment networks.
- Retailers have long complained about the more than $100 billion they spend each year to accept electronic payments…
Updates to the pricing schedules will occur in the next 90 days.
- Visa declined to comment on the changes proposed in the document. Mastercard, which has its policies, had no immediate comment on whether it is proposing changes of its own.
Where to expect change:
- With Visa’s changes, the interchange rate for so-called card-not-present transactions, which include those made online or over the phone, will increase. For a trationtional Visa card, the fee on a $100 transaction will climb to $1.99 from $1.90. For premium Visa cards, the fee will rise to $2.60 from $2.50.
- Point of sale transactions, which carry benefits from the recently adopted EMV chip, will likely see a reduction.
Merchants have yet to react but the change intends to ensure interchange covers fraud, operational risk and technology investments for the payments infrastructure.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
