Sep
19
What is Visa Interchange?
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Interchange
What does it take to:
• Buy specialty spices from India to expand the inventory at your independent convenience store?
• Accept floral orders from customers across the continent and know you will get paid?
• Automatically pay your rent, water and garbage bill on time while dancing the night away aboard
your first Mediterranean cruise?
It takes Visa: The Currency of Life and the company that connects thousands of financial institutions,
millions of businesses and millions of cardholders to make these experiences possible. And it takes
interchange: the transfer rate exchanged between the merchant’s financial institution and the cardholder’s
financial institution every time a Visa payment product is used.
Interchange provides the incentives necessary to assure that financial institutions invest in the Visa
system and the benefits that we all enjoy with payment products – from protection against fraud to car
rental insurance coverage to airline miles to 24/7 customer service. Visa also uses interchange as a tool
to aid financial institutions in signing up more and more merchants to accept Visa so that you can fuel up
at the gas station, buy stamps at the post office and pick up a 50th anniversary gift for your parents in the
same afternoon – all without carrying a checkbook or fumbling for cash.
Understanding a Visa Transaction
Visa is one of the world’s best ways to pay and be paid, with acceptance in more than 170 countries
around the world. And while swiping your card in a store or entering your number online is easy and fast,
there is a lot more happening behind the scenes.
A typical Visa transaction actually involves four distinct players:
• A merchant is the store, restaurant, online retailer, hotel, airline or other entity that accepts Visa
as payment.
• An acquirer is a financial institution that signs up merchants to accept Visa payments and makes
sure those merchants get paid for those transactions as a result.
• An issuer is a financial institution that provides consumers with Visa-branded cards or other Visabranded
products. When a Visa credit card is used, the issuer actually “lends” the consumer the
funds to make the transaction.
• A cardholder is the consumer who chooses to use their Visa card or other Visa-branded
payment product to make purchases.
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When a cardholder uses a Visa card to pay, the cardholder, merchant, acquirer and issuer all play a role.
For example, a cardholder uses a Visa card to buy a pair of shoes. It’s actually the merchant’s bank, or
the acquirer, that reimburses the merchant for the pair of shoes. The cardholder’s bank, or issuer, then
reimburses the acquirer, usually within 24 to 48 hours. And finally, the issuer collects from the cardholder,
whether through funds from the cardholder’s bank account if a debit card is used, through billing if a credit
card is used or from a prepaid account if a gift card is used.
The system works because all participants get value from the transaction, whether it’s convenience,
worldwide acceptance, a more secure way to pay, stronger customer loyalty or business efficiencies,
among others.
The Economics of Participating in the Visa System
Like every other business, participants choose with whom to do business and at a price commensurate
with the value they receive. There is a cost to participating in the Visa system and accepting Visa
products. And each participant’s decision depends on a range of factors:
• Merchants: Merchants negotiate the Merchant Discount or Merchant Service fee they pay to
their financial institution. The Merchant Discount may include a number of costs, including
interchange; the cost of transaction processing, terminal rental and customer service; and their
financial institution’s or processor’s margin. Merchants may change financial institutions in search
of a better Merchant Discount rate or broader services.
• Financial Institutions: Merchants’ and cardholders’ financial institutions pay certain fees to Visa
to participate in the system. Visa uses these revenues to maintain Visa’s global payments
network, strengthen the Visa brand through a range of marketing and promotional activities,
support the development of new Visa products and processing services, and make other
investments in expanding Visa’s business.
Additional value is exchanged between merchants’ and cardholders’ financial institutions through
interchange. Visa establishes this transfer rate level of interchange. Among other things,
interchange helps fund the various cardholder benefits and innovations that consumers have
come to expect. As a result, interchange ensures that both merchants’ and cardholders’ financial
institutions are able to attract new customers, expanding participation in the Visa network to the
benefit of all parties.
• Cardholders: Cardholders may pay certain fees to their financial institution, which may vary by
the type of account or be based on other features and services provided by the financial
institution to its cardholders.
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Visa’s Position on Interchange
Interchange plays a critical role in nearly every Visa transaction and the system at large. And it is also an
issue that has been debated in courtrooms and regulatory arenas from time to time. Currently, retail trade
associations in some parts of the world are lobbying to establish price controls on interchange, either
through regulation or litigation.
Visa believes that any inappropriate intervention into interchange, if successful, would result in fewer
payment choices and a reduction in benefits for both consumers and merchants, and possibly even
higher check-out costs. While we respect any business’s right to lower its costs, we continue to believe
that interchange is the most effective mechanism for managing a global network that includes thousands
of financial institutions, millions of merchants and millions of cardholders.
Merchants have options when it comes to the payments they accept. They can also provide discounts to
those who pay with cash or PIN debit, choose to accept only cash or checks, or shop around for the
best prices.
Facts About Interchange
• Interchange is set in a highly competitive and dynamic environment.
• There is a cost to accept Visa cards, just as there is a cost to accept cash, checks and other
forms of payment. For example, it takes time to count and deposit cash, and cash may
disappear as a result of errors or theft. Checks can be delinquent or cause losses to merchants
because of a lack of funds in the check writer’s account. The cost to accept electronic
payments may be more apparent to merchants, however, because they are directly billed for
the service.
• Interchange is consistently monitored and adjusted — sometimes increased and sometimes
decreased — in order to assure the economics and value of the transaction are balanced for all
parties. Such adjustments enable Visa to expand the types of payments consumers can make
with their cards, including payments for small-ticket items, rent, utilities and even mass transit.
• Merchants do not pay interchange. They pay what is known as a Merchant Discount or
Merchant Service fee, which is negotiated with their financial institution and may include
interchange; the cost of transaction processing, terminal rental and customer service; and their
financial institution’s or processor’s margin, among other costs. So imposing price caps on
interchange would not necessarily lower a merchant’s costs for card processing.
• Visa sets interchange in a manner that balances the value and economics among all parties
that participate in the Visa network — merchants, financial institutions and cardholders. If
interchange is too low, then cardholders’ financial institutions won’t issue cards; if interchange
is too high, merchants won’t accept them.
• Merchants have options when it comes to the payment options they offer. They can provide
discounts to those who pay with cash or PIN debit, choose to accept only cash or checks, or
shop around for the best prices.
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Frequently Asked Questions
How does Visa set interchange?
Interchange is set in response to dynamic and highly competitive market forces and strikes the right
economic balance between participants in the payment network. Among other things, it varies by the
type of merchant, cost of the sale, payment product type, processing technology the merchant uses
and region or country. For example, transactions at fuel merchants, quick service restaurants and car
rental agencies each possess unique attributes that require different interchange categories and
processing strategies. Similarly, the type of payment product used (e.g., credit or debit) and how that
product is used (e.g., face-to-face or over the Internet) affect the interchange rate and processing
requirements.
Who pays interchange?
The merchant’s financial institution generally pays interchange. Merchants make a payment to their
financial institution for Visa transactions, frequently referred to as a Merchant Discount or Merchant
Service fee. This is a market-based fee set by each merchant’s financial institution operating in a
competitive marketplace — merchants can choose their financial institution in the same way
cardholders can choose the financial institution that issues their Visa card. Interchange is only one
component of this cost of doing business.
How much is interchange?
Among other things, interchange varies by the type of merchant, cost of the sale, payment product
type, processing technology the merchant uses and region or country. For example, transactions at
fuel merchants, quick service restaurants and car rental agencies each possess unique attributes that
require different interchange categories and processing strategies. Similarly, the type of payment
product used (e.g., credit or debit) and how that product is used (e.g., face-to-face or over the
Internet) affect the interchange rate and processing requirements.
Can merchants negotiate interchange rates?
Merchants do not pay interchange directly. They pay a Merchant Discount or Merchant Service fee
that they can actively negotiate directly with their financial institution. Interchange is a mechanism that
helps manage a worldwide system made up of thousands of financial institutions, millions of
merchants and millions of consumers.
Are you being sued over interchange?
Yes. In some countries, such as the United States and New Zealand, merchants have chosen to
attempt to negotiate their cost of accepting cards through litigation.
Are interchange rates regulated?
In some countries, price controls have been imposed on interchange. Such regulation has only
proved to harm consumers. In Australia, where interchange levels are regulated, merchants have
increased their profits, while consumers have lost card benefits and choice. Consumers are also
paying higher prices due to the check-out fees merchants can now charge.
How much revenue does Visa gain from interchange?
Interchange is the transfer rate paid by the merchant’s financial institution to the cardholder’s financial
institution for the vast majority of transactions. For ATM transactions, interchange flows in the
opposite direction, from the cardholder’s bank to the acquiring bank. It is part of financial institutions’
cost structure.
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Fred Erickson
fred@merchantaccountstandard.com
www.merchantaccountstandard.com
Higher Standards, Inc
Voice: 612.229.8808
eFax: 1.888.657.8529