Card Acceptance FeeS
Suppliers pay a merchant discount fee in conjunction with accepting card payments. This fee helps fund the rebates that card issuers may extend to end-user organizations. The composition of the merchant discount fee is impacted by the type of payment system (four-party or three-party); see below. Payment systems are also referred to as payment schemes or card schemes, especially outside the United States.
Four-party Payment System
This card payment system (the Visa and MasterCard models) involves interchange as part of the merchant discount fee. The parties include:
- end-users/cardholders and card issuers/banks on the card usage side, and
suppliers and merchant acquirers (“suppliers’ banks”) on the card acceptance side
These four parties are linked by the card network (MasterCard or Visa), which technically equates to a fifth party.
Who Earns the Interchange Revenue?
Card issuers/banks, not the card network, receive interchange, which is the largest component of the merchant discount fee. The card network only receives a very small portion of the merchant discount fee; this portion is referred to as a network, assessment or switch fee.
Who Controls Interchange?
Interchange rates are set and managed by the card networks, but might be subject to external requirements stemming from litigation or government regulation. Rates vary by country.
What Other Factors Impact Interchange?
Interchange rates are impacted by other factors, too, such as supplier type, the card product used, whether or not a card is physically present at the point of purchase, the data provided by the supplier in conjunction with processing a transaction, etc. For example, card-not-present (CNP) transactions, such as online purchases, are generally associated with higher rates because they represent greater risk than a card used in person at the point of sale.
The rates are available for the public to view through the respective network websites.
Three-party Payment System
In contrast to the above, the card network in this type of card payment system also fulfills the role of card issuer and merchant acquirer. Examples include the traditional American Express and Discover models.
Suppliers still pay a merchant discount fee for card acceptance, but the fee is structured differently (no interchange component).
For both card payment systems, the fee that suppliers pay is typically 2–4% of the transaction amount.