The Green Sheet Online Edition
March 10, 2008 • Issue 08:03:01
Interchange for smarties
"Interchange for dummies," by Steven Feldshuh, which appeared in The Green Sheet on Oct. 8, 2007, issue 07:10:01, is not 100% accurate (to my knowledge). The first section states:
"Interchange is the wholesale price (also called discount rate, fee and variations thereof) charged by Visa U.S.A. and MasterCard Worldwide for authorization and settlement of a credit card transaction. For example, a merchant is charged 3.5% for each credit card transaction made at the merchant's store.
"If a customer makes a $10 credit card purchase, 3.5% of $10 is 35 cents. About 80% of that 35 cents (about 28 cents) goes to the issuing bank. The remaining 20% (7 cents) is divided among Visa or MasterCard, the processor and the merchant level salesperson (MLS), if there is one.
"So, if the card issuing bank makes 28 cents and Visa gets, say, 3 cents of the remaining 7 cents, then interchange would be 31 cents on that transaction."
But my understanding is a little different:
Interchange is the wholesale price charged by the Visa/MasterCard Associations. They remit those fees to the issuing bank as part of being a Visa or MasterCard card issuer. Dues and assessments are charged by Visa and MasterCard.
One hundred percent of interchange fees are paid to the issuing banks (and yes they get the annual percentage rate they charge to the customer who has the card as well); 100% of dues and assessments are paid to Visa and MasterCard. These dues and assessments are 0.095% for MasterCard and 0.0925% for Visa. There's also BASE I, BASE II and MasterCard INET, Visa ACQ and MasterCard ACQ surcharge and gateway fees - all fractions of pennies.
One hundred percent of any markup over interchange, dues and assessments are given to the processor. The percent allotted to the ISO is determined by your agreement with the processor; the percentage given to the merchant level salesperson is determined by your agreement with the ISO.
Visa and MasterCard don't receive any portion of interchange; they are associations of member banks. The member banks issue the cards, take all the risk, deal with all the customers and so forth. For all intents and purposes, Visa and MasterCard are just brands and marketing machines. But in order to incent the banks to issue the cards, MasterCard and Visa compete and pay the banks interchange for all transactions processed on those cards.
Here's an example of a $10 transaction:
$10 Charge from merchant to customer
$0.35 Charge to merchant to process $10 transaction (3.5%)
$0.33 100% of interchange (set at 2.3% + $0.10) to issuing bank
$0.00925 100% of Visa/MasterCard dues and assessments
$0.0108 100% of markup to processor
Vault Payment Solutions LLC
We were unable to reach Steven Feldshuh for comment; he is no longer with Tribul Merchant Services. On behalf of him and The Green Sheet, thank you for your clarification.
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