For the majority o card transactions—those involv-ing the Visa, MasterCard, and, in some cases, Discovernetworks—our parties are involved: the consumerand the merchant, as well as the bank that issuedthe credit card (the “issuer”) and the merchant’s bank (the “acquirer”). The latter is an institution that pro-vides card payment processing services, or which itcharges the merchant.
Figure 1 depicts the exchange o unds in a typicalour-party card transaction.
The gure depicts onlythe directional ow, not the timing, o the exchangeo unds and ees among the parties. Merchants paywhat is known as a merchant discount ee, whichincludes the interchange ee paid to the card-issuingbank, the network assessment ee paid to the cardnetwork, and the acquiring ee paid to the acquirer.While the merchant discount rate is composed o three separate ees, the interchange ee is the larg-est component. Logistically, while authorization o
transactions (based on the availability o unds orcredit or debit and credit purchases, respectively)occurs in real time, nancial settlement takes placewithin one or two days o the transaction date.
Forsimplicity, Figure 1 represents one transaction. Whena cardholder makes a purchase, the merchant sub-mits the transaction to the acquirer, usually daily. Theacquirer sends the transaction to the issuer or pay-ment through the card network. The issuer subtractsthe interchange ee and submits the net amount tothe acquirer through the card network. The acquirerthen pays the merchant the net o the transactionamount less the interchange ee. While the network assessment ee and acquiring ee are per-transactionees, both are generally billed by the acquirer to themerchant on a monthly basis.
The Economics of Interchange Fees
The demand or card payment services is otendescribed as a “two-sided” market: a payment card
Note: Fees in this example are typical but not average. Dollar amounts, except network assessment ee, are rom a similarow chart in “Rising Interchange Fees Have Increased Costs or Merchants, but Options or Reducing Fees Pose Challenges,”a Government Accountability Oce report rom November 2009.* The card network assesses additional ees on the issuer and merchant.
Cardholder uses cardto make $100 purchase.
Merchant’s bank (acquirer)retains $0.40 acquiring ee and$0.10 network assessment eeand transers $97.80 to merchant.
Cardholder pays $100to card-issuing bank.
Figure 1: Typical Card Transaction
Card-issuing bank (issuer) approvestransaction, retains $1.70 interchange ee,and transers $98.30 to merchant’s bank.
Merchant submits $100transaction or approval.
Cardholder MerchantAcquirerIssuerCard Network*
Merchant absorbsdiscount ee o $2.20.