What is interchange and why is it necessary?
Whenever you buy something with your Visa card, four parties are involved: You, your bank, the retailer you buy from, and the retailer’s bank.
Both banks perform a series of steps to ensure your payment is processed and transferred securely, and it reaches the retailer promptly.
When your bank sends your payment to the retailer’s bank (known as the acquiring bank), it deducts a small fee. This is called the interchange fee.
If interchange didn’t exist, your bank would not be able to cover the costs it incurs in operating your card services, such as fraud prevention and customer call centres. If this were the case, your bank may not choose to issue cards or might charge you for them.
Similarly, when the retailer’s bank sends the payment to the retailer, it deducts a small fee – this is called the Merchant Service Charge which incorporates the interchange fee plus additional amounts to cover services provided by their bank, such as guaranteed payment and the technology to accept card payments such as a terminal or contactless reader. This rate is negotiated directly between the retailer and its bank and Visa plays no role in this process.
For a step by step visual guide to interchange and the Visa four-party model, please visit our Annual Report.
What does it cost and how is this decided?
The level of interchange is a small set fee or a minor percentage of the transaction amount.
This fee is set by Visa and its members and varies by type of transaction and from country to country. For example, transactions with retailers who comply with the highest levels of payments security have a lower interchange fee. Similarly, countries which are investing heavily in new payments infrastructure tend to have higher fees. Other payments businesses also use the interchange model but set it at different, often higher, levels.
Visa Europe is a membership organisation made up of over 3,500 member banks in 37 countries. In each country Visa and the banks that sit on its board, decide the interchange fees appropriate for that country. They consider the type of card and its associated risk – for cardholders, businesses and member banks – in order to set the fee.
There is a current proposal from the European Commission to regulate interchange fees across Europe that aims to create clarity for all parties. For further information and our views on the proposal, please visit http://www.visaeurope.com/about-us/policy-and-regulation/
You can find details of the different interchange fees and further explanation at http://www.visaeurope.com/about-us/fees-and-interchange.
What is interchange used for?
Interchange is used to help the payment system function quickly and securely:
- It helps cover the costs of operating card services that banks might otherwise pass onto consumers
- It contributes to investment in creating the ease and security of electronic payments that consumers have come to rely on and expect; for example, Chip and PIN and Verified by Visa help reduce fraud and increase transparency
- It helps investment in the future development and maintenance of the system which in turn allows companies like Visa Europe to make payments faster, more secure and more convenient, such as Contactless. Any system that is used by millions of consumers and businesses each day benefits from continual investment
What is Visa's role and how does Visa make money?
Visa’s role is to make sure a payment works every time. It creates common operating standards, technology and processing platforms that enable safe and secure payments and helps to ensure the payments system works effectively.
Visa provides, on a competitive basis, the products, services, systems and operating regulations that enable our members to participate in the global Visa system. Visa does not receive any revenue from the interchange fee; rather our revenues are earned through three major areas:
- Association fees are determined by the number of cards issued and the extent to which these cards are used.
- Data processing fees are determined by each member’s connections to the Visa Europe processing systems and the extent to which these systems are used.
- International fees are determined by the extent to which Visa cards are used outside of Visa Europe.
Consumers want payments they don’t have to think about from a brand they trust, so we work at the forefront of technology to introduce new, faster, smarter, more convenient and more secure payment options to make that possible.
What do other people think about the role of interchange?
Views on interchange are regularly discussed in academic and business publications; a selection of which you will find here:
- The Economist looks at interchange:
- The International Center for Law and Economics looks at interchange:
- Industry news source Pymnts.com looks at interchange: