Understanding the ‘Interchange rate’
Features of the VISA payment system’s operation
The Visa Interchange rate is the fee paid by the merchant’s bank to the cardholder’s bank each time a VISA card transaction is processed. For credit cards, it is typically a small percentage of the transaction, while for debit cards it is a fixed fee.
The amount of interchange fee varies greatly depending on the card type, associated risks, and the country where the transaction is initiated. Fees can vary depending on the location of the financial institution that issued the card and the country or economic zone where the merchant’s bank is located.
Interchange enables the operation of the payment system, which allows financial institutions to connect merchants and cardholders in more than 170 countries. This allows financial institutions integrated into the VISA system to provide benefits to cardholders – from fraud protection to 24/7 customer support through balanced economic relations between all participants.
VISA charges interchange fees as a fee for conducting a transaction between financial institutions. Merchants do not pay interchange fees; merchants pay a “merchant service charge” to their bank. This is a crucial distinction because the merchant is purchasing a type of processing service from their bank; all of these services may be bundled into the cost of their “merchant service charge”, which is typically a percentage rate per transaction.
Typical transaction
VISA payment transactions are carried out continuously, all over the world through VisaNet – the VISA network which connects financial institutions of merchants (acquirers) opening merchant accounts and cardholder’s banks.
- The cardholder selects the goods, agrees to pay for them at the retailer’s price, and provides their card for payment.
- The merchant provides purchase details, including VISA card information, to their bank for transaction processing.
- The merchant’s bank sends the purchase details to the cardholder’s financial institution.
- Upon successful adherence to the procedures requested by the bank, the merchant receives a “payment guarantee,” and the cardholder receives the goods.
- The cardholder’s financial institution debits an amount less than the retailer’s price, accounting for the interchange fee. The interchange fee may be unique based on a direct agreement between the cardholder’s and merchant’s financial institutions, or it may be a standard fee set by the VISA payment system.
- The merchant’s financial institution credits their account with an amount less than the price of the goods or services, which includes the Interchange Rate, transaction processing fees, terminal rental and customer support; the margin of the financial institution and the processing centre, and other expenses. These costs are negotiated directly between the merchant and their payment service provider.
Interchange rate is the cost of accepting a VISA card, similar to the cost of accepting cash, cheques, and other forms of payment. For example, counting cash takes time, and some money might disappear due to miscounting or theft. Cheques might be invalid, and the merchant would incur losses due to insufficient funds in the customer’s account. Accepting electronic payments includes significant guarantees for the merchant to receive the funds because the transaction is authorised directly by the customer’s bank.
If you would like to learn more about the mechanics of payment systems, please contact us for a consultation. We also provide assistance in establishing processing centres and opening offshore banks.