Fees

Question 1

Why is Interchange the highest of the fees?

Answer 1

“Many of the costs of creating the card payment ecosystems are realized up by Issuers”

• Setting up programs
• Underwriting and assessing cardholders
• Managing risk
• Customer support

Hence, interchange fees tend to make up the bulk of the overall cost of a payment

Question 2

Factors influencing Interchange Rate

Answer 2

• Scheme: Visa vs. MasterCard
• Card Type: Commercial credit, premium reward cards, standard debit
• Funding source: Debit, credit, prepaid, stored card
• Shopper interaction: POS, e-commerce, MOTO, CNP vs. CP
• MCC (charities getting lower rates for instance)

Question 3

Interchange Rates in the EU

Answer 3

• 0.2% for Consumer Debit
• 0.3% for Consumer Credit Cards

Question 4

Scheme Fees - Definition

Answer 4

Scheme fees are the fees applied to transactions to compensate the networks in their role in facilitating a payment

Question 5

Scheme Fees - Rates

Answer 5

• Tend to be the lowest for domestic transactions and sum to 0.05%-0.2%
• For international transactions, scheme fees tend to be significantly higher and sum to 0.5%-1.5% of the transaction value

Question 6

Acquirer Markup - Definition

Answer 6

This fee goes to the acquirer and is typically a percentage of the settled amount

Question 7

Why Do Acquiring Banks Charge Fees?

Answer 7

“Without the acquiring bank, merchants would not be able to get paid”

• Acquiring bank assumes some financial risk
• Acquiring bank has to deal with sensitive cardholder data

Question 8

Interchange ++ Definition

Answer 8

Interchange ++ shows you a detailed breakdown of the three payment card costs

Question 9

The average Interchange Rate for a credit card payment in the US

Answer 9

1.8%

Question 10

Why do CP transactions have lower interchange?

Answer 10

Because the risk of fraud is lower when the customer’s card is physically present

Question 11

Durbin Amendment - Interchange Debit Regulation

Answer 11

• Only applies to banks with assets of $10bn or more
• 0.05% + $0.21

Question 12

Neo- Banks

Answer 12

• The majority of neobanks have capitalized on the debit interchange model
• And because the merchant is the one who pays the interchange fee, neobanks are still fee-free for users

Question 13

Why do credit cards have higher interchange than debit cards?

Answer 13

The issuing bank is compensated for the higher risk

Question 14

Why do reward cards have higher interchange?

Answer 14

Because the increased fees pay for the extras offered by rewards programs

Question 15

Is US credit interchange regulated?

Answer 15

No

Question 16

Recent Suggested Changes To US Debit

Answer 16

The changes would shave the “base component” of the interchange fee cap to 14.4 cents; that figure has been 21 cents. The proposed rule-making would also reduce the ad valorem component to 0.04%, a reduction from the current 0.05%

Question 17

Interchange Fee Regulation

Answer 17

• In force since December 2015 for all EU member states
• Consumer debit transactions are capped at 0.2% of transaction value
• Consumer credit transactions are capped at 0.3% of transactions value

“Commercial transactions are out of scope for the IFR”

Question 18

Decoupled Debit

Answer 18

“Non-bank issuers can issue debit cards that are not tied to a specific bank account”

• Usually associated with retailers (Targets’s REDcard), and can only be used at that retailer!

“If the retailer manages to encourage their customers to use those cards for payment, not only can they increase loyalty and spend, but they can also avoid interchange fees, because these cards use bank rails, not the card rails”

• With decoupled debit, the underlying bank will still be the entity that authorizes the transaction, but that would be done on the bank rails
• Acquirer and card scheme are not involved and the merchant is also the issuer of the card
• This is an early form of Account-to-Account (A2A) Payment, where the exchange of value is from the cardholder’s bank account to the merchant’s bank account

Question 19

Two types of Scheme Membership

Answer 19

• Principal Members (these members are allowed to settle with the scheme)
• Affiliate Members (these members are sponsored and supervised by principal members, who are in turn responsible for the settlement and other activities)