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Association Interchange Process Overview

Both Visa and MasterCard, the two national Associations, are owned by member banks and governed by separate Boards of Directors. Funded through assessments and fees charged to member banks based largely on bank card volumes (representing cardholder purchases), these national associations perform several key functions, including:
  • Licensing of banks for issuance of cards to consumers
  • Operating regulations
  • National and international settlement and authorization systems
  • Interchange
  • Product development
  • Advertising and promotion
As mentioned, a critical function managed by the national Associations is that of interchange. This interchange function enables banks around the world to exchange information, transactions, money, and other items on a standard and consistent basis.

An important component of the interchange function is the fee, which is assessed back to all merchants. The purpose of the fee is to compensate the cardholder’s bank for the free period between settlement (payment) to the merchant bank for cardholder purchases, and the collection of purchase amounts from billings to cardholders. Additionally, other operating costs incurred by the cardholder’s bank are also considered in the interchange fee. Both Visa and MasterCard Associations set and regularly adjust the fee. There is one set of interchange fees for MasterCard transactions and another for Visa transactions. The fee always flows from the merchant’s bank processor to the cardholder’s bank.

For example, if a purchase amount is $100 and the interchange fee is 1.5% plus 7 cents per transaction, the amount of the interchange fee is calculated as follows:

              $100 x 1.5% + $.07 = $1.57 (Interchange Fee)

Representing the merchant, the merchant’s bank pays the interchange fee to the cardholder’s bank through the respective Visa and MasterCard settlement systems. The dollar value that the merchant’s bank receives for merchant transactions sold to interchange is “discounted” to the merchant bank.

The amount of these fees depend on many factors, including whether or not credit card transactions are electronically authorized with terminals or cash registers in merchant locations and entered into interchange for “prompt” settlement (within a specific number of days after the purchase date).

Over the past several years, both associations have upgraded and/or substantially changed their programs in an effort to encourage the use of advanced technologies at the point-of-sale such as the Compass Technologies EPP application. The sophistication level of the point of sale equipment has become a factor in determining interchange levels since enhanced data received in the authorization must be retained and returned with the deposit transaction to achieve the best rates. The resulting transition to a revised multiple rate interchange fee structure more accurately reflects the unique needs of various segments of merchants in the marketplace and thereby ensures that credit cards remain a viable payment mechanism.