Interchange
A Cornerstone of the Electronic Payment System
Interchange rates power the electronic payments system, a powerful, global network, which enables financial institutions to connect merchants and cardholders. For any network model to succeed, participants must be encouraged to maintain usage of the network and invest in network improvements. Within the Visa network, this balancing act is achieved in part through a predetermined and centrally set default interchange fee — a highly effective way to balance the varied interests of a complex network of financial institutions, retailers and other parties. Interchange is recognized globally as an appropriate and essential element in managing our valued network.
A Question of Balance
Specifically, interchange is the small amount of money transferred from one financial institution, the retailer’s bank, to another, the cardholder’s financial institution, each time a Visa payment product is used. The primary role of interchange is to create an equitable balance of incentives between a cardholder’s financial institution — which issues Visa cards to consumers — and a retailer’s financial institution that enrolls retailers and processes Visa transactions for them.
Retailers do not pay an “interchange reimbursement fee”; retailers pay a "merchant discount fee" to their financial institution. This distinction is subtle but necessary because retailers receive in return a number of processing and other services from their financial institutions, all or many of which are included in their merchant discount rate.
Fundamental Value
We believe that interchange is fundamental to the value Visa delivers to retailers, financial institutions and cardholders alike. It assures that financial institutions invest in the Visa system and the benefits that all cardholders enjoy — from fraud protection to car rental insurance to airline miles to 24/7 customer service. It also ensures that retailers benefit from the system through guaranteed payment, speed, efficiency and reliability that only electronic payments can bring. By carefully balancing the economics among all participants, interchange encourages more retailers to accept Visa and banks to issue Visa to their cardholders.
Like every business, participants choose with whom they do business and negotiate the price they pay for the value received. There is a cost to participating in the Visa network and accepting Visa products, and each participant’s decision to participate or not is unique.
Retailer and Financial Institution Clients
Retailers negotiate the “merchant discount” or “merchant service” fee they pay to their financial institution. The merchant discount may include a number of costs, including, for example, interchange, the cost of transaction processing, terminal rental and customer service. This fee also includes their financial institution's or processor's margin. Retailers are free to change financial institutions in search of a better merchant discount rate or a greater level of service for their money.
Retailer and cardholder financial institutions pay fees to Visa to participate in the system. Visa uses these revenues to maintain Visa's global payments network, strengthen the Visa brand through a range of marketing and promotional activities, support the development of new Visa products and processing services, and expand Visa's business.
Additional value is exchanged between retailer and cardholder financial institutions through the interchange rate established by Visa — among other things, interchange funds, cardholder benefits and innovations that consumers have come to expect. Interchange ensures that both retailer and cardholder financial institutions can attract new customers, expand participation in the Visa network and provide benefits and innovations to all parties.
Misguided Intervention
Currently, Washington-based retail trade associations are lobbying and litigating in an attempt to lower the cost retailers pay when they accept payment cards. They want to allow retailers to continue to benefit from the payment network in which they participate without paying their fair share. Instead, they would like consumers to pay. Through regulation and litigation, they are seeking to establish a price-setting body that would remove the ability for the market to set rates. And they have also advocated for the ability to surcharge transactions on payment cards, an anti-consumer practice currently prohibited in 10 states.
Visa believes that these attempts not only are wrong but also are harmful to consumers and other system participants. The regulatory intervention that the retail lobby seeks would result in fewer payment choices, a reduction in benefits for consumers and possibly higher costs for consumers in their monthly statement and/or at the checkout counter. Ironically, merchants would also suffer from unintended consequences of poor regulatory intervention. This scenario has been tested in Australia, with harmful and unintended consequences for all parties.
Visa continues to believe that vigorous and fair competition, rather than government regulation, should be the guiding principle in the development of a safe, robust and innovative payment system. Visa remains concerned that the artificial suppression of interchange may lead to less competition and reduced innovation in the marketplace but remains committed to providing a world-class payment system that meets the fundamental payment needs of consumers, retailers and financial institutions globally.
