Thursday, June 7, 2012

Bank Merchant Services Interchange

Bank Merchant Services InterchangeBank merchant services interchange provides incentives for banks to issue credit cards and for businesses to accept them (see details). It is a fee that is paid by the retailer's bank (the acquirer or processor) to the customer's bank (the card issuer) and is designed to compensate the latter for the risks and costs it takes to manage its cardholder accounts. These include the finance costs for the interest-free period that lasts from the time a customer makes a sale to when he pays his bill, as well as for credit losses, fraud prevention and processing costs.

Setting the various interchange fees necessitates achieving a careful balance. If they are set too high, the bank merchant services user' desire for accepting bank cards will diminish. If interchange fees are set too low, on the other hand, the issuers' desire to continue issuing cards and maintaining cardholder accounts will decrease and so will the use of cards.

MasterCard and Visa periodically re-examine interchange fees to make sure that the rates provide to everyone involved: the merchants, the issuers and the cardholders. Each Association keeps dozens of different interchange rates that account for the differences between the various card programs, like e-commerce, gas stations or restaurants.

The discount rate that merchants pay when they accept credit cards is typically a small percentage of the cost of the products or services the retailer pays its bank when a card is used. It includes the interchange fee and is negotiated between the retailer and its bank. The Associations are not parties to these negotiations.

The Associations operate networks that facilitate the communications among four separate parties:
  • The issuer markets and issues bank cards to customers and provides credit to cardholders from when a purchase is made until a payment is due.
  • The cardholder uses the bank card to buy merchandise and services at millions of locations around the globe.
  • The bank merchant services user accepts bank cards for the payment of products and services.
  • The acquirer contracts with retailers and provides them with bank card acceptance and processing services.
By contrast, three-party systems, like Discover, charge discount rates that are often higher than the ones for accepting Visa and MasterCard cards. As three-party system providers act as both issuers and processors, they do not have to set interchange rates. They can use the fees collected directly from retailers to cover the costs for the issuing of the cards.

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