Interchange is a part of the system that makes electronic payments possible.
Interchange is the transfer rate exchange between the retailer’s financial institution (an acquirer) and the cardholder’s financial institution (an issuer) every time a Visa payment product is used.
Interchange provides the incentives necessary to assure that financial institutions invest in the Visa system and the benefits that we all enjoy with payment products – from protection against fraud to car rental insurance coverage to airline miles to 24/7 customer service. Visa also uses interchange as a tool to aid financial institutions in signing up more retailers to accept Visa so that cardholders can use their Visa credit or debit card to fuel up at the gas station, buy stamps at the post office and pick up a 50th anniversary gift for your parents in the same afternoon – all without carrying a cheque book or fumbling for cash.
In today’s market, consumers are opting more often to pay with credit and debit cards. Every day, Visa connects thousands of financial institutions, hundreds of thousands of businesses and millions of cardholders to make all of your everyday purchases possible around the globe.
Understanding a Visa Transaction
Visa is a global payments technology company that connects consumers, businesses, financial institutions, and governments in more than 200 countries and territories to fast, secure and reliable electronic payments. And while paying with your card in a store or online is easy and fast, there is a lot more happening behind the scenes.
A typical Visa transaction actually involves four distinct players:
A retailer is the store, restaurant, online retailer, hotel, airline or other entity that accepts Visa as payment.
An acquirer is a financial institution that signs up retailers to accept Visa payments and makes sure those retailers get paid for those transactions as a result.
An issuer is a financial institution that provides consumers with Visa-branded cards or other Visa-branded products. When a Visa credit card is used, the issuer actually "lends" the consumer the funds to make the transaction.
A cardholder is the consumer who chooses to use their Visa card or other Visa-branded payment product to make purchases.
When a cardholder uses a Visa card to pay, the cardholder, retailer, acquirer and issuer all play a role. For example, a cardholder uses a Visa card to buy a pair of shoes. It's actually the retailer’s bank, or the acquirer, that reimburses the retailer for the pair of shoes. The cardholder's bank, or issuer, then reimburses the acquirer, usually within 24 to 48 hours. And finally, the issuer collects from the cardholder, whether through funds from the cardholder's bank account if a debit card is used, through billing if a credit card is used or from a prepaid account if a gift card is used.
The system works because all participants get value from the transaction, whether it's convenience, worldwide acceptance, a more secure way to pay, stronger customer loyalty or business efficiencies, among others.
The Economics of Participating in the Visa System
Like every other business, participants choose with whom to do busines and at a price commensurate with the value they receive. There is a cost to participating in the Visa system and accepting Visa products. And each participant’s decision depends on a range of factors:
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 interchange; the cost of transaction processing, terminal rental and customer service; and their financial institution's or processor's margin. Merchants may change financial institutions in search of a better Merchant Discount rate or broader services.
Retailers' and cardholders' financial institutions pay certain 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 make other investments in expanding Visa's business.
Additional value is exchanged between retailers' and cardholders' financial institutions through interchange. Visa establishes this transfer rate level of interchange. Among other things, interchange helps fund the various cardholder benefits and innovations that consumers have come to expect. As a result, interchange ensures that both retailers' and cardholders' financial institutions are able to attract new customers, expanding participation in the Visa network to the benefit of all parties.
Cardholders may pay certain fees to their financial institution, which may vary by the type of account or be based on other features and services provided by the financial institution to its cardholders.
Frequently Asked Questions
Most people don’t realize that Visa is not actually a credit card company. Today, Visa is a secure network built to ensure safe, convenient, and fast transactions for merchants, issuers, and consumers. Visa enables payments all over the globe and is the central system to make Visa payments possible.
Payments can be complex to understand; however, each participant in the network: those selling, paying, processing, funding, and verifying each transaction has an important role in making the payments possible. The value of this service is reflected by fees each party collects to ensure a smooth and reliable flow of transactions.
One commonly misunderstood term is interchange, the fee exchanged by financial institutions to make payments for merchants possible. The below FAQ explains interchange and why this fee is a necessary component of the payments system.
Interchange is the fee that Visa sets and is paid by the merchant’s financial institution (the acquirer) to a cardholder’s financial institution (the issuer).
Interchange is not revenue to Visa in Canada. Interchange is a value transfer between financial institutions for accepting payments.
No. Consumers do not pay interchange. Interchange is a fee that a merchant’s financial institution pays to a cardholder’s financial institution for a payment transaction.
Visa sets default interchange rates in Canada. Visa carefully sets rates that incentivize financial institutions to provide consumers with a way to pay merchants. On the merchant’s side, the merchant’s financial institution pays a fee due to the value of access to more customers and therefore more revenue. Striking the right balance creates a system where everyone is compensated for the service they provide and offers consumers choice in how they pay.
Visa Canada adheres to a voluntary commitment with the Canadian Department of Finance that manages domestic consumer credit interchange rates to an average level of 1.40%. Annual third party validation confirms adherence to this commitment and any modifications to rates must comply with the notice requirements prescribed by the Code of Conduct for the Credit and Debit Card Industry in Canada which is overseen by the Financial Consumer Agency of Canada (FCAC).
No. Interchange is the fee that a merchant’s financial institution pays to cardholder’s financial institution for a payment transaction. A surcharge is a fee applied at the discretion of a merchant to customers choosing to pay by card and becomes revenue for the merchant.
Acquiring Network Assessment Fees are fees charged by Visa to acquirers for transmitting transactions through the Visa network. These fees are a cost to acquirers that may impact the overall pricing they set for their merchants.