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
Visa sets interchange in a manner that balances the value and economics among all parties that participate in the Visa network – retailers, financial institutions and cardholders. If interchange is too low, then cardholders' financial institutions won't issue cards; if interchange is too high, retailers won't accept them.
Interchange is set in response to dynamic and highly competitive market forces and strikes the right economic balance between participants in the payment network. Among other things, it varies by the type of retailer, cost of the sale, payment, product type, processing technology the retailer uses and region or country. For example, transactions at fuel retailers, quick service restaurants and car rental agencies each possess unique attributes that may require different interchange categories and processing strategies. Similarly, the type of payment product used (e.g., credit or debit) and how that product is used (e.g., face-to-face or over the Internet) affect the interchange rate and processing requirements.
The retailer's financial institution generally pays interchange. Retailers make a payment to their financial institution for Visa transactions, frequently referred to as a Retailer Discount or Retailer Service fee. This is a market-based fee set by each retailer's financial institution operating in a competitive marketplace — retailers can choose their financial institution in the same way cardholders can choose the financial institution that issues their Visa card. Interchange is only one component of this cost of doing business.
Retailers and consumers do not pay interchange. Retailers pay what is known as a Merchant Discount or Merchant Service fee, which is negotiated with their financial institution and may include interchange; the cost of transaction processing, terminal rental and customer service; and the acquirer's or processor's margin, among other costs. So imposing price caps on interchange would not necessarily lower a retailer's costs for card processing.
Among other things, interchange may vary by the type of retailer, cost of the sale, payment product type, processing technology the retailer uses and region or country. For example, transactions at fuel retailers, quick service restaurants and car rental agencies each possess unique attributes that may require different interchange categories and processing strategies. Similarly, the type of payment product used (e.g., credit or debit) and how that product is used (e.g., face-to-face or over the Internet) affect the interchange rate and processing requirements.
There is a cost to accept Visa cards, just as there is a cost to accept cash, cheques and other forms of payment. For example, it takes time to count and deposit cash, and cash may disappear as a result of errors or theft. Cheques can be delinquent or cause losses to retailers because of a lack of funds in the cheque writer's account. The cost to accept electronic payments may be more apparent to retailers, however, because they are directly billed for the service.
Retailers do not pay interchange directly. They pay a Retailer Discount or Retailer Service fee that they can actively negotiate directly with their financial institution. Interchange is a mechanism that helps manage a worldwide system made up of thousands of financial institutions, millions of retailers and millions of consumers.
Retailers have options for lowering their costs if they genuinely believe that their card acceptance costs are too high. They can provide discounts to those who pay with cash, or choose to accept only cash or cheques. Or, retailers can shop around among competing financial institutions for the best prices offered by them.
In some countries, such as the United States, retailers have chosen to attempt to negotiate their cost of accepting cards through litigation.
Interchange in Canada is not regulated, however, Visa Canada has entered into multiple voluntary Undertakings to reduce domestic consumer credit interchange rates. As part of these agreements, which began in April 2015, Visa has managed domestic consumer credit interchange rates to an average effective interchange rate of 1.40% (this level was 1.50% prior to April 2020). Interchange is consistently monitored and adjusted to ensure adherence to this Undertaking and deliver balanced economics to all parties in the Visa system. These adjustments also enable Visa to incent usage and acceptance in new segments, new channels and on new form factors.
Interchange is the transfer rate paid by the retailer's financial institution to the cardholder's financial institution for the vast majority of transactions. For ABM transactions, interchange flows in the opposite direction, from the cardholder's bank to the acquiring bank. It is part of financial institutions' cost structure.
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.