Four-party Payment System

This card payment system (the Visa and Mastercard models) involves interchange as part of the merchant discount fee. The parties include: 

• end-users/cardholders and card issuers/banks on the card usage side, and

• suppliers and merchant acquirers (“suppliers’ banks”) on the card acceptance side

These four parties are linked by the card network (Mastercard or Visa), which technically equates to a fifth party.

Who Earns the Interchange Revenue? 

Card issuers/banks, not the card network, receive interchange, which is the largest component of the merchant discount fee. The card network only receives a very small portion of the merchant discount fee; this portion is referred to as a network, assessment or switch fee.

Who Controls Interchange?

Interchange rates are set and managed by the card networks, but might be subject to external requirements stemming from litigation or government regulation. Rates vary by country.

What Other Factors Impact Interchange?

Interchange rates are impacted by other factors, too, such as supplier type, the card product used, whether or not a card is physically present at the point of purchase, the data provided by the supplier in conjunction with processing a transaction, etc. For example, card-not-present (CNP) transactions, such as online purchases, are generally associated with higher rates because they represent greater risk than a card used in person at the point of sale.

The rates are available for the public to view through the respective network websites.

Three-party Payment System

In contrast to the above, the card network in this type of card payment system also fulfills the role of card issuer and merchant acquirer. Examples include the traditional American Express and Discover models.  

Suppliers still pay a merchant discount fee for card acceptance, but the fee is structured differently (no interchange component).

For both card payment systems, the fee that suppliers pay is typically 2–4% of the transaction amount.