Understanding Visa and Mastercard Earnings on Each Transaction

When it comes to processing payments through Visa and Mastercard, the revenues earned vary based on several factors. Understanding how these payments are structured and the different fees involved can offer valuable insights for merchants and cardholders.

Revenue Models of Visa and Mastercard

Visa and Mastercard do not earn a fixed amount on every transaction. Their earnings are influenced by several factors, including the transaction amount, the type of merchant, and the specific agreements with banks and payment processors.

Interchange Fees

While Visa and Mastercard set the interchange fee structure, they do not receive this fee directly. Instead, the merchants' bank (acquirer) pays it to the cardholders' bank (issuer) as a part of a transaction. Typically, the interchange fee can range from about 1% to 3% of the transaction amount. This is a significant component of the overall processing fees.

Assessment Fees

Visa and Mastercard also charge assessment fees directly to the acquirer. These fees are typically a percentage of the transaction amount, usually around 0.13% to 0.15%. This fee is associated with the network usage for each transaction.

Service Fees

In addition to the above fees, Visa and Mastercard can charge additional fees for services such as fraud prevention and data analytics. These fees are designed to cover the costs of providing these critical services to ensure secure and efficient payment processing.

The Term 'Interchange Fees' Explained

The term 'interchange fees' has specific meanings in the payment processing industry. It does not solely pertain to the cardholder or the merchant's transaction location. Instead, it is an agreement between the acquirer (merchant's bank) and the issuer (cardholder's bank) that covers the cost of processing a transaction through the payment network.

The Key Players in a Card Transaction

Issuing Bank/Credit Card Issuer: The bank or organization that issued the card to the cardholder. Acquiring Bank: The bank that settles the payment to the merchant's account. Card Network: Visa, Master, American Express, etc. These networks handle the communication between the acquiring and issuing banks. Switch: This is a system that connects all the parties involved in the transaction and processes the payment in real time. Processing Platform/Payment Gateway/Merchant Location: This includes the service provider that processes the payment and captures the transaction details.

Transaction Fee Breakdown

When you use a credit or debit card to make a payment, several parties benefit from the transaction. Typically, merchants are charged between 1.99% to 3.5% per transaction. This fee is normally hidden from the payer and is deducted from the final payment settled to the merchant's account. The primary beneficiaries of the transaction fees are:

The Card Company (Visa, Mastercard, etc.) receives the highest portion of these fees. The Issuing Bank (the bank that issued the card to the cardholder). The Processing Platform/Payment Gateway/Merchant Location.

While detailed cost breakdowns for specific transactions are not publicly available, a justified cost for a credit card-based transaction falls within the range of 1.99% to 2.5%. For debit card transactions, the costs are generally lower, ranging from 0.75% to 1%.

Visa, in addition to its interchange fees, also charges a network usage fee that ranges from 0.1% to 1.5% of the transaction value.

Conclusion

Understanding how Visa and Mastercard earn revenue on each transaction is crucial for merchants to manage their costs effectively and for cardholders to be aware of the fees associated with their payments. By familiarizing yourself with the different components of the transaction fees, you can make more informed decisions about your payment methods and manage your financial transactions more efficiently.