Visa-Mastercard settlement leaves wider card cost stack in focus

A judge last month gave preliminary approval to a $38bn Visa-Mastercard interchange settlement that includes a 10 basis point reduction in credit interchange rates, a 1.25% ceiling on standard consumer cards and broader merchant rights to add surcharges, according to Reuters and details cited by Dimitri Akhrin, president of BAMS. The Merchants Payments Coalition has called the agreement a “bad deal” for consumers and merchants, while Akhrin argued in a Finextra opinion that the settlement addresses only one component of what businesses pay to accept cards.

Interchange is the most visible part of card acceptance costs. It is attached to debit and credit transactions and is paid to the card-issuing bank. Akhrin said the level charged depends on factors including card type, transaction type, region, merchant category code and industry, with debit generally carrying a lower rate than credit because of different risk assumptions.

Other charges can affect the total cost borne by merchants. Assessment fees are paid to card networks such as Visa, Mastercard and American Express, and Akhrin said they are usually set at about 0.15%. Though small as a percentage of each transaction, the charge can become material across large volumes.

Costs beyond interchange

Online payments also involve gateway fees. A payment gateway protects and transmits payment data between the issuing bank and the merchant, but it does not approve the transaction. Akhrin said gateway charges may be less obvious because they are often supplied by the same companies that provide processing services.

Processors move transaction data from the issuing bank to the merchant’s bank and charge a markup for that service. Akhrin named BAMS, Stripe and PayPal as examples of processors. The markup is not necessarily a fixed dollar amount and can be calculated as a percentage of transaction value, which means it rises with larger payments.

International payments can carry a cross-border premium, reflecting the additional requirements associated with moving transactions across jurisdictions and currencies, according to Akhrin. Those costs sit outside the interchange reduction contemplated in the settlement.

Effective rate is the key measure

Akhrin said merchants should focus on the effective rate, meaning total fees paid divided by total payment volume processed. That measure captures the combined cost of interchange, network assessments, gateway charges, processor markups and other fees.

One driver of higher effective rates is downgrade pricing. Card networks set qualifying conditions for lower interchange categories, including data fields, authentication steps and batch settlement within a defined period, which Akhrin said is usually within 24 hours of authorization. If a transaction fails to meet the criteria, it can be moved to a higher default rate.

Merchant category code classification is another factor. Each merchant account receives a four-digit code identifying the type of business. Akhrin said that code affects the interchange bracket and can also influence chargeback monitoring and fraud oversight. A misclassification can therefore raise processing costs for a long period if it is not reviewed.

Data transmission matters particularly for business-to-business payments made with corporate or government procurement cards. Akhrin said card networks already publish lower interchange categories for transactions that include additional Level 2 or Level 3 data, such as tax amounts, purchase order numbers, item descriptions and customer codes.

Visa changed its framework in April, according to Akhrin, retiring its standalone Level 2 interchange programme and replacing it with the Commercial Enhanced Data Program. He said the new structure combines previous Level 2 and Level 3 incentives and applies tighter data-quality requirements.

Operational controls under scrutiny

Akhrin distinguished between accurate processing and misrepresentation. He said merchants can reduce unnecessary cost when transactions are correctly coded as card-present or card-not-present, when eligible Level 3 data is submitted, and when fraud-control tools reduce disputes and chargebacks.

He cited Address Verification Service checks, 3-D Secure and tokenization as tools that may reduce the likelihood of disputes. In his view, fewer disputes can limit reclassification into more expensive categories and reduce exposure to higher-risk treatment by processors.

The settlement may lower part of the published interchange schedule, but Akhrin’s analysis points to a broader issue for finance teams: whether payment statements disclose enough detail to identify downgrades, classification errors, cross-border charges and processor margins. The final cost of acceptance depends on those mechanics as well as on the headline rates set by card networks.

This story draws on original reporting from Finextra Research.