12
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CMSPI – IAC State of the Industry Report
CMSPI – IAC State of the Industry Report
HOW NEGOTIABLE ARE CARD FEES? While interchange fees and network fees set by card networks in a four-party model are typically non-negotiable, these fees can occasionally be directly negotiated by merchants in certain markets, but it usually requires an act of regulation and/or direct network competition on a given card transaction. Germany’s Girocard is an example of a domestic debit card network that negotiates directly with merchants (see Section 5.3.2). The acquirer fee is the only truly negotiable aspect of the MSC, and as a result these fees tend to fluctuate significantly between merchants, with higher rates generally paid by smaller merchants and merchants that may pose a risk of default to acquirers. Section 1.1.2 – Three-Party Card Networks In a three-party card network, one entity often performs the role of acquirer, issuer and network. These financial institutions contract directly with merchants and consumers, in addition to providing their own payments infrastructure. Prominent examples of three-party networks include American Express and Discover. 11 Fee structures are generally simpler for a three-party card network, since there is usually only one entity being paid. As a result, there is no need for separate interchange, network and acquirer fees; merchants tend to be levied one single fee for each transaction. 12
WHAT IS MERCHANT SERVICE CHARGE? The Merchant Service Charge (MSC), sometimes known as the Merchant Discount Rate (MDR) in the U.S., is a term given to fees levied on a merchant when accepting a card transaction. The MSC generally consists of three main fees for each transaction, each flowing to a different stakeholder in the payments system. • Interchange is typically the largest cost within the MSC and is the fee that the card-issuing bank receives from the acquirer, or processor. Interchange fees are usually set by the card network. • Network fees, or scheme fees, are the charges levied by the card networks on the merchant acquirer. 10 • The acquirer cost, or processor cost, is the fee the acquirer, or processor, receives from the merchant. The acquirer adds the interchange fee and the network fee to the acquirer costs, which is then passed on to the merchant as the MSC.
EXEMPLARY CARD FEES STRUCTURE Interchange Fee
Network Fee
Processor Fee
Note: % share of each type of fee varies by country, type of merchant and other factors
75%
20%
5%
Figure 1.4 – Three-Party Card System
Figure 1.3 – Typical Card Fee Structure in the U.S.
11 CMSPI understands both American Express and Discover have partnerships with third-party issuers, which may be considered a 4-party model. 12 In some instances, merchants will use other processing partners to facilitate a 3-party transaction, but still the combi- nation of interchange and network fees into a single cost simplifies the fee structure.
10 Card networks typically levy fees on both the issuing bank and the acquiring bank. The scheme fees levied on the issuing bank are not included in the MSC.
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