Who Gets Paid on a $100 Card Purchase

So far this series has followed a payment and named the parties along the way. Now follow the money, because each party takes a piece, and those pieces explain most of the decisions that come later.

Take a $100 purchase. Every figure here is illustrative, and real rates vary widely.

The merchant doesn’t receive the full $100. It pays its acquirer a fee, often called the merchant discount, of around 2%, so it receives about $98.

Most of that $2 goes to the issuer as interchange, say $1.40. It is the largest piece and the idea to understand first. In practice it is netted out in settlement: the issuer sends the acquirer $98.60 instead of $100. The acquirer pays the merchant $98 and pays the network about 15 cents in fees, which leaves it roughly 45 cents.

Interchange exists because the issuer carries the credit risk, the fraud risk and the cost of rewards, while the merchant gets a guaranteed payment and access to customers who prefer to pay by card. It varies by card type, merchant category, region and how the payment was made, and some markets cap it by regulation. Credit cards usually earn more of it than debit cards, which is part of why issuers offer rewards on them. A rate quoted in one country says little about another.

Interchange is not the issuer’s only income. It also earns interest on credit balances, fees such as annual, late and replacement fees, a margin when a payment crosses currencies, and the value of holding customer money for a while. Against that, it pays for fraud losses, credit losses, processing, rewards, network fees, compliance and customer support.

A card program works when income exceeds those costs. A card that is used heavily but earns little interchange can lose money, and generous rewards need enough spending to pay for them. That is why later choices about card type, spending patterns and fraud controls all come back to money.