Why is the credit card called “the most ๐ฉ๐ซ๐จ๐Ÿ๐ข๐ญ๐š๐›๐ฅ๐ž product in banking history”?

How does VISA make money?

The diagram below shows the economics of the credit card payment flow.

1. The cardholder pays the merchant $100 to buy a product.

2. The merchant benefits from the use of the credit card with more sales volume, and needs to compensate the issuer and the card network for providing the payment services. The acquiring bank sets a fee with the merchant, called the “๐ฆ๐ž๐ซ๐œ๐ก๐š๐ง๐ญ ๐๐ข๐ฌ๐œ๐จ๐ฎ๐ง๐ญ ๐Ÿ๐ž๐ž.”

3 - 4. The acquiring bank keeps $0.25 as the ๐š๐œ๐ช๐ฎ๐ข๐ซ๐ข๐ง๐  ๐ฆ๐š๐ซ๐ค๐ฎ๐ฉ, and the rest of $1.75 is paid to the issuing bank as the ๐ข๐ง๐ญ๐ž๐ซ๐œ๐ก๐š๐ง๐ ๐ž ๐Ÿ๐ž๐ž. The merchant discount fee should cover the interchange fee.

The interchange fee is set by the card network because it is less efficient for each issuing bank to negotiate fees with each merchant.

5. The card network sets up the ๐ง๐ž๐ญ๐ฐ๐จ๐ซ๐ค ๐š๐ฌ๐ฌ๐ž๐ฌ๐ฌ๐ฆ๐ž๐ง๐ญ๐ฌ ๐š๐ง๐ ๐Ÿ๐ž๐ž๐ฌ with each bank. Each bank pays the card network for its services every month. For example, VISA charges a 0.11% assessment plus a $0.0195 usage fee for every swipe.

6. The cardholder pays the issuing bank for its services.

๐Ÿ‘‰ Why should the issuing bank be compensated?
๐Ÿ”นThe issuer pays the merchant even if the cardholder fails to pay the issuer.
๐Ÿ”นThe issuer pays the merchant before the cardholder pays the issuer.
๐Ÿ”นThe issuer has other operating costs, including managing customer accounts, providing statements, fraud detection, risk management, clearing & settlement, etc.

๐Ÿ‘‰ Over to you: Does the card network set up the same interchange fee for big merchants and small merchants?

Click Follow for more Payments Illustrations. Hua Li

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