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How do payment networks make money?

Answer by Gus Fuldner:

Visa and MasterCard make money by charging fees to banks that participate in their respective networks.  They do not make money directly from merchant discount interchange fees by the merchant to the acquiring or issuing bank or from fees charged to the consumer (e.g., late fees, interest, etc.). 

The major components of revenue (from largest to smallest) are:

1. Network participation fees
Issuing banks (the cardholder's bank) pay a service fee that is a percentage of the payments value processed on cards (debit, credit, or prepaid) issued on that network. 

Acquiring banks (the merchants bank) also pay a service fee that is a percentage of the payments value processed through that network. 

2. Data processing fees
Issuing and acquiring banks also pay small fees for each transaction that is authorized or settled on its network.  These fee are not related to the value of the transaction. 

3. International transaction fees
Revenue from currency conversion and other international transaction fees.

4. Other
Revenue from operating rewards programs, concierge services, marketing promotions for certain merchants, and other programs that issuing banks offer to cardholders. 

Both companies are publicly traded so you can read their annual reports if you want more detail.

Visa: http://www.sec.gov/Archives/edgar/data/1403161/000119312510265236/d10k.htm
MasterCard: http://www.sec.gov/Archives/edgar/data/1141391/000119312511044721/d10k.htm

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