Oct 14, 2006

How much do banks lose when they reimburse credit card surcharges?

Merchants in India that operate POS terminals typically pay up to two per cent in merchant fees to their card-acquiring bank, with 30 basis points going to Visa or MasterCard, 110 basis points in interchange fees to the card issuer, and the acquiring bank retaining the balance of up to 60 basis points.

When a bank agrees to reimburse cardholders for the credit card surcharge that merchants add to the transaction, the loss is huge.

110 basis points in interchange fee revenue, wiped out.
30 basis points paid to Visa or MasterCard, out of the issuer’s pocket.
60 basis points paid to the acquirer, also out of the issuer’s pocket.

This could be the worst case scenario for banks facing interchange pressure in other countries. Not only do 110 basis points of interchange revenue disappear, but the issuer has to pay for card acceptance as well. All of this has to be made up in fees charged to the cardholder (which nobody wants to pay anymore) or in interest margins (not much left there, either).

1 comment:

Arvind S Kelkar said...

Wow! Excellent post!! I was doing research for a college project on the "Credit card / debit card processes and systems in India". Do you any good sources? So far your blog has been the best source.
I have a few questions. Please write a post that will throw light on this.

1. Why do some players in this entire exchange get higher margins than the others?

2. How are clearing and settlement services in India carried out? Is it gross or net?

3. Can you throw some light on the relationship between merchant acquirer and gateway? Do they overlap?

4. How is fraud taken care of by the different players in the entire process?

Will check your blog again. Thanks for the excellent information again! :)