Credit Card Processing Explained

Credit card processing is a complicated system - with several players!

Have you ever been watching a football game, and noticed the Mastercard or VISA sponsorship? Have you ever wondered how these credit card networks like VISA, Mastercard, Discover, AMEX, get so big? It’s because of something called Interchange.

Interchange is the cost of insuring the credit transaction by the consumer. When you go to the store and buy a pair of shoes with your VISA credit card, there is a percentage fee that is assessed to the volume of that transaction as insurance for the parties that are guaranteeing that purchase on your behalf - the processor, the network, the acquiring bank and sponsoring bank - all have skin in the game in terms of you paying your credit card bill. If you don’t pay your credit card bill, all of those parties will not be able to cash in on the credit they extended you.

In order to offset this inevitable business loss on behalf of the different parties, there is a ‘tax’ that is assessed to each credit card transaction. This tax compensates the transaction guarantor for the risk that they are incurring in their business scheme.

That said, most of us, pay our credit card bill pretty consistently and regularly - so these entities that are being compensated for the risk they are incurring, are getting a lot more in than they are losing from credit card debt default. That is how and why these networks are so large and prolific.