Visa, MasterCard Interchange Definitions

Want to know everything about Interchange?

The below glossory of terms were extracted from the May 23, 2008 second consolidated amended class action complaint re Payment Card Interchange Fee and Merchant-Discount Antitrust Litigation, filed in the U.S. District Court Eastern District of New York.  These definitions of key terms associated with the antitrust litigation are helpful, especially if any defense attorneys or advocacy groups are unfamiliar with interchange issues.

DEFINITIONS as used in this Complaint, the following terms are defined as: 

• a. “Access Device” means any device, including but not limited to a Payment Card or microchip, that may be used by a consumer to initiate a General Purpose Card or Debit Card transaction.

b. “Acquiring Bank” means a member of Visa and/or MasterCard that acquires payment transactions from merchants and acts as a liaison between the merchant, the Issuing Bank, and the Payment-Card Network to assist in processing the payment transaction. Visa and MasterCard rules require that an acquiring Bank be a party to every merchant contract. In a typical payment transaction, when a customer presents a Visa or MasterCard card for payment, the merchant relays the transaction information to the Acquiring Bank. The Acquiring Bank then contacts the Issuing Bank via the network for authorization based on available credit or funds. Acquiring Banks compete with each other for the right to acquire payment transactions from merchants but do not compete on the basis of the interchange fee, which is the subject of this Complaint.

c. “All-Outlets Rule” is a rule of the Visa and MasterCard Networks that requires a merchant with multiple outlets to accept Visa or MasterCard, respectively, in all of its outlets, even if those outlets are owned by a separate corporate entity, operated under a different brand name, or employ a different business model.

d. “Anti-Steering Restraints” are the rules of the Visa and MasterCard Networks that forbid merchants from incenting consumers to use less expensive payment forms, including: the No-Surcharge Rule; the No-Minimum-Purchase Rule; and the Networks’ so-called “antidiscrimination rules,” which prohibit merchants from treating any other Payment Card or medium more advantageously than the Defendants’cards. The Defendants’ standard-form-merchant agreements proscribe steering by preventing merchants from establishing procedures that favor, discourage, or discriminate against the use of any particular Card.

e. “Assessment” refers to an amount computed and charged by the Networks on each transaction amount to the Acquiring and Issuing Banks.

f. “Authorization” is the process by which a merchant determines whether a cardholder is authorized by his or her Issuing Bank to make a particular transaction. The merchant sends the cardholder’s information to its Acquiring Bank or a Third-Party Processor, which sends it to Visa or MasterCard, which then sends it to the issuer or the issuer’s processor, to obtain authorization. If authorization is given, the process is repeated in reverse.

g. “Charge Card” or “Travel & Entertainment Card” (T&E) is an access device, usually a Payment Card, enabling the holder to purchase goods and services on credit to be paid on behalf of the holder by the issuer of such device. Typically, the contractual terms of such cards require that payment from the holder to the issuer be made in full each month, for all payments made on behalf of the cardholder by the issuer during the preceding month. The issuer does not extend credit to the holder beyond the date of the monthly statement, nor does it impose interest charges on the balance due except as a penalty for late payment. Examples of Charge Cards are the American Express Green, Gold, Platinum, and Centurion cards as well as the Diners Club and Carte Blanche cards issued by Citibank.

h. “Credit Card” is an access device, usually a Payment Card, enabling the holder to (i) effect transactions on credit for goods and services purchased, which are paid on behalf of the holder by the issuer of such devices; or (ii) obtain cash with credit extended by the issuer. Credit Cards permit consumers to borrow the money for a retail purchase from the card issuer and to repay the debt over time, according to the provisions of a revolving-credit agreement between the cardholder and the issuer. Examples of Credit Cards are the Visa and MasterCard Credit Cards issued by members of the Defendant Bank card networks, as well as the Discover and Private Issue cards issued by Morgan Stanley, Dean Witter & Co., and the Optima and Blue-type cards issued by American Express. Proprietary cards of individual merchants for use only at particular merchants’ outlets are not included in this definition.

i. “Debit Card” is an access device, usually a Payment Card, enabling the holder, among other things, to effect a cash withdrawal from the holder’s depository bank account, either at an Automated Teller Machine (“ATM”) or a point of sale.

j. “Float” refers to the expense the Issuing Bank incurs by extending interest-free credit to the consumer for the grace period between the date of purchase and the date of payment.

k. “General Purpose Cards” collectively refers to Credit Cards and Charge Cards.

l. “Grace Period” refers to the time between a consumer’s purchase and the date on which the consumer’s payment is due to the Issuing Bank, during which time the consumer pays no interest.

m. The “Honor All Cards” Rules are rules of the Visa and MasterCard Networks that require any merchant that accepts Visa or MasterCard Payment Cards to accept all Payment Cards that are issued on that Network.

n. “Interchange Fee” in the United States General Purpose Card Network Services and Debit Card Network Services markets means a fee that merchants pay to the Issuing Bank through the Network and the Acquiring Bank for each retail transaction in which the Issuer’s card is used as a payment device at one of the Acquirer’s merchant accounts.  The Interchange Fee is deducted by the Issuing Bank from amounts otherwise owed to Class members on Payment Card transactions, and constitutes a component of and a floor for the Merchant-Discount Fee. The following example illustrates how the Visa and MasterCard Interchange Fees work. A customer presents a Visa or MasterCard card to a merchant as a payment method. The merchant contacts the Acquiring Bank, either directly or through a Third-Party Processor, to authorize the transaction. The Acquiring Bank submits the transaction to the Network. The Network relays the transaction information to the Issuing Bank or the Issuing Bank’s Third-Party Processor, which approves the transaction if the customer has a sufficient line of credit or available funds. If the transaction is authorized through the Network, the Issuing Bank pays the Acquiring Bank the payment amount minus the “Interchange Fee,” which is fixed by the member banks of Visa and MasterCard. The Acquiring Bank then pays the merchant the payment amount minus the Interchange Fee and other charges for processing the transaction. The total fee charged the merchant is often referred to as the “Merchant-Discount Fee.” The Interchange Fee is the largest component of the Merchant-Discount Fee. Visa Interchange Fees are fixed periodically by Visa member banks, acting through the Visa Board of Directors. MasterCard Interchange Fees are fixed periodically by the MasterCard member banks, acting through the MasterCard Board of Directors. “Merchant-Discount Fee” means the the same Third-Party Processor.

p. “Issuing Bank” means a member of Visa and/or MasterCard that issues Visa and/or MasterCard branded Payment Cards to consumers for their use as payment systems and access devices. Issuing Banks compete with each other to issue Visa and MasterCard cards to consumers. Visa and MasterCard rules require that all member banks issue, respectively, Visa and MasterCard Payment Cards.

q. “Merchant-Discount Fee” is the total sum that is deducted from the amount of money a merchant receives in the settlement of Visa and/or MasterCard transactions. The largest component of the Merchant-Discount Fee is the Interchange Fee.

r. “Miscellaneous Exclusionary Restraints” refer collectively to the All-Outlets Rule, the No-Bypass Rule, and the No-Multi-Issuer Rule.

s. “Network Services” means the services and infrastructure that Visa and MasterCard and their members provide to merchants through which payment transactions are conducted, including authorization, clearance, and settlement of transactions, and those similar services offered by American Express and Discover. As they currently are offered by Visa and MasterCard and their member banks, Network Services include Network-Processing Services and the Visa and MasterCard Payment-Card Systems that facilitate acceptance of Visa and MasterCard Payment Cards.

t. “Network-Processing Services” are the services that are or may be used for authorizing, clearing, and settling Visa and MasterCard Credit and Debit Card transactions.

u. “No-Minimum-Purchase Rule” is a rule of the Visa and MasterCard Networks that prohibits merchants from imposing minimum-purchase amounts for Visa and MasterCard Credit-Card purchases.

v. “No-Bypass Rule” is a rule of the Visa and MasterCard Networks that prohibits merchants and member banks from bypassing the Visa or MasterCard system (thereby avoiding the supracompetitive Interchange Fees) in order to clear, authorize, or settle Credit Card transactions even if the Issuing and Acquiring Banks are the same, or even if an independent processor has agreements with both the Issuing and Acquiring Banks on any given transaction.

w. “No-Multi-Issuer Rule” is a rule of the Visa and MasterCard Networks respectively, that prohibits Visa and MasterCard transactions from also being able to be processed over other Networks.

x. “No-Surcharge Rule” is a rule of the Visa and MasterCard Networks that forbids merchants from charging cardholders a surcharge on their Payment-Card transactions to reflect cost differences among various payment methods. For example, merchants are prohibited from surcharging cardholders who use a Visa Credit Card rather than a Discover-branded Credit Card, or use a Premium Credit Card rather than a standard Credit Card, or use a Credit Card rather than another form of payment.

y. “Offline Signature Debit Card” or “Offline Debit Card” is a Debit Card with which the cardholder authorizes a withdrawal from his or her bank account usually by presenting the card at the POS and signing a receipt. Offline Signature Debit Card transactions are processed as Credit Card transactions. Examples of Offline Signature Debit Cards include Visa’s “Visa Check” product and MasterCard’s “Debit MasterCard” product.

z. “Online PIN-Debit Card” or “PIN-Debit Card” is a Debit Card with which the cardholder authorizes a withdrawal from his or her bank account by swiping her card at the POS and entering a Personal Identification Number (“PIN”). PIN-Debit-Card networks grew out of regional ATM networks and are therefore processed differently than Offline transactions. Examples of Online PIN-Debit-Card networks include Interlink, Maestro, NYCE, and Pulse.

aa. A “Premium Card” is a General Purpose Card that carries a higher Interchange Fee than a Standard Card and is required by a network to carry a certain level of rewards or incentives to the cardholder. Visa’s “Signature” and “Traditional Rewards” card products and MasterCard’s “World” card product are examples of Premium Cards.

bb. “On-Us Transactions” are transactions in which the Acquiring Bank and the Issuing Bank are the same. Even when the Issuing and Acquiring Banks are identical, Visa and MasterCard require that the Issuing Bank charge an Interchange Fee to the merchant.

cc. “Payment Card” refers to a plastic card that enables consumers to make purchases from merchants that accept the consumer’s Payment Card.  The term “Payment Card” refers to several different types of cards, including, General-Purpose Cards, Debit Cards, Travel & Entertainment Cards, stored-value cards, and merchant-proprietary cards.

dd. Although “Payment Cards” are a subset of “Access Devices”, the two terms are used interchangeably herein, because despite evolving technology, Payment Cards continue to constitute the vast majority of Access Devices.

ee. “Payment-Card-System Services” means the standard-setting functions performed by Payment-Card Networks. Payment-Card-System Services encompasses the brand of the particular card program, the rules and protocols for providing merchant acceptance of and conducting Payment-Card transactions under that brand, and the rules and protocols for conducting transactions under that brand. The four leading providers of Payment-Card-System Services are Visa, MasterCard, Discover, and American Express.

ff. “Payment-Guarantee Services” refers to a service that a merchant might purchase to insure the merchant against Credit- or Debit-Card fraud, check fraud, and other forms of payment fraud, and/or assists the merchant in minimizing the costs of such fraud.

gg. “Settlement” is the process by which the merchant is reimbursed for a Payment Card transaction. While Visa and MasterCard rules require that an Acquiring Bank be a party to all merchant card-acceptance agreements, merchants often use Third-Party Processors to process these transactions. The Acquiring Bank or its processor credits the merchant’s bank account with the amount paid by the cardholder less the Merchant-Discount fee, the largest component of which is the Interchange Fee, and then transmits the transaction data to Visa or MasterCard, which sends it to the Issuing Bank or its Third-Party Processor. The Issuing Bank then sends payment to the Acquiring Bank through Visa or MasterCard (and possibly the Acquirer’s processor). In a Credit Card or Offline Debit Card transaction, settlement occurs two to four days after authorization and clearing. In a PIN-Debit transaction, all three processes occur in the same electronic transaction virtually instantaneously.

hh. “Third-Party Processor” is a firm, other than Visa, MasterCard, a member bank, or an entity affiliated with a member bank, that performs the authorization, clearing, and settlement functions of a Visa or MasterCard Payment-Card transaction on behalf of a merchant or a member bank. Examples of Third-Party Processors include First Data and Transfirst.

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Banks Revise Overdraft Fees, Why Not Interchange Fees Too?

Ron Lieber wrote in The New York Times that JPMorgan Chase and Bank of America have overhauled their debit card overdraft fees.

Read article (9/23).

This has been a multi-billion dollar annual boondoggle for the banks at the expense of millions of consumers.  The larger question is why haven’t the banks also addressed merchant interchange fees – which account for substantially more unfair costs to businesses and consumers? 

It was the public outcry, an NBC Nightly News segment and extensive media coverage on debit card overdraft fees that helped cause this very rapid shift in policy.  It is also being used as a marketing tool, as the credit card issuers can now promote they have waived and adjusted the terms of these overdraft fees to better compete.  However, there is no competition when it comes to merchant interchange fees; retailers are still forced to accept Visa and MasterCard’s terms.  Issuing banks can simply pass along any lost overdraft fees with higher merchant interchange fees, which simply means that ultimately the consumer still gets screwed.

My five-year legal battle as class-representative in an antitrust class-action against Visa, MasterCard and its member banks continues to reap unsubstantiated profits for the credit card companies with even greater costs. 

Merchant interchange fees are an insult that is an atrocity and slap in the face of every consumer and merchant that accepts debit and credit cards.   Along with the banks, which until Visa and MasterCard’s IPO’s controlled one-hundred percent of the two giant credit card associations, are continuing to wage a battle against its customers. If only they listened to their critics addressing these equally excessive charges.

Cal National Bank’s Most Distasteful Promotion yet?

One bank is touting that your house be used as their ATM card and use your nest egg as collateral for your every day spending needs.

According to the Cal National website, use “[a] Home Equity Card, for convenient access to your line of credit wherever Visa^® is welcomed. Or access your line by writing a check—it’s your choice.” 

What does this mean?

Forget for a moment the sub-prime mortgage meltdown and national housing market collapse, but instead, look at Cal National and its latest gimmick.  They want you to use your Visa card to access your home equity line of credit.  Risk everything and then a portion of the charges will be diverted back to Visa and Cal National from interchange fee payments.

As if the housing crisis isn’t bad enough, now banks are promoting that homeowners access their available line of credit by using a Visa card. 

We’d like to see that commercial during the Summer Olympic Games.  “Max out the remaining valuation of your home by buying stuff on your Visa card.” 

Have they no shame?

Editors note: WayTooHigh.com is edited by the owners of ScanMyPhotos.com.  This site features the most comprehensive international breaking news, daily updates and commentaries on the history of merchant interchange fees. The goal in representing millions of merchants and cardholders is to reform an antiquated, costly and unfair payment system and explain why the nearly $40 billion annual merchant interchange fee is a hidden tax on consumers and retailers.  WayTooHigh.com, The Credit Card Interchange Report, is co-edited by Carl Berman and Mitch Goldstone, founders of California-based 30 Minute Photos Etc., the national online boutique photo service, 30minphotos.com and its newest division, ScanMyPhotos.com. Berman and Goldstone are also the lead plaintiffs and class representatives in the multi-billion dollar antitrust class-action litigation against Visa, MasterCard and member banks. This informational web site was created to provide news and commentary updates only. None of the information posted on WayTooHigh.com is intended to constitute legal arguments; it reflects only the opinions of its co-editors and not of any other plaintiffs or other parties involved in the merchant antitrust litigation. The information is not guaranteed to be correct, complete, or current. We make no warranty, express or implied, about the accuracy or reliability of the information posted by WayTooHigh.com or at any other Web site to which this site is linked.

  

 Want to know more about lead plaintiff ScanMyPhotos.com?  Click here and read their daily blog: Tales from the World of Photo Scanning

“Read This Before You Swipe! Debit Card Dangers” (MSNBC)

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“Fees: Banks prefer the credit option when you use your debit card, because they make more money in fees. For a $200 transaction, for example, a bank could make $1.99 if the customer chooses the “credit” option and signs his or her name. This is more than three times the 60 cents they usually make from customers who choose “debit” and enter a PIN number.”

Click here to view article by Sloan Barnett, MSNBC

Interchange Fees: From $40,000,000,000 to Zero

One of the disruptive forces in electronic payments are micropayments.  It helps draw attention to the argument that interchange fees are now obsolete.  What currently represents a $40 billion hidden tax on retailers and consumers is destined to implode due to technology, and hopefully, our merchant interchange antitrust complaint against Visa, MasterCard and its leading member banks.

As we assert, while the defendants were conspiring to illegally fix prices by agreement and create anti-competitive practices, they lost hold of technology.  Today, nearly everything is faster.  Look at the payment network and its low-value electronic financial transactions’ micropayments – which represent charges from a few cents to a dollar or two.  Whether it is paying for a parking meter, McDonald’s meal or a newspaper from its newsstand rack, you can find more places today to charge for small transactions.

While the actual cost to transact an electronic payment is tiny, Visa and MasterCard think that using their 80% market power and payment network should enable them to have variable fees.  If they are able to effectively connect the issuing and acquiring banks and process the payment for a Big Mac for pennies, how can its member banks justify a $40 billion annual interchange merchant tax that is no longer cost based?

Even our company has a fixed rate for our newest technology, super-fast photo scanning. Whether you order just one or one-thousand analog pictures to be digitized, ScanMyPhotos.com charges a flat-fee of just $49.95 [and that includes our interchange payments too].  Point is that the new, super-fast photo scanning service we created involves about the same level of work to scan one or one-thousand pictures, and that is the question to Visa and MasterCard.  If the incremental network cost to process an electronic payment to buy a newspaper or a Rolex watch is about the same, other than illegal price-fixing, how can the financial institutions and credit card associations justify their fee structure?

Are Visa and MasterCard Merchants Violating Their Rules?

From the Visa and MasterCard merchant requirements, it is clear that many retailers regularly violate their rules, but we are still unfamiliar with how many are penalized.

At 30 Minute Photos Etc., ScanMyPhotos.com and our online ecommerce business, if a picture-taker orders a single 4×6″ photo online, for instance, we charge 26-cents.  But the electronic payment fees are substantially more than that.  As the lead plaintiff in the merchant interchange litigation and as a Visa and MasterCard customer, we are careful not to violate the minimum payment requirement.  But, what about others?

From the Rule for Visa Merchants website listing for card acceptance [page 9], it clearly explains that: “Dollar Minimums and Maximums: Always honor valid Visa cards in your acceptance category, regardless of the dollar amount of the purchase. Imposing minimum or maximum purchase amounts in order to accept a Visa card transaction is a violation of the Visa rules.”

The question is why are merchants, especially non-profits still posting notices requiring minimum payments?

The concern is that record high merchant interchange fees are causing retailers to create their own rules to help soften the effects of these fees.  Previous WayTooHigh.com articles identified groups which blatantly impose minimum charges on their website. 

Test for yourself: when you visit a “mom and pop” store take a look and see if they have a handwritten notice requiring a minimum payment.

Related blog posting: “Requiring minumum credit card purchase is a violation.”

Merchant Interchange Distraction (WayTooHigh.com)

We couldn’t help but notice today’s news that Citigroup is again facing [$15] billions is write-offs from its mortgage losses. 

Along with other major banks, you would think that when they gathered together to illegally fix merchant interchange rates, they would have also discussed why the other house of cards was poised to crash. The major banks are accused by us and others of violating antitrust laws by fixing prices. 

The same banks that were represented on the Visa and MasterCard boards, are also the ones facing billions in losses from the subprime mess. Where was the leadership?  With all the top-level terminations, it is clear there was huge mismanagement. 

Were they too focused on violating the Sherman Antitrust Act to recognize that the phony mortgage business would have to crash too?  While studying how they schemed to create billions each year in the name of interchange fees, they should have, instead been questioning what would happen to the “homeowners” when their no-interest mortgages’ lapsed.  It turns out that people were renting homes, as they had no equity invested.  Although all the media attention is on the banks’ mortgage mess, our litigation has the potential to be even greater and more overwhelming.

[commentary: WayTooHigh.com]