EP 8 | How does VISA make money?

How does VISA make money from Credit Card transactions

Hi, Aniket here 👋🏻 and welcome to my System Design Newsletter 😊!

Let’s talk credit cards today. In every credit card transaction, the merchant is charged a Merchant Discount Fee (MDR) of 2-3%, which is divided among the issuer, acquirer, POS provider, and card networks. Figure 1 illustrates how this MDR is split among the various parties involved.

Previous issue talks about the BTS actions after you swipe your credit card at a merchant’s terminal. Today, we’ll dive into the revenue breakdown, revealing how each party involved in a credit card transaction earns from the fees.

1. Acquirer Markup

   1. Typically ranges between 0.5% to 0.75% of the transaction amount.

   2. This is split between the Acquirer and the POS provider.

   3. In cases where the POS provider is also the acquirer (eg: Paytm), the same party retains the full markup.

2. Interchange Fee

   1. Usually between 1% to 1.25% of the transaction value.

   2. Paid by the Acquirer to the Card Issuer.

   3. The Issuer earns the largest share since it assumes the risk by paying the merchant, even if the cardholder defaults.

3. Network and Assessment Fee

   1. Typically around 0.2% of the transaction amount.

   2. Both the Issuer and the Acquirer pay this fee to the Card Network (eg: VISA)

4. Interest and Late Fees

   1. Earned by the Issuer from cardholders who fail to repay their credit card bills on time.

   2. This forms a significant part of the issuer’s overall revenue from card transactions.

It’s a win-win for everyone, right? No wonder why credit card is called “the most profitable product in banks”! See you in the next one ✌🏻.