Understanding Card Scheme Fees: A Guide for Business Owners

What Are Card Scheme Fees?

Card scheme fees are essentially membership fees paid by financial institutions, including banks, to be part of a payment network associated with different types of debit and credit card brands. By paying these fees, banks and other financial institutions gain the right to issue these cards or acquire merchants who operate within the network of a particular card scheme. For instance, a bank can provide its customers with Visa debit cards by joining Visa’s card scheme.

What Are Scheme Fees and How Are They Calculated?

In this guide, we’ll cover what scheme fees are, who is responsible for them, and the typical costs you can expect for various transaction types. Scheme fees are an unavoidable part of processing card payments and are one of the several fees a business may incur.

Scheme Fees Defined

Scheme fees are unregulated charges that merchant acquirers (banks or financial institutions that process card payments for merchants) pay to the operators of card payment schemes like Mastercard and Visa. These fees are then passed on to merchants as part of the overall Merchant Service Charge (MSC), which also includes interchange fees and an acquirer’s markup.

The fees can cover a range of services, including but not limited to:

• Volume fees
• Licensing fees
• Marketing and innovation funds
• Cross-border fees
• Scheme authorisation fees
• Compliance fees, such as those for anti-money laundering (AML) services

Scheme fees are set independently by each card scheme and are periodically reviewed throughout the year. Unfortunately, these fees have increased significantly in recent years, posing an additional cost to businesses.

Key Factors That Determine Scheme Fees

Each card scheme determines its own fee structure based on the nature of the transaction. The factors influencing these fees include:

• Card Type: Fees vary depending on whether the card is a debit, credit, consumer, business, corporate, or purchasing card.
• Authentication: Transactions where the card is not physically present (e.g., online or over the phone) tend to incur higher fees compared to those where the card is present, such as when a cardholder taps their card on a contactless reader or enters a PIN.
• Sales Channel: Fees may differ depending on whether the transaction occurs through a website, mobile app, or physical store.
• Regional Considerations: If the merchant and card issuer are in different countries, scheme fees are usually higher. The cost varies depending on whether the transaction is domestic, intra-regional (within the same region), or interregional (across multiple regions).

For example, since 16 October 2021, the UK is no longer part of the European Economic Area (EEA). This change has affected scheme fees in the UK for transactions involving the EEA.

Scheme Fee Structures for Major Card Schemes

While scheme fees vary between card schemes, here are some of the top categories for Mastercard and Visa:

Mastercard

1. Cross-Border Fees: Applied when the merchant and card issuer are not in the same country.
2. Assessment Fees: Based on transaction volume and contributions to scheme development, innovation, and marketing.
3. Clearing Fees: Related to clearing transactions, including multi-currency settlement.
4. Authorisation Fees: Incurred for verifying transactions, including pre-authorisations and account status inquiries.
5. SecureCode Fees: For authenticating online transactions through Mastercard’s SecureCode feature.

Visa

1. Clearing and Settlement Fees: Charged for clearing transactions.
2. Mandatory Service Fees: Includes the International Acquiring Fee (IAF) for cross-region transactions and fees related to fraud and disputes.
3. Authorisation Fees: Incurred for verifying the authenticity of transactions.
4. Quarterly Operating Certificate Fees: Based on card present and card-not-present transactions.
5. Optional Service Fees: Related to the authentication of online transactions using Visa Secure (formerly Verified by Visa).

How Are Card Scheme Fees Charged?

Card scheme fees are charged to banks or financial institutions to join individual card schemes. These fees are then passed on to merchants, typically as a percentage of each transaction or as a bundled monthly charge.

Three-Party and Four-Party Schemes

Three-Party Scheme: Involves three main parties – the cardholder, the merchant, and the issuer/acquirer (usually the bank). American Express operates on this model, where only one franchisee is allowed per market, limiting competition.

Four-Party Scheme: Involves separate entities for the card issuer and acquirer, allowing multiple institutions to join the scheme. This model, used by Visa and Mastercard, encourages competition and provides more choices for merchants.

Who’s Involved in Card Schemes?

The main participants in card schemes include:

1. Cardholder: The customer with a debit or credit card issued by a bank.
2. Merchant: You, as the business owner, accepting card payments in-store or online.
3. Acquirer: The financial institution that processes payments for the merchant.
4. Issuer: The bank that issues the card to the customer.
5. Card Scheme: The overarching network (e.g., Visa or Mastercard) that facilitates transactions between the issuer and acquirer.

To accept card payments, businesses need a card machine and merchant account for in-store transactions or a payment gateway and acquirer for online payments.

UK interchange and scheme fees chart

Reducing Card Payment Costs

While it’s true that scheme fees are non-negotiable, there are still ways to reduce your overall card payment costs. By optimising your Merchant Service Charge and exploring competitive pricing options from various payment providers, you can potentially save a significant amount. Understanding your transaction patterns and choosing the right payment solutions tailored to your business needs can make a big difference. If you’d like to learn more about how to manage and reduce your card payment costs effectively, get in touch and let us help you find the best solution for your business.