Card Scheme Compliance Costs Explained

Card scheme fees are the fees that are collected by Visa and Mastercard from the merchant’s acquiring bank and issuing bank. They are a separate cost from interchange fees and the acquirer’s markup on the transaction values.

The total cost of card acceptance includes three separate cost components:

Scheme fees are often buried within the total cost of the transactions that are accepted by a merchant. As such, both the merchant and the acquiring bank’s internal financial department usually have no visibility into these fees or cost components. Consequently, it is difficult for either organization to accurately forecast the total cost of card acceptance for any given merchant.

Where interchange fees on the United States and European Union (EU) and United Kingdom (UK) markets are regulated to a ceiling in relation to the amount that can be charged to merchants and acquiring banks, scheme fees are entirely outside of this regulatory framework.

The fees that are collected from acquiring banks by both Visa and Mastercard can be divided into two different categories: transactional and nontransactional fees. Each of these fees incudes both domestic and international transactions.

Transactional Scheme Fees

Transactional fees are applied to each transaction that passes through Visa or Mastercard networks. These fees are applied at the time of authorization, clearing, and settlement of those transactions. As such, no matter how many transactions are batched together or how those transactions are routed to the issuing bank, each individual transaction will generate these fees for the acquiring bank.

Additionally, transactional fees can be divided further into domestic and international transaction fees. International transactions generate additional fees for Visa and Mastercard, which increases the total fees that must be paid by the acquiring bank.

Non-Transactional Scheme Fees

Nontransactional fees are fees that are applied to acquiring banks regardless of the number of transactions that pass through their bank. These fees can include membership fees, licensing fees, and fees related to the registration of the bank’s bank identification number (BIN). Each acquiring bank that is members of Visa and Mastercard must pay these fees each year, regardless of the number of transactions that it processes for merchants.

These fees include:

These fees are considered “compliance” fees for the acquiring bank, since they are applied as a result of the bank’s required membership in the Visa and Mastercard organization.

Not all fees that are applied by Visa and Mastercard to acquiring banks are “compliance” fees. Only those fees that are applied as a result of the acquiring bank’s failures or potential failures to comply with the standards and policies of the card schemes are considered to be compliance fees.

Within the fees that are applied by Visa and Mastercard to acquiring banks, compliance fees include:

In addition to these fees, both Mastercard and Visa apply penalties to acquiring banks whose merchants exhibit high rates of chargebacks or who misappropriate authorizations. These fees can be classified as “fines,” though they are also a means of collecting fees from acquiring banks whose merchants exhibit behaviors that increase the risk of chargebacks and fraud errors.

Visa applies three different chargeback monitoring programs to acquiring banks:

For mainstream merchants, thresholds for chargebacks include 100 chargebacks and a 1 percent threshold for chargebacks relative to total sales. For high-risk merchants, thresholds are 500 chargebacks and 2 percent of total sales.

Mastercard applies the Excessive Chargeback Merchant (ECM) and Excessive Fraud Merchant (EFM) programs as well as the Questionable Merchant Audit Program (QMAP). Any acquiring bank that has a merchant that is within these programs will begin to be assessed for fees for these programs once they have been identified as exhibiting high rates of chargebacks or fraud for two consecutive or non-consecutive months. For these programs, Mastercard begins to assess acquiring banks for fees at the rate of $1,000 per month for merchants and reaches a level of $100,000 per month for high-risk merchants by month nineteen of exhibiting high rates of chargebacks.

Chargeback monitoring programs for both Mastercard and Visa are used to apply fees for merchants whose behaviors create an increased risk of chargebacks or fraud against those merchants.

In contrast with the published fees for transactional fees, there is no published rate for the compliance fees. Instead, these fees appear in the regulatory guidelines of Mastercard and Visa, or are directly sent to the acquiring bank through the organizations with which those acquiring banks receive their merchant transactions.

Thus, fees for compliance with Visa and Mastercard standards are more difficult to accurately forecast than the transactional fees. Furthermore, compliance fees are only made visible to the acquiring bank once those banks receive their monthly statement from the acquiring bank.

Regardless of the model in which the acquirer operates, the fees that they are mandated to pay to the card schemes cannot be eliminated. Such fees begin to accrue as soon as the acquirer becomes a member of the card scheme and continue to accrue as long as they are a member of that organization.

Membership and Network Access Fees

Every acquirer is required to pay a base layer of fees to the card schemes as a condition of their membership. There are two primary models under which acquirers can become members of the card schemes:

Additionally, every acquirer that desires membership in the card schemes must pay fees to both the Visa and the Mastercard organizations to gain access to their networks. These fees are mandatory and do not vary based upon the model of the acquiring organization.

Per-Transaction Processing Fees

In addition to the fees that an acquirer pays for membership in a card scheme, they are also required to pay fees on every transaction that passes through their system. Even if the transaction declines, the acquirer must pay a fee for those declined transactions.

These fees are mandated at the individual acquirer. Only the card schemes’ approved programs allow for a reduction in the fees that are charged to acquirers:

These programs are not mandatory for the acquirers, and the reduced fees are not permanent. What is mandated for every acquirer, however, is the standard fee structure.

Some fees that are mandated for acquirers and their merchants vary depending upon the type of merchants that they acquire and the geographic regions in which their merchants operate.

Card type

The fees that are mandated from acquirers vary based upon the type of card that the merchants that are acquired use. For example, merchants that primarily use premium and commercial cards will incure fees from the card scheme that are higher than merchants that use only consumer cards.

Geographic routing

If the merchants that are acquired by the acquirer have customers in other countries than where the merchants are located, the acquirer will be mandated to pay additional fees for each transaction that is routed to another country by the merchants. These fees include international service fees and currency conversion fees that are mandated by the card schemes.

The Fixed Acquirer Network Fee

Visa also operates a Fixed Acquirer Network Fee (FANF): a monthly fee applied to all merchants that accept Visa. It is tiered by:

Visa and Mastercard compete with one another in certain regions of the world. In some regions of the world, both of these card schemes compete for the volume of transactions that are processed by merchants. As such, there are special programs within each card scheme that allow for the reduction of fees for merchants or acquiring organizations with high transaction volumes. However, these rates are still mandatory; they are only set at a reduced rate.

Card scheme compliance fees are not regulated by any governing body. While interchange fees for certain markets are subject to a regulation that limits the fees to certain levels, compliance fees are not regulated. Visa and Mastercard are not required to set their compliance fees at a certain level, nor are they required to justify that level of fees to any governing body.

For instance, interchange fees for both consumer and business cards are subject to a cap in the European Union and the United Kingdom. However, compliance fees are specifically excepted from this regulation. As such, Visa and Mastercard can change their compliance fees without needing to provide a justification or a reason for that change.

In an effort to control compliance fees for merchants, several regulatory bodies around the world have begun to scrutinize the fees that are mandated for merchants. For example, the Payment Systems Regulator for the United Kingdom has investigated whether the compliance fees that are mandated by Visa and Mastercard are economically justified for the merchants that are required to pay those fees. However, as of now, there is no cap on compliance fees for any market. Additionally, while the regulator has indicated an interest in the issue, no action has yet been taken to address the issue.

The lack of regulatory control over compliance fees for acquirers makes these fees difficult to include in an accurate cost model for the acquirer. The fees are controlled by Visa and Mastercard and are updated on a regular basis; the updates can occur on a quarterly or even an annual basis. Additionally, the acquirer is required to monitor the bulletins that are published by both Mastercard and Visa to ensure that they are aware of any changes in their compliance fees.

Every acquirer that is interested in accurately forecasting its compliance fees with the card schemes must establish a line item in its cost model for these fees. Compliance fees are not the same as pass-through interchange fees. Additionally, because there are conditions under which these fees will be mandated for the acquirer, they cannot be accurately forecasted with the same assumptions that are made for pass-through interchange fees.

The compliance fees should be a separate line item on the acquirer’s financial reports. Such a line item would allow for the fees to be audited separately from the other costs of operating the organization. Additionally, acquirers should establish a process for monitoring the bulletins that are published by both Mastercard and Visa. When these bulletins are published, the compliance fees for the organization may change; the cost forecasting teams will need to review the bulletins to understand the change and to create new cost models accordingly.

For growing acquirers, it is essential to understand which thresholds will lead to increased compliance fees for those acquirers. For instance, thresholds for Mastercard and Visa include:

Mastercard also has a threshold wherein their compliance assessment for merchants in high-risk tracks can reach $100,000 per month by month nineteen. Understanding these thresholds will allow the acquirer to understand the different stages of growth for the merchants that they control.