How does MasterCard make money?

How does MasterCard work, really?

Ever wondered about the fees and charges that get added to your transaction when you make a purchase with your credit or debit card? Well, they’re interchange fees, and they’re the fees that banks charge for using their credit cards.

What’s that got to do with MasterCard? Everything. It’s MasterCard’s whole reason for existence and the way that this global corporation makes its money.

Even though the name MasterCard is printed on a vast number of credit and debit cards worldwide, MasterCard – and their main competitor, Visa – are not directly responsible for the cards that are branded under its name. The financial institutions that issue the branded credit and debit cards are responsible for the credit and debts. MasterCard creates revenue by charging transaction fees to the financial institutions that participate in the MasterCard network.

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A bit of MasterCard history

What we know today as MasterCard was originally called ‘Master Charge’ and was created as a joint venture in the U.S.A. between a group of Californian banks who went on to form the InterBank Card Association in 1966. This led to the development of ‘Master Charge – the Interbank Card’ in 1967. It was a competitor to the Bank Americard that had been created by the Bank of America and was a predecessor of today’s Visa card.

The InterBank Card Association changed its name to MasterCard in 1979 and continued to expand, eventually floating on the stock market in 2006. With that move came a further tweaking of the name to MasterCard Worldwide to better reflect its global presence and business activities.

MasterCard is now well known as one of two key players in the global payments industry, an increasingly important part of our cashless lifestyle and buying or selling goods and services online. MasterCard provides the services you don’t see. It’s a global payments technology company that connects consumers, businesses, banks and governments to fast, secure and reliable electronic payments. Its processing network allows us to complete financial transactions with our credit or debit cards using laptops, tablets and mobile devices. It also offers fraud protection for consumers and assured payment for merchants.

How does MasterCard make money?

MasterCard makes money every time you use your card. They are the network that processes the transaction between the banks and the retailer, making a pre-determined interchange fee on the transaction. This interchange fee is their payment and it’s where they make their profits.

Paying by card

What is the connection between MasterCard and my local bank?

MasterCard (and competitor Visa) do not issue any credit cards. Rather, they license their payment brands to Issuers and Acquirers. Issuing banks are the local banks that provide you, the consumer, with the credit cards in your wallet. Acquirers are the merchants/retailers’ banks that process the transactions.

Banks using MasterCard services compete in their local markets for the business of cardholders and merchants. Using the power of the MasterCard global brand also helps smaller financial institutions access the economies of scale of this huge global payment system.

MasterCard and Visa do not approve transactions. The bank that issues your credit card approves the transactions. The issuing bank takes on the risk that you as the consumer will pay them back for the items you purchase. In turn, the issuing bank is paid an interchange fee. This is a small fee for processing the transaction, ensuring the merchant gets his money, as well as for providing monthly statements, 24/7 support and troubleshooting. This fee is locked into your agreement from the start.

Who supplies all those lovely credit card rewards?

Consumers are spoilt for choice when it comes to credit and debit cards. We can choose between hundreds of bank-issued cards which, on the credit card side, are often linked to rewards tied to airlines, hotels and any number of products or services we value. Banks chase our business by offering the most dazzling rewards they can, especially at the Platinum level and above. It’s not just about frequent flyer points anymore – these days you can redeem rewards points for merchandise, gift cards, cashback on your statement, and the rewards program offer even offers exclusive access to pre-sale tickets to concerts and other events.

Concert crowd and lights

Using the MasterCard or Visa global brand allows banks of all sizes to compete for customers by harnessing the rewards offered. And these are considerable, undoubtedly more than your local bank could muster by itself. Both MasterCard and Visa have a suite of eye-catching rewards they continually improve on to attract banks to sign up for their services.

Rewards range from the top shelf personal concierge services to special offers on luxury goods and services. Competition for customers is fierce and credit card rewards programs run the gamut from cards that only millionaires would use to cards for the more modest spender. Fuelling these rewards programs are interchange fees.

More info on interchange fees

This is where it gets complicated. There are layers of interchange fees that are paid between banks for the acceptance of card-based transactions. MasterCard (and Visa) have established a number of interchange fee categories based on factors such as the type of account (e.g. consumer or commercial), the type of card (e.g. standard or premium), the type of merchant (e.g. government, charity or service station) and the type of transaction (e.g. chip, non-chip or contactless). Some examples of interchange fee categories on domestic transactions are given in the following table.

Interchange Category (Places) MasterCard
Government & utilities 0.32%
Service Stations & supermarkets 0.32%
Education 0.32%
Charity 0%
Interchange Category (Card Type)
Standard rate 0.32%
Premium Platinum rate 0.70%
Consumer Super Premium 1.22%
Consumer Elite 2.00%
Commercial 0.94%
Commercial corporate executive 1.14%
Commercial business executive 1.15%
Commercial large ticket (? AUD $10,000) 0.75%
Business elite 1.98%
Source: MasterCard

RBA demands transparency for card payments

The Reserve Bank of Australia (RBA) allows card schemes to set interchange fees for different types of merchant and product categories. It says the fees must be at the level of what MasterCard (and Visa) consider to be the reasonable cost of a merchant accepting a credit card as a method of payment.

The RBA in 2016 has conducted a review of the current regulatory framework for card payments, due to some developments in the payments system. It looked at the whole interchange structure, as well as the practice of excessive surcharging by some merchants and retailers. The annoying and often-complained-about surcharges levied by airlines when you book tickets is one example that springs instantly to mind.

Thanks to the review, we have waved goodbye to excessive surcharging as of September 2016. Here’s what consumers need to know about the new credit card surcharging standards, and here’s what merchants need to know in order to comply with the new regulations.

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