Design The Envelope, Not The Price
Visa's interchange system is widely misunderstood as a fixed tax on merchants. It is actually what Ben Gilbert calls an envelope of value: a pool of money that flows between five parties in every transaction, the consumer, the merchant, the issuing bank, the acquiring bank, and Visa itself, and that gets divided differently depending on who is doing what work in each specific transaction. The merchant sees a 2% discount on a $100 sale. Of that, roughly 1.6% goes to the issuing bank, 0.2% to the acquiring bank, and 0.15 to 0.2% to Visa. Those ratios shift constantly based on card type, merchant size, transaction method, and geography. The genius is that the envelope is intentionally flexible. When Visa wanted point-of-sale terminals installed across the country, it did not mandate them. It discounted interchange for merchants who processed transactions digitally. When it wanted to attract higher-spending cardholders to the network, it created Visa Signature, a tier with higher interchange that gave issuing banks more money to spend on rewards, which brought better customers to merchants. The merchant pays more per transaction and gets higher-value customers in return. Every product decision Visa makes, according to Gilbert, is answerable by one of three questions: does it increase transaction volume, does it increase margin, or does it deepen lock-in? This model also functions as the primary barrier to disruption. Merchants are the only party in the five-sided network who are genuinely unhappy with the arrangement. Consumers love rewards and will advocate for the system that provides them. Issuing banks capture the largest share and have every incentive to keep issuing. The network fee Visa collects is so small, 20 cents on a $100 sale, that it is nearly invisible. But it accrues across 190 billion transactions a year with essentially zero variable cost.