So you’ve got your new, revolutionary FinTech idea. Your target customer profiles are created, their goals and their pain points articulated, and a creative new app is in staging ready to address them all. But your investors, VCs, and many stakeholders are starting to ask the same question that sounds oddly familiar to what your parents might be saying - “You sound really smart, but how are you making money?”

No matter what stage you’re at in your FinTech career, it’s critical to understand the variety of ways your idea can ultimately make revenue in the marketplace so you can grow it into a long term, sustainable business.

The goal of this blog is to get you up to speed on one of the most important (and common) types of revenue you can generate from a FinTech idea: interchange revenue from debit cards, credit cards, and prepaid card transactions. While there are plenty of other revenue streams you can pursue (i.e. subscription fees, transaction fees, brokerage fees, software, etc), interchange will only add to them. This is especially topical as companies like Visa, Mastercard raise credit card fees after postponing them for the past two years.

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What are interchange fees?

Interchange fees are incurred on debit card and credit card transactions. They are paid from the merchant’s bank (the acquiring bank) to the customer’s bank (the issuing bank). Interchange fees are set by the card network.

Interchange fees are typically calculated as a percentage of the total transaction amount. However, this percentage varies depending on a wide variety of factors, including:

• Transaction mix
• Card brand
• Regions or jurisdictions
• The type of credit or debit card
• The type, size, and industry of the accepting merchant
• The size and type of transaction
• Whether you’re offering a commercial or consumer cards program

Occasionally, people operating in the FinTech space will use the phrases “card schemes” or “card networks,” but they are synonymous with one another. Oftentimes you’ll hear card schemes to describe the interconnected system of banks, merchants, and card issuers and how each party gets paid.

Credit card networks like Visa, Mastercard, and others play an important role in how everyday people access financial rails to use cash and credit before it’s settled up by banks and issuers. Credit card networks determine how and where a card works as well as any benefits a holder receives.

In order to be a part of a card scheme, a bank or financial institution has to apply to become a member. If your local bank issues a debit card with a MasterCard logo on it, that means your bank is a part of MasterCard’s card scheme.

Whenever you see a sticker at a local business for a card network, that business can easily access consumers’ wallets who have those cards and get access to its funds for a sale. As a result, the merchant will have to pay a fee to the card schemes so that transaction can take place and money can securely move hands for services or goods aka interchange!

How do FinTechs generate revenue from interchange?

For illustrative purposes, we’ll show you how to earn interchange revenue when you build your FinTech idea on a Banking as a Service platform like Synctera’s (since you know we’re kind of the experts at it).

1. For each of your customers’ transactions, the merchant where they made their purchase pays a discount rate that they have negotiated with an acquiring bank
2. The acquiring bank pays the issuing bank the interchange fee, net of network fees
3. In bank partner programs the issuing bank pays Synctera 100% of the interchange
4. Synctera then distributes 70% of the interchange revenue to you
5. The remainder of the interchange revenue is used to compensate your bank partner for the services they provide you.

The 70/30 split between FinTechs / Banking-as-a-Service (BaaS) providers is currently an industry pricing standard

Since blended interchange fees across the industry are approximately 100-240 bps of total transaction value (depending on transaction mix and whether you are offering a commercial or consumer cards program), you can expect to earn approximately 70-170 bps of total transaction value.

How do I maximize interchange revenue?

Interchange revenue depends on transaction mix, so the interchange revenue you earn will be determined by your business model. While you’ll likely determine your business model and target market based on external inputs or use-cases, the following activities tend to generate more interchange revenue:

• Commercial cards programs
• Transactions with smaller merchants
• Size of transactions e.g. the higher the transaction, the more interchange fees you can generate
• Card not present (CNP) transactions
• Signature transactions (instead of PIN transactions)
• Keeping your chargeback rates low
• Transactions on a limited number of networks (e.g. Visa and Mastercard)

What’s the first step to earning interchange revenue?

In order to earn interchange revenue, you’ll need your own card program. But be warned before embarking on this adventure: building a card program in-house from scratch is time consuming and expensive. What does a typical product roadmap look like for a card program?

1. Connect with a credit card network such as Visa or MasterCard
2. Get your processor integration set up
3. Establish underwriting (KYC, risk assessment approval)
4. Set up your compliance and risk management process to access financial rails
5. Pass security tests and financial certification
6. Set up credit facilities

Total duration: 18-24 months

In addition, sourcing all of the services you need to operate a card program from individual vendors yourself (Finicity, Plaid, Marqeta, and more) is likely to be a prolonged endeavor, not to mention increased one-off expenses related to implementation fees, minimums, and sub-optimal transaction pricing.

How do I quickly launch a card program?

An emerging solution that helps fix all of these issues are FinTech platforms, otherwise known today as Banking-as-a-Service (BaaS). Good BaaS platforms will have all of the components you need to create a card program –from vendors to partner banks– allowing you to maximize the interchange revenue you can earn and help you launch in days vs. years.

When you’re exploring a FinTech / BaaS platform to build out a card program with, keep an eye out for:

• Services from best-in-class third parties and whether or not the platform itself can negotiate better pricing power for you
• Usage-based prices for the individual platform for services you consume compared to prices from card vendors you’d be able to get on your own
• Card network processing fees vs. platform fees
• All-in-one card issuing and processing solution that lets you issue virtual and physical debit cards and process debit transactions
• Related components you’ll be required to have in order to work with a bank partner and achieve regulatory compliance (e.g. case management, KYC, BSA/AML, and fraud services)
• Issuing bank partners that have less than $10 billion in assets and are therefore not subject to the 2010 Durbin Amendment - in layman’s terms, that means no capped fees for debit and prepaid card transactions

Next steps: build on an end-to-end FinTech platform that has an attractive cost structure

Now that we’ve explained how you can make interchange revenue, look out for future posts from our Revenue Series like how you can set up your FinTech app to make money from fees and interest, or how you can use a FinTech offering to drive revenue indirectly in the form of higher customer retention, increased purchasing volumes, and more.

At Synctera, we provide everything you need to build, test, and launch FinTech and embedded banking products, including an end-to-end platform, a personalized development experience, and a range of programs that can get you a bank partner that can support your products.

To learn more about how Synctera can help you launch your next banking product, reach out to our team using the link below.

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