CPP CPP Card Networks & Interchange 1 — Questions and Answers
Question 1: What is interchange in the context of card payment processing?
- The fee a cardholder pays to use their credit card
- The fee paid by the acquirer to the issuer for each card transaction (Correct answer)
- The markup charged by a payment processor to a merchant
- The annual fee charged by a card network
Correct answer: The fee paid by the acquirer to the issuer for each card transaction
Interchange is the fee paid by the acquiring bank (merchant's bank) to the issuing bank (cardholder's bank) to compensate for transaction risk and funding costs.
Question 2: Which of the following card networks operates a 'three-party' (closed-loop) model?
- Visa
- Mastercard
- American Express (Correct answer)
- Discover
Correct answer: American Express
American Express traditionally operates a three-party (closed-loop) model where it acts as both the issuer and acquirer, though it now also supports third-party issuers.
Question 3: What is the 'four-party model' in card payments?
- A model involving cardholder, merchant, issuing bank, and acquiring bank (Correct answer)
- A model with four different payment networks
- A pricing model with four interchange tiers
- A model with four types of card products
Correct answer: A model involving cardholder, merchant, issuing bank, and acquiring bank
The four-party model consists of the cardholder, merchant, issuing bank, and acquiring bank, with the card network (e.g., Visa, Mastercard) facilitating the transaction between them.
Question 4: What is an authorization hold in card payment processing?
- A temporary freeze on funds equal to the transaction amount pending final settlement (Correct answer)
- A permanent charge applied immediately to the cardholder's account
- A security hold placed on cards suspected of fraud
- A delay in payment to the merchant by the acquirer
Correct answer: A temporary freeze on funds equal to the transaction amount pending final settlement
An authorization hold temporarily reserves funds on a cardholder's account to ensure availability, which is released or converted to a charge at settlement.
Question 5: What does the term 'downgrade' mean in card processing?
- A card being declined due to insufficient funds
- A transaction qualifying for a higher interchange rate than the optimal rate (Correct answer)
- A reduction in a merchant's processing limit
- A card being downgraded from rewards to basic tier
Correct answer: A transaction qualifying for a higher interchange rate than the optimal rate
A downgrade occurs when a transaction fails to meet the requirements for a preferred interchange category and is therefore assessed a higher interchange rate.
Question 6: What is the Durbin Amendment and how does it affect debit card interchange?
- It caps credit card interest rates at 15%
- It limits debit card interchange fees for large issuers to 21 cents plus 0.05% per transaction (Correct answer)
- It requires banks to offer free debit card accounts
- It mandates debit card PIN use for all transactions
Correct answer: It limits debit card interchange fees for large issuers to 21 cents plus 0.05% per transaction
The Durbin Amendment (part of the Dodd-Frank Act) caps debit card interchange fees for banks with over $10 billion in assets at 21 cents plus 0.05% per transaction.
CPP CPP Card Networks & Interchange 1
What is interchange in the context of card payment processing?