A $250 million fine and $1.225 billion in restitution fees to merchants‼️
… that’s what the card network Discover has been ordered to pay for misclassifying millions of consumer cards as commercial ones over a period of 17 years. This sparked quite a debate in a couple of conversations I had this week. Without getting too political, the point that left us quite perplexed was how Discover, 𝘸𝘩𝘰 𝘴𝘦𝘵𝘴 𝘵𝘩𝘦 𝘳𝘶𝘭𝘦𝘴, could get its own product classification wrong?
The reality is probably more nuanced, but what we can agree on is that the interchange is a complex product, and assigning the correct fee is no simple task. While merchants don’t directly apply the interchange fee, payment processors, acquirers, and other intermediaries are responsible for properly categorising each transaction according to the card network’s rules.
But here’s the thing… when a card transaction is processed, it doesn’t automatically fall into a flat fee bucket. Instead, each transaction is assessed against quite complex specific interchange “programs” (rules) based on factors like:
◾Card type (e.g., credit, debit, commercial)
◾Transaction method (e.g., in-person, online)
◾Merchant category (e.g., retail, hospitality)
◾Geography (domestic vs. international)
… amongst many other parameters…
(Youtube Link)
So misqualifying the interchange does happen, and what it means is that a transaction is assigned to the wrong category i.e. under the wrong interchange program. This typically leads to a higher fee than what would have been applied had it been correctly classified.
A common cause for this is outdated BIN configuration, often inherited from legacy systems and left unchecked… until it starts showing up in fee discrepancies or reporting errors.
One point to note is that whilst commercial cards typically have higher interchange fees, when richer data (such as Level 2 or Level 3 data) are passed through, they can qualify for lower fees (context applies).
Discover’s issue was not about the data levels themselves, but rather the misclassification of the card type (consumer vs. commercial), yet I’m wondering what could have led to this if not a matter of system oversight slipping through the radar… albeit for 17 years! With the consequences that significant, you’d hope it prompts more transparency around how BIN classification and related data attributes are managed across the payment systems?
hashtag#paymentexperts, any perspectives to share on the hashtag#interchange misqualification?
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𝑾𝒐𝒏𝒅𝒆𝒓 𝒘𝒉𝒐 𝒘𝒆 𝒂𝒓𝒆? 𝘞𝘦 𝘢𝘳𝘦 𝘢 𝘵𝘦𝘢𝘮 𝘰𝘧 𝘗𝘢𝘺𝘮𝘦𝘯𝘵𝘴 𝘚𝘵𝘳𝘢𝘵𝘦𝘨𝘪𝘴𝘵𝘴 𝘣𝘭𝘦𝘯𝘥𝘪𝘯𝘨 𝘰𝘶𝘳 𝘪𝘯𝘥𝘶𝘴𝘵𝘳𝘺 𝘦𝘹𝘱𝘦𝘳𝘵𝘪𝘴𝘦 𝘸𝘪𝘵𝘩 𝘢 𝘤𝘳𝘦𝘢𝘵𝘪𝘷𝘦 𝘢𝘱𝘱𝘳𝘰𝘢𝘤𝘩 𝘵𝘰 𝘢𝘴𝘴𝘪𝘴𝘵 𝘰𝘶𝘳 𝘤𝘭𝘪𝘦𝘯𝘵𝘴 𝘵𝘩𝘳𝘰𝘶𝘨𝘩 𝘊𝘰𝘯𝘴𝘶𝘭𝘵𝘪𝘯𝘨, 𝘚𝘵𝘳𝘢𝘵𝘦𝘨𝘺, 𝘙𝘦𝘴𝘦𝘢𝘳𝘤𝘩 𝘢𝘯𝘥 𝘛𝘩𝘰𝘶𝘨𝘩𝘵 𝘓𝘦𝘢𝘥𝘦𝘳𝘴𝘩𝘪𝘱 𝘱𝘳𝘰𝘫𝘦𝘤𝘵𝘴.
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