Actually, this can be quite a bit higher if you are in a "high risk" category. For example, a phone sex / internet porn vendor can pay over 10% because of the incredibly high ratio of chargebacks ("No, honey, I have no idea what that charge is for. Someone must have stolen our card number!").

Quite true. So, the merchant bank keeps the difference between the discount rate they charge the merchant and the 1.05% settlement. Obviously, there's money to be made here. They have no credit risk from the cardholders, but they have a huge potential liability should a merchant go under. Any time there's a successful chargeback and they can't collect from the merchant (because they're bankrupt, disappeared, etc.), they have to reimburse the cardholder's bank. Reportedly, the merchant bank for Eastern Airlines nearly went out of business because of the huge chargeback liability they incurred when Eastern went under.



How do you think they afford all of those "Priceless" and "Everywhere you want to be" ads? Actually, one thing that most people don't realize is that both MasterCard International and Visa International are non-profit corporations, albiet not charitable. They exist solely to service member banks, enabling the banks to make a profit. They provide joint marketing, clearinghouse, and brand protection services, but it's up to the member banks to issue cards and make all the money.

I think you meant to say that the issuing bank pays the airline out of the 1% discount rate they got from the merchant bank.