Understanding IRDs

RDs

Definition The Interchange Rate Designator is a two-position code that indicates the interchange rate and editing rules applied to the transaction. A valid two-position IRD is required for all MasterCard-branded U.S. region and international First Presentment/1240 messages and chargeback cycle messages. It also is required in messages submitted for a business service that requires an IRD to be present in the given message type.

Step 1 To determine the business service matching

Both the origination and destination members of a transaction (for example, the acquirer and issuer) must be licensed for a selected card program and must participate in a common business service; otherwise, the clearing system rejects the transaction because there are no business rules to govern its completion. The clearing system selects the appropriate business service from those in common between the issuer and acquirer in the following order of priority: Member-to-member Intracountry Intercountry Intraregional Interregional After the business service is determined, the clearing system evaluates financial transactions with respect to the interchange criteria defined for the business service and submitted interchange rate designator to determine the correct interchange rate. The clearing system validates any data the message originator submits in PDS 0158, calculates interchange fees, and forwards the transaction to the receiver. This information is made available to the transaction originating processor through reconciliation processing options. The IRD identifies the interchange rate program for which the acquirer presented the transaction, throughout the life cycle of the item, including during presentment, retrieval, and chargeback. The IRD is presented in Business Activity, Interchange Rate Designator (PDS 0158, subfield 4).

Srinivasa Sundar

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5/09/2007

Understanding IRDs

Chargebacks and second presentmentsThe issuer may not change the Interchange Rate Designator (IRD) (PDS 0158, subfield 4) in chargebacks to reflect interchange compliance adjustments, nor does MasterCard adjust the IRD. The IRD and chargeback interchange fees reflect the interchange rate program initially presented by the acquirer.

Step 2: Interchange Compliance Validation

Last Valid Transaction Date The last valid transaction date (LVTD) is the oldest calendar date on which a transaction can occur and still qualify for the timeliness requirements of a specific interchange rate program. The interchange compliance process uses the system processing date to calculate the LVTD for the interchange rate designator specified in PDS 0158, subfield 4 (Interchange Rate Designator) of the clearing transaction. The LVTD is calculated by subtracting a specific number of days associated with a particular interchange rate program from the system processing date. Because calculation of the LVTD is based on the system processing date (that is, the date that GCMS processed the transaction) as opposed to the File Reference Date (PDS 0105, subfield 2) provided by the acquirer, it has the following implications: First, transactions that pass GCMS edits may not pass interchange compliance timeliness edits if the file reference date submitted by the acquirer is not the true file submission date. Second, the system processing date is usually one day after the date the acquirer submitted the transaction. For this reason, the interchange compliance process adds one day to the GCMS timeliness requirements to verify compliance.

Step 3: Determination of the Appropriate Interchange Rate Program

After matching and validation are complete, the interchange compliance process determines which interchange rate program the transaction qualifies for according to the following criteria: If the transaction successfully passed the matching and validation process, no interchange rate program adjustments occur. If the transaction failed one of the tests in the matching or validation processes, the interchange compliance process adjusts the transaction to the appropriate interchange rate program.

Srinivasa Sundar

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5/09/2007

Understanding IRDs
If the transaction failed more than one of the tests in the matching or validation processes, the interchange compliance process adjusts the transaction to Consumer Standard, World Standard, or Corporate Standard.

Step 4: Calculation of Settlement Adjustment

The interchange compliance process compares the interchange rate designator in PDS 0158, subfield 4 of the First Presentment/1240 message with the interchange rate designator associated with the adjusted interchange rate program determined in step 3. The interchange compliance process determines whether a rate adjustment is necessary, according to the following criteria: If the interchange rate designator in the clearing transaction is the same as the interchange rate designator determined in step 3, the interchange compliance process does not calculate an adjustment for the transaction. If the interchange rate designator in the clearing transaction is more favorable for the acquirer than the interchange rate designator determined in step 3, the interchange compliance process calculates an adjustment. If the interchange compliance process determines that the interchange rate designator in PDS 0158, subfield 4 differs from the interchange rate designator determined in step 3, it does not change the value of PDS 0158, subfield 4 of the clearing message. Instead, it reports the adjusted interchange rate designator in the Issuer Detail Adjustment and Acquirer Detail Adjustment records. Calculation of the Adjustment The interchange compliance process performs the steps listed below to calculate the adjustment. See the following pages for examples of each calculation. Step Action 1. Determines the original interchange fee based on the interchange rate designator in the clearing transaction. 2. Determines a new interchange fee based on the interchange rate designator determined in step 3 of the interchange compliance process. 3. Determines an adjustment value that is the difference between the original and new interchange fees. 4. Determines a total accumulated adjustment value for the acquirer and issuer.

Srinivasa Sundar

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5/09/2007

Understanding IRDs
Original Interchange Fee The interchange compliance process uses the following values to calculate the original interchange fee: Original interchange percentage rate and fixed transaction fee indicated by the interchange rate indicator in the clearing transaction. Transaction dollar value from the clearing transaction.

The calculation of the original interchange fee is as follows:

Original Interchange Fee

Transaction Dollar Value

Original Interchange Percentage Rate

Fixed Transaction Fee

For example, if the interchange rate designator from the clearing transaction is 70 (Merit III Base), the interchange compliance process uses the Merit III Base 100.00, the original interchange fee is determined as follows: Original Interchange Fee interchange percentage rate plus fixed transaction fee of 1.36% + USD 0.10. If the transaction dollar value from the clearing transaction is USD

USD 100.00

0.0136

USD 0.10

USD 1.46

It is by the above process the MC gets its fees from the issuer and acquirer for the respective flows. i.e. from the acquirer for all the I presentment transactions that are passed to the issuer Hence if a IRD is assigned for a transaction by the acquirer, it will be revisited by the Mastercard and changes it appoipriately so that the same IRD should be passed for the whole life cycle.

Srinivasa Sundar

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5/09/2007