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What are card networks, and how do they work?

Every day, billions of credit and debit card transactions power global commerce, influencing the very fabric of modern society. The card network lies at the core of each transaction.

So, what exactly are card networks, and how do they function? Let's take a look and explore the role of card networks in the payment lifecycle.

What is a card network?

Card networks, commonly known as card schemes, connect issuing banks and acquiring banks, allowing them to communicate and seamlessly pass data back and forth to facilitate transactions globally.

Interoperability is a key term when thinking of card networks because they allow consumers to use (and merchants to accept) cards issued by pretty much any bank anywhere in the world, and the experience will basically be the same. And that wouldn’t happen without the card network.

What role does a card network play in the payment lifecycle?

While online payments may seem instantaneous, a complex sequence of events unfolds when customers click "pay." Here's a breakdown of the process and where a card network fits into the payment lifecycle:

  1. Payment initiation: The payment lifecycle begins when a customer initiates a payment or when a merchant starts a transaction using stored card details.
  2. Authorization request: Transaction details are sent to the merchant's acquirer and then forwarded to the card network, which contacts the customers issuing bank.
  3. Issuer decision: The issuer evaluates the request and responds with an authorization code for approved transactions or a decline/error code for declined payments.
  4. Communication of decision: The card scheme communicates the issuer's decision to the merchant's acquirer, which relays it to the payent gateway.
  5. Notification to customer: The merchant's gateway informs the customer whether the transaction is authorized or declined.
  6. Hold and settlement: Upon approval, a temporary hold is placed on the customer's account until funds are transferred from the customer's bank to the merchant's account.

How do card networks work?

Although all card networks have the same role in the card payment lifecycle. There are nuances to how card networks operate. Primarily, some networks operate a three-party model. Why others utilize a four-party model.

Let's take a look at these.

The three-party scheme (closed scheme): This model involves a single entity acting as both credit card issuer and acquirer. Diners Club, Discover Card, and American Express are all examples of financial institutions that act as both issuers and acquirers. 

Four-party scheme (open scheme): This model separates issuers and acquirers, meaning there is a fourth corner. Brands like Visa, Mastercard, and UnionPay operate under this scheme. Any eligible institution can join and issue cards on these card networks.

Why are there different card networks?

The presence of multiple card networks, such as Visa, Mastercard, American Express, and Discover, is attributed to the competitive dynamics within the financial services industry. This competitive environment spurs innovation and bolsters efficiency. Additionally, each card network possesses distinct business models, strengths, weaknesses across various markets, and unique priorities concerning innovation.

What are domestic card networks? 

You’ll recognize the big-name payment networks, such as Mastercard and Visa, American Express, and UnionPay. But these global card networks aren’t always the only game in town. Domestic card schemes have existed in many markets globally for decades. Examples include Cartes Bancaires in France, Dankort in Denmark, and mada in Saudi Arabia.

Typically operated by a domestic government agency, these domestic card networks seek to:

  • Reduced dependence on international card brands
  • Promoting competition
  • Lower transaction costs
  • Support national economic policies
  • Offer regulatory control
Domestic card schemes are expected to account for 7.5% of card volume worldwide by the end of 2027.

Frequently, domestic card schemes are co-badged with Visa and Mastercard, enabling cardholders to use them globally.

What’s the difference between a card network and a card issuer?

Think of card networks, such as Visa and Mastercard, like a vast network of roads connecting cities. They own the ‘highway’ that your money travels on, as well as setting the rules, ensuring smooth traffic flow (transactions), and handling tolls (transaction fees). 

Of course, to drive on the roads, you need a car. This is your payment card, given to you by issuing banks or credit unions. Imagine card issuers as car rental companies; they decide if you get a car (a payment card), what kind of perks it comes with (cashback, rewards, etc.), and how much gas money you get (your credit limit).

What fees are charged to process a payment?

There are various fees taken by the card network and other parties in the payment flow when processing a payment.

Interchange fees:

  • This is a percentage of the transaction amount charged to the merchant and paid to the issuing bank. 
  • The specific interchange rate depends on factors such as the card type (debit, credit, rewards, etc.), transaction size, and network (Visa, Mastercard, etc.).
  • Interchange fees can be up to a few percentage points of the overall transaction amount.

Transaction fees:

  • Also called assessment fees, these are flat fees charged by the card network to the issuing bank for each transaction processed.
  • Transaction fees are typically much lower than interchange fees.

Network access fees:

  • Network access fees are annual fees charged to issuing banks for the privilege of offering cards on the network.

Final thoughts 

Making online transactions have never been easier or quicker. But behind that simplicity lies the complex yet fascinating world of card networks. A deep knowledge of card networks empowers merchants to make strategic decisions regarding their payment processing. With this expertise, merchants can drive enhanced customer experience while optimizing costs and mitigating risks in the ever-evolving world of online transactions.

Learn more about the card payment lifecycle.

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Head of Payments