What is a Card Network?

Card networks play an essential role in the payment transaction process. 

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They enable consumer banks to connect with merchants for card transactions.

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In this blog we discuss types of card networks, their roles, payment players they are sometimes mixed up with, and more.

What is a credit card network?

A card network (also known as a card association) is an organisation that facilitates and streamlines payment card transactions. They create virtual payment infrastructures to facilitate this.

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Networks and issuers authorise and process debit and credit card transactions. They also establish terms (fees, interest rates, credit limits, etc.), and transfer payments among businesses, customers and banks.

Examples of card networks

Mastercard, Visa, American Express and UnionPay are four major card networks.

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They process 97% of all credit card transactions globally and their logos feature on many of the cards distributed by issuing banks.

What is a card issuer?

Card issuers (or issuing banks) handle everything from card applications and approvals. They also distribute cards and rewards, collect payments, and set terms.

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Issuers decide consumers’ credit limits and have the last say on approving or denying their transactions.

Card network vs. card issuer

The primary difference between the two is credit card issuers provide credit cards to consumers whereas credit card networks transfer information.

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When customers make a purchase with a credit card, the transaction request goes to the issuer, the entity that extends credit. 

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The issuer decides whether to authorise the transaction, and the cardholder repays the issuer for their credit card purchases.

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Card issuers decide eligibility, fees, and rewards. As a cardholder, interactions like bill payments and reporting are mainly with the customer’s issuer, not the network.

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Visa and Mastercard do not directly issue cards but consumers can obtain them by applying through another financial institution.

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Some credit card networks act as both the network and issuer, providing credit directly to cardholders.

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For instance, American Express (AmEx) and Discover are credit card networks that also issue credit cards.

Types of credit card networks

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Two main types of card networks are:

Open networks

In an open network, the card processing network, like Visa or Mastercard, typically doesn't issue cards. Instead, it relies on third-parties like banks for card issuing and distribution.

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Open networks enable financial institutions to issue credit cards to customers within their networks.

Closed networks

Closed networks serve as both the card processing network and the card issuer. They handle the entire card issuance process within their system.

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These networks (like Discover and AmEx), usually provide banking services and do not permit third-party institutions to issue their credit cards.

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Knowing if a card is on an open or closed network is vital to grasp how card payments work.

Card networks’ role in the payment process

1. Customer initiates a payment

A transaction begins when a cardholder (customer) uses their credit or debit card at a business's point of sale (POS). This could be a physical terminal or an online checkout.

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It may appear to the customer that the entire transaction completes in a matter of seconds. This is the impression the process is designed to achieve. However, in reality, this is simply the initiation of the transaction.

2. Terminal interacts with merchant’s bank

Next, the terminal (or payment gateway) sends the card and transaction data to the merchant’s bank.

3. Merchant’s bank communicates with cardholder’s bank (via card network)

The merchant’s bank seeks approval from the cardholder’s bank (often referred to as the issuer bank or simply put, issuer) for the transaction via the card network.

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The cardholder’s bank checks that there are sufficient funds in the cardholder’s account, no grounds for suspicion of fraud, etc.

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When the card network passes this information along, it encrypts it for added security.

4. Cardholder’s bank communicates with merchant’s bank (via card network)

The cardholder’s bank communicates its approval (or decline) to the merchant’s bank. It does this through the card network, which again encrypts the information along the way.

‍5. Merchant’s bank (and cardholder) receive approval or decline message

‍Once the merchant's bank receives the approval or denial from the cardholder's bank, it communicates it to the point of sale. In other words, it gives the merchant (and cardholder) a message saying something like ‘Transaction Approved’ or ‘Transaction Declined’.

6. Settlement process begins

‍The cardholder will leave now, i.e., they will walk out of the store or close their browser. This is when the settlement process (i.e., transfer of funds) begins.

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The settlement process usually begins at the end of the business day. The merchant’s bank ‘batches’ together all of its transactions and requests the funds from the cardholder’s banks via the card network.

7. Settlement process completes

‍Within a few business days, the cardholder’s bank will settle the funds of the original payment.

A note on card network fees

‍‍Accepting card payments instead of cash comes with costs. Transaction fees are added by most parties in the payments process.

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Card networks charge a number of fees throughout the transaction process. These include, but aren’t limited to:

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• Assessment fees: These are charged by card networks to both cardholder’s banks and merchant’s banks. They are typically based on the total monthly transaction volume involved and are a small percentage of each transaction.

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• Network Access and Brand Usage (NABU) fees: These are usually fixed fees charged per transaction.

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• Chargeback fees: If a cardholder disputes and reverses a payment (a chargeback), the card network charges the merchant’s bank a fee, which in turn passes the charge onto the merchant.

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Each network has its own fees and fee structure. And they change over time. Merchants may not accept some networks due to their fees.

Liability

Card issuers aid customers in fraud cases, but card networks also detect and secure against fraud and provide liability protection.

Conclusion

Card networks are an essential part of facilitating payment transactions. They facilitate efficient card transactions by connecting cardholder's banks with merchants. 

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Mastercard, Visa, and UnionPay are the largest card networks. They play a crucial role in authorizing and processing most of the world’s transactions. They also set terms and manage fund transfers between businesses, customers, and banks.

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Distinguishing between card issuers and networks is crucial. Card issuers, such as banks, manage card applications, distribute cards, set terms and credit limits. In contrast, card networks primarily facilitate information transfer and transaction authorisation.

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There are two types of card networks. The first are open networks like Visa or Mastercard, which rely on third-party banks for card issuing. The second are closed networks like Discover and American Express, which issue and process their cards.

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The payment process involves several steps. Card networks are involved in many of these. They charge fees for their services, including:

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• Assessment fees 
• Network Access and Brand Usage (NABU) fees
• Chargeback fees

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Lastly, both card issuers and networks play roles in fraud detection and prevention. They also offer liability protection, which contributes to a safe transaction environment.