Card Networks — What Fintechs and Companies Need to Know

Breakdown of the major players in the card network infrastructure and the anatomy of card fees

Interchange fees from card transactions are often one of the most significant sources of revenue for fintechs with card programs. If you’re offering a card product on your platform, you’ll need to understand the card network payment infrastructure. Card networks are one of many payment rails (e.g., cash, ACH, wire transfer) that can be used to complete a transaction. Familiar examples of these networks are Mastercard, Visa, and American Express. The card network’s role is to enable and facilitate card transactions in many forms — swipe, dip, or tap a physical card, pay with virtual cards on a mobile device, or complete online transactions via e-commerce websites.

To do this, a card network creates a virtual payment infrastructure (often described as “rails”) that connect the two sides of a card transaction, the issuing side and the acquiring side. Think of these sides as it relates to the payment: the issuing side issues payment to the acquiring side. On each side of the transaction, there are many parties involved in making the transaction happen.

Card Networks: On the issuing side

• Cardholder: End user who gets card(s) from their issuing bank and uses them to make purchases.
• Issuing bank: The bank that issues the card to the cardholder.
• Issuer processor: Technology provider that connects the issuing bank to the card network. Issuer processors, on behalf of the issuing bank, help authorize transactions, complete transaction settlement, and identify potential fraud.

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Card Networks: In the middle

• Card network: Card networks like Visa and Mastercard enable transactions by bridging the gap between the issuing & acquiring sides of the network — their infrastructure acts as the communication system between the issuing bank/cardholder and acquiring bank/merchant. The network defines the interchange fees (defined below) associated with a transaction (though interchange fees are paid to the issuing bank). They themselves also collect a small fee based on the amount of the transaction. Importantly (and this is a common point of confusion), card networks are not financial institutions and do not themselves issue cards, collect interchange, or receive revenue (or bear risk) associated with extending credit to cardholders.

Card Networks: On the acquiring side

• Merchant: The entity who sells the goods and/or services to the cardholder.
• Acquiring bank: The bank that holds the merchant’s account and accepts the merchant payment.
• Acquiring processor: The technology provider (also sometimes called “card acquirer” or “credit card acquirer”) that connects the acquiring bank to the card network.

When a cardholder uses their card to make a purchase, the total amount of the transaction is distributed amongst the entities involved in processing the transaction. Invisible to the cardholder, the merchant pays different fees that allow this transaction flow to occur.

There are two main portions of the total transaction, the merchant payment and the interchange.

Merchant payment 

This is the final amount received by the merchant for the goods and/or services; the total cost the cardholder paid in the transaction less interchange fees defined below. The merchant also owes the acquiring bank and acquiring processor a fee for each transaction. This is typically paid on a monthly basis for all transactions on a network.

Interchange Fee 

The fee determined by the card network and paid to the issuing bank for enabling the cardholder to initiate a card transaction. Interchange, as described by Visa, “reflects the value merchants receive from accepting our products and play a key role in balancing the costs and benefits that account holders and merchants derive from participating in” payments networks.

The card networks also collect a small fee for each transaction, which we’ll call the “network fee.” These network fees are charged to both issuing and acquiring banks and are essentially fees that reflect the value of the card network in processing transactions, fees charged on the number of cards issued, cross border/currency conversion fees, etc. These fees can be partially passed on via acquiring processing fees for merchants and, for cardholders, as monthly account fees, annual credit card fees, or lumped into credit card interest rates as a fee for extending credit.

Coming up next, we will do a deeper dive on interchange fees and its effect on your business. 

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