When you use your credit or debit card it’s easy to overlook the complex system that makes that transaction seem so simple. Behind the scenes, the card-networks are the central players in a vast system of providers. Understanding the networks and the role they play can be a huge undertaking, particularly for merchants who are just beginning to dive into payment systems and card processing.
Card processing networks (sometimes called “card brands”) like Visa and Mastercard are the backbone of payments processing, connecting the players so you can swipe without worry — allowing merchants to accept all types of card-payments from customers and other businesses. To accept these payments, merchants must have access to an acquiring bank and the proper tools for accepting and processing payments, such as a payment gateway for digital transactions. With an estimated 678 billion global credit card transactions in 2022 (equivalent to an average of 1.86 billion per day), it has never been more crucial for merchants to understand the role of card processing networks in their day-to-day operations.
In this article, we cover what you need to know about card processing networks, including what they are, how they work, and any fees you need to be aware of. Stay tuned to discover how major card processing networks like Visa and Mastercard work their magic.
What is a Card Processing Network?
A card processing network (also called a credit card processing network) is a financial organization that facilitates card-based payments. Some of the most common card processing networks are Mastercard, Visa, Discover, and American Express (AmEx), as well as UnionPay in China.
In 2022, Visa was the most popular card processing network with 242 billion total card transactions (followed by 213 billion for UnionPay and 150 billion for Mastercard).
What these card networks do is fairly straightforward: they offer infrastructure for digital payments. They create the rules and pathing that makes it possible to accept, authorize, verify, and ultimately approve card transactions. You may hear the term debit or credit card “rails” - which refers to the infrastructure that enables card-payments. It’s an apt metaphor - think of the card brands as the railway company that lays down the train tracks. They manage and standardize the construction of rail lines, set rules for the signals and practices locomotives must follow, and bring order and safety to the world of commerce.
For many years, accepting payments from one or many payment networks was a hassle — but the credit and debit card business was still a backseat to cash. We now live in a world which spends on plastic and many merchants now support all four major payment networks.
There are now thousands of debit card and credit card products in addition to card-products like gift cards. These are created by card issuers (often working with a partner, such as an airline or your favorite retailer) that work with the card networks. These issuing banks and financial firms offer cards in partnership with one of these payment networks.
Visa, Mastercard, Discover, and AmEx also form the PCI Security Standards Council (SSC) alongside Japan’s JCB International. The PCI SSC acts as an authority in the payments industry, regulating and enforcing the PCI Data Security Standard (DSS) to protect cardholder information. The rules set by this consortium are not guidelines, but the ground-rules participants must abide by in order to participate in card-payments. While the card processing networks establish a smooth infrastructure for card payments, they also make requirements of the other players, principally to ensure a safe-processing environment for cardholders. This includes both in-person payments and digital payments, though networks have placed an increasing amount of emphasis on optimizing digital payments over recent years with the surge in card-not-present volumes and activity.
As such, card processing networks not only facilitate card payments but also outline the rules and requirements for merchants to follow when accepting card payments. Overall, card processing networks enable merchants to accept, authorize, and approve card payments.
How Card Processing Networks Work
Carrying out a transaction is a complex process — one that merchants and businesses would struggle to complete without the assistance of card processing networks and payment service providers. The requirements go beyond just executing the transaction too - they encapsulate settlement, reporting, monitoring, returns/refunds, and disputes or chargebacks. For now, let’s stick to the basic transaction.
In-person card payments (sometimes called “card-present”) involve a physical point-of-sale (POS) system, while digital card payments (ecommerce, which is also a type of “card-not-present” transaction) utilize digital tools, called payment gateways. Payment processors are the service providers that connect the merchant to the card processing network, while payment gateways communicate the transaction to the cardholder and the merchant (think of the approval or denial message) that comes back after a payment is submitted. In order for a transaction to be approved, each player in the system must approve it - if a single participant doubts the validity of the transaction, it will not go through (although Payments Orchestration does offer some workarounds).
When a customer makes a purchase, the customer sets in motion a request to their card issuer to provide the payment to a merchant. The processing network for the customer’s card receives the initial request, passing this information on to both the merchant’s acquiring bank and the customer’s card issuer.
These two banks are the intermediaries which transfer funds from the customer to the merchant:
- Issuing Banks: Issuing banks are the institutions that provide the bank account (or credit account for credit cards) that are linked to the debit or credit cards of the cardholder. Issuing banks, in partnership with the issuer-processor) are responsible for authorizations and set the necessary security standards and verification measures required for cardholders to make a purchase.
- Acquiring Banks: Acquiring banks are the institutions which receive money into a bank account they maintain on behalf of merchants. After a customer has made a purchase which has been authorized by the issuing bank, the acquiring bank collects the payment from the issuing bank and transfers it into the merchant’s account.
In an open-network, banks and processors such as those working with Visa and Mastercard may come in all shapes and sizes. Closed-networks, such as American Express and Discover, actually have all these entities under a single brand in a closed-loop. While this can have its benefits, it generally means a less-inclusive operating model and subsequently less adoption for these networks. This is why it’s important for merchants to clearly identify which networks they will accept and participate in to optimize the customer experience. If you’re a luxury brand or a high-end travel experience merchant then not accepting American Express might mean turning off many of your key customers.
To illustrate where the card network sits in the transaction flow, let’s examine a transaction flow among parties in an open-loop system courtesy of Mastercard.
Step 1: The customer pays with Mastercard
The customer purchases goods/services from a merchant.
Step 2: The payment is authenticated
The merchant point-of-sale system captures the customer’s account information and securely sends it to the acquirer.
Step 3: The transaction is submitted
The merchant acquirer asks Mastercard to get authorization from the customer’s issuing bank.
Step 4: Authorization is requested
Mastercard submits the transaction to the issuer for authorization.
Step 5: Authorization response
The issuing bank authorizes the transaction and routes the response back to the merchant.
Step 6: Merchant payment
The issuing bank routes the payment to the merchant’s acquirer who deposits the payment into the merchant’s account
Are Card Processing Networks Different from Card Issuers?
A common misconception when it comes to card-based transactions is that your card issuer is your card processing network (it’s confusing, we get it). While this may be true in cases of closed-networks (American Express), in the majority of cases, your card issuer is not the same as your card processing network at all.
Card issuers refer to the financial institutions that provide a customer with any type of card-payment method. The card issuer determines whether or not a transaction is approved. In the same way “card processor” is often used to describe both a processor and a merchant bank, “card issuer” can be used to describe both an issuer-processor (like Marqeta) and an issuing bank (like Wells Fargo). These parties work closely with a chosen card-network and, sometimes, a merchant in issuing a card-product (when a merchant works directly with these parties to get its logo on the card and tie-in a rewards program it is called a “co-branded” card).
Meanwhile, the card processing network is responsible for connecting the customer’s request to the relevant card issuer. Additionally, the card processing network is also responsible for passing transactional information to the merchant’s acquiring bank.
What are Open vs. Closed Networks?
To understand how card processing networks work behind the scenes, we must first examine the two different types of card processing networks:
- Open Networks: Open networks (such as Visa and Mastercard) are card processing networks that allow other financial institutions to issue credit cards within their networks to customers. Remember, in an open network, the card processing network generally does not act as a card issuer, relying instead on third-party institutions like banks to issue and distribute cards.
- Closed Networks: Closed networks (such as Discover and AmEx) act as both the card processing network and the card issuer. These types of networks typically offer banking services and do not allow third-party institutions to issue their credit cards. Closed networks can offer co-branded cards as well, think of the Delta card from American Express where Delta has partnered with the actual card-network.
Knowing whether a card belongs to an open or closed network is important for understanding the nuances of the card payment process.
How Do Merchants Connect to a Card Processing Network?
To connect to a card processing network, merchants need the right mix of POS systems, payment processors, and payment gateways. In the age of digital payments, reliable payment processors and payment gateways are particularly important for a seamless payment solution.
This requires a variety of different integrations within the merchant’s payment infrastructure. Depending on how a merchant manages their payment system, this infrastructure can be built through direct integration to one or more payment service providers (PSPs) or streamlined through an orchestration platform like Spreedly.
In simple terms, the way a merchant connects to a card processing network is through an acquiring bank. An acquiring bank accepts money on behalf of the merchant from the issuing bank, but in order to accept that money, there must be a connection between the two. The card-networks facilitate the flow of information between these two parties at time of transaction. The actual transfer of funds happens later, but the networks provide the data-transfer so that funds can be settled in a timely manner.
Payment orchestration platforms are ideal for any merchant dealing with digital payments, as they not only simplify the necessary card processing integrations but also have the integrations needed for both card- and non-card payment methods.
Additionally, payment orchestration platforms often provide more comprehensive support and security to keep a merchant’s payment system safe and up to the latest compliance standards.
Important Cost Considerations for Card Processing Networks
The privilege for merchants to accept plastic instead of cold hard cash comes at a cost. Fees are tacked on to every transaction made on a payment network, which are levied by payment networks, processors, and issuers. According to Forbes, the average credit card processing fee ranges between 1.5% to 3.5%+ of the transaction value.
Card processing fees cover the cost of running large payment networks and credit card businesses, as well as supporting payment processors. here are three main types of card processing fees merchants encounter:
- Interchange Fees: Interchange fees are paid per transaction and are generally calculated using a flat rate plus a small percentage of the total sale. Interchange represents the largest component of card-fees. Merchant Maverick reports the following average interchange fee rates for the four major card processing networks in 2023:
• Visa: 1.30% to 2.60%
• Mastercard: 1.45% to 2.90%
• American Express: 1.80% to 3.25%
• Discover: 1.55% to 2.45%
- Payment Processor Fees: Payment processor fees are charged to merchants for the use of various payment processors and other payment tools. These fees are sometimes referred to as merchant service fees and can include both per-transaction and monthly fees. The cost of these fees varies widely depending on the payment service providers a merchant works with.
- Assessment Fees: Assessment fees are charged monthly to the merchant by the card processing networks. These fees are calculated based on a percentage of the merchant’s monthly sales. The average cost of assessment fees typically ranges between 0.13% to 0.15%.
Final Thoughts: Connect to a Global Payments Ecosystem with Spreedly
At Spreedly, our payment orchestration platform optimizes payment infrastructures for merchants, merchant aggregators, and fintechs.
Through the Spreedly API, you can easily connect to a global payments ecosystem, including connections to all the major card processing networks. Our team works to ensure each of your transactions is fully optimized, secured, and cost-effective. Plus, we help you achieve higher authorization rates and lower card-processing fees by reducing payment friction across the entire payment process.
Whether you are carrying out traditional credit and debit card transactions or you are utilizing alternative payment methods, Spreedly has the payment method connection capabilities necessary to keep your payment system localized and frictionless.
Get in touch with Spreedly today to begin lowering the costs of card processing.
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