Anyone who owns a credit or debit card would have seen Mastercard’s or Visa’s logo on their card. But did you know that Mastercard and Visa do not actually issue any credit cards? They’re known as credit card associations which sit merrily between the card issuing bank and the merchant’s bank. Let’s break down the business model.
The Life Cycle of a Credit Card Transaction
First, let’s walk through the steps in a credit card transaction. (I’ve tried to be concise but if you’d prefer a visual flowchart, just scroll down). At the point of sale, the cardholder presents the credit card to the merchant for payment. The merchant inserts the card into its payment terminal which reads the EMV chip on your card. This triggers a series of authorization requests routed through the acquiring bank, the payment network, and finally the card issuer. The card issuer will validate whether or not the cardholder has available credit. Upon receiving the authorization message on its terminal, the merchant will issue the cardholder with a receipt confirming payment.
The payment network calculates the card issuer’s settlement obligation (more on the fees later). The card issuer pays the card association’s settlement bank. The card association then sends on the amount due to the acquirer after taking their cut. The acquirer finally sends on the amount due to the merchant after taking their own cut.
[1] Authorization
[2] Clearance & Settlement
Now, Who Pays What?
It is ultimately the merchant who bears the all of the fees earned by the financial institutions (card issuer, card association, acquirer) in exchange for access to the payment network. The cardholder may not have to pay anything beyond the price of the goods or services plus taxes if he/she settles the credit card bill on-time.
Merchant Fee Pricing Models
Here’re the categories of fees and the usual pricing models TABUL8TED!
Fee Categories
Pricing Models
A Quick Note on Amex
Unlike Visa and Mastercard, American Express has its own banking subsidiaries (American Express Centurion bank and American Express Bank) who issue cards. However, as Amex requires cardholders to pay off their balance in full every month-end, they don’t earn interest on unpaid credit card balances. To make up for this, Amex charges higher processing rates than Visa and Mastercard.
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