Card Networks (Payment Networks)

What are Card Networks and what is their primary function?

Card Networks, also known as payment networks or card schemes, are the central technical backbone that facilitates the movement of funds and information in an electronic payment transaction. Their primary function is to authorize, clear, and settle transactions between the issuing bank (which gives the card to the consumer) and the acquiring bank (which services the merchant). Major networks like Visa and Mastercard operate vast global systems, such as VisaNet, which can process over 65,000 transactions per second with 99.999% availability. They establish the operating rules, security standards (like EMV and tokenization), and fee structures (including interchange rates) that govern the entire ecosystem, which collectively processes over $15 trillion annually worldwide.

How do Card Networks generate revenue?

Card Networks generate revenue primarily through non-negotiable assessment fees and various per-transaction charges. Assessment fees, which are paid by the acquiring bank, typically range from 0.13% to 0.15% of the transaction volume. They also charge authorization and switch fees for routing messages between issuers and acquirers, such as Visa's Acquirer Processing Fee (APF) of around $0.0195 per authorization. Furthermore, networks impose premiums for cross-border transactions, which can add 0.80% to 1.4% to the cost. Finally, networks offer value-added services like fraud scoring, tokenization, and data analytics. For instance, Mastercard's value-added services now represent nearly 40% of its total net revenue, demonstrating a shift toward diversified income streams beyond core transaction processing.

What is the difference between open-loop and closed-loop networks?

The key distinction lies in the number of parties involved in the transaction flow. Open-loop systems, exemplified by Visa and Mastercard, use a four-party model where the network acts as a neutral intermediary connecting separate issuing banks and acquiring banks. This allows any qualifying financial institution to participate, leading to wide acceptance (Visa has 4.7 billion cards globally). In contrast, closed-loop systems, historically used by American Express and Discover, operate on a three-party model. In this structure, the network itself acts as both the issuer and the acquirer, maintaining direct relationships with both the cardholder and the merchant. This closed structure gives Amex superior data visibility and complete pricing control, allowing them to negotiate higher discount rates—historically 2.5% to 3.5%—justified by their high-spending average cardholder ($24,059 annually).

How do Card Networks ensure transaction security and speed?

Networks employ sophisticated technical standards and infrastructure to ensure speed and security. Speed is achieved through highly efficient switching centers; a typical card-present transaction is authorized in 1-3 seconds. Security relies on standards like EMV and tokenization. EMV chips prevent counterfeit fraud by generating a unique dynamic cryptogram for every transaction, reducing card-present fraud by 87% in mature markets. Network tokenization (e.g., Visa Token Service) replaces the Primary Account Number (PAN) with a domain-restricted token, making the token useless if stolen. This tokenization lifts authorization approval rates by 3-6 percentage points and reduces fraud rates in mobile wallets (like Apple Pay) to as low as 0.01%, significantly lower than the 1.2% rate for traditional cards.