Card networks and card associations

What you will learn

  • What issuing banks are
  • What acquiring banks are
  • What merchant accounts are
  • What underwriting is
  • Why a merchant’s credit rating matters for accepting credit cards
  • What card associations are
  • What processors are
  • What ISOs are

What you should read first

Full article

This is part 1 of 6 of the credit card basics article. Here are links to each part:

Introduction

Recall how the previous two parts of this article described that an acquiring bank is an intermediary that receives money from issuing banks on a merchant’s behalf.

In this part we describe how cardholders, issuing banks, acquiring banks and merchants are linked together by the card associations and their card networks.

Card networks and card associations

Issuing and acquiring banks use a technology infrastructure called a card network to communicate data necessary for the acquiring bank to be an intermediary. This communication happens every time that cardholder uses their card. The phrase “card network” is widely misused interchangeably with the phrase “card association”. Technically speaking, a card network is the technology infrastructure built and maintained by groups of issuing and acquiring banks that want to work together. These groups of banks form what are known as card associations, standalone legal entities that have their own management and employees that manage and operate their respective card networks. In the US, the members of card associations can only be financial institutions that are “federal or state chartered”, meaning that they are regulated at either the federal or state level.[1] For all practical purposes, this means that all members are banks.

Card network
A card network is the technology infrastructure built and maintained by groups of issuing and acquiring banks that want to work together.
Card association
A card association is a legal entity that maintains a card network and represents a group of issuing and acquiring banks (called members) that want to work together.

We will refrain from using the terminology “card network” to refer to a card association because the phrase can easily be confused with communication networks. We will only use “card network” to refer to a communication technology infrastructure operated by a card association. Visa and MasterCard are examples of card associations that operate their own card network and where all members are banks. These banks work together in their respective card associations to set rules, including but not limited to the following:

  1. Fees that the card association can charge for a transaction
  2. Fees that the issuing bank can charge for a transaction
  3. When and how money is moved between issuing banks and the acquiring banks
  4. Standards by which banks communicate and store transaction data
  5. The hierarchy of liability for all purchases, starting with the merchants and cardholders and going all the way up to the acquiring bank, issuing bank and the card association itself

Note that while the fees charged to merchants by the issuing banks and card associations are regulated by the respective association, the fees that acquiring banks charge are left up to the acquiring bank’s discretion.

Banks participating in a card association take the rules of their association and embed them in the contracts that codify their relationships with their own merchants, cardholders, and any third parties that they work with. The diagram below represents the relationships that card associations and their members (only issuing and acquiring banks) use to bind merchants and cardholders to card association rules.

Card Association Members.jpg

What you should read next

References

  1. Federal Reserve: Clearing and settlement of MasterCard transactions p. 4