Introduction to card associations

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What you will learn

  • What a card association is

What you should read first

Introduction

A card association is a group of banks that has joined together for the purpose of facilitating payments and transfers of funds within the group. Card associations have two overarching purposes:

  • Operating card networks: card networks are the technical infrastructure linking the member banks and enabling transfers of funds
  • Governing: the association also functions as a rule-making body for the member banks, which includes responsibilities such as establishing fees. [1]

Card associations are standalone legal entities that have their own management and employees that 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.[2] For all practical purposes, this means that all members are banks.

Card association
A card association is a group of issuing and acquiring banks that want to work together. Each member must be a bank.
Card network
A card network is the technology infrastructure built and maintained by a card association.

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 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 banks and the card association itself

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


References

  1. "An Introduction to the Economics of Payment Card Networks," Federal Reserve Bank of Philadelphia Working Paper, p. 2
  2. "Clearing and Settlement of MasterCard Transactions," Federal Reserve Bank of Philadelphia Working Paper p. 4