Introduction to closed loop networks

What you will learn

  • What interchange is
  • What an interchange downgrade is
  • What dues and assessments are
  • What an acquirer’s mark-up is

What you should read first

Full article

This is part 4 of 4 of the fees article. Here are links to each part:

Introduction

The first three parts of this article covered the fees that a merchant pays in order to accept card from card associations like MasterCard, Visa, and Discover.

This part is focused on explaining how the fees paid to American Express are different from the fees of the above card associations.

American Express

The cost of accepting American Express cards is calculated differently from the other card associations because American Express operates what is called a "closed loop network". A closed loop network is unlike a card association like Visa or MasterCard (which operate open loop networks) because instead of being a consortium of banks, a closed loop network performs all of the issuing and acquiring bank tasks under one entity.

American Express performs limited merchant acquisition themselves so most merchants sign up to accept American Express via the acquirer for Visa, MasterCard, and Discover transactions. Even in these cases, however, their American Express transactions are always settled by American Express. Discover is another example of a closed loop network but unlike American Express, they allow issuing and acquiring banks to sign cardholders and merchants onto the Discover network in addition to Discover operating directly with cardholders and merchants. In a sense Discover is a hybrid of a closed loop and open loop card network.

Closed loop network
A card brand that performs all of the issuing and acquiring bank tasks under one entity.

American Express's equivalent to interchange and dues and assessments is a bundled percentage of transaction size (e.g. 3.50%) that is set only by American Express. These fees vary by merchant type and volume and are negotiable.[1] When an acquirer other than American Express performs the merchant acquisition tasks, the acquirer will often add an acquirer's mark-up fee that will be similar to that for Visa, MasterCard, and Discover transactions. American Express's total cost of acceptance is frequently higher than other card associations largely because they provide many rewards to their cardholders.

Conclusion

Payment processing fees are extremely complicated to understand and even harder to negotiate because of the amount of pricing knowledge needed to interpret and monitor the costs. The information in this article gives an explanation of the mechanics behind payment processing pricing that should enable a merchant to be able to put their own processing costs into context.

We hope that the above information will help in deciphering how this pricing works. In the next article we break down the nuts and bolts of what happens between when a cardholder uses their card to when the money lands in a merchant's bank account.

What you should read next

References

  1. American Express pricing by merchant type