Credit card networks facilitate electronic payments between businesses and consumers using a secure, global financial infrastructure.
There are four major credit card networks in the United States: Visa, Mastercard, American Express, and Discover. These networks establish the rules, standards, and security protocols for credit card transactions, ensuring that payments move seamlessly across banks, payment processors, and merchants.
Types of Credit Card Networks
There are two main types of credit card networks. Card networks that are also credit card issuers—meaning, they’re responsible for approving credit applications, setting credit limits, billing cardholders, and managing payments—and those that offer cards for other banks to issue.
- Open-Loop Networks: operate as intermediaries and don’t issue cards directly. Instead, other banks issue cards under their brand. Visa and Mastercard are the two largest open-loop networks.
- Closed-Loop Networks: issue their own cards and process transactions without relying on external banks. American Express and Discover operate closed-loop networks.
Key Functions of a Credit Card Network
Moving transactions is just one of the things a credit card network does. They have a several other roles in the credit card ecosystem.
- Transaction processing and routing. Card networks ensure transactions are processed within seconds and enforce encryption, tokenization, and fraud detection measures to keep transactions safe.
- Create standardization & compliance standards: They require compliance with PCI-DSS (Payment Card Industry Data Security Standard) to protect cardholder data and oversee dispute resolution processes, including chargebacks and fraud liability rules.
- Offer fraud prevention and risk management: Networks analyze transaction patterns to detect and prevent fraud in real time, set security requirements, and offer fraud protection policies to reduce risk.
- Maintain global acceptance and merchant enablement: Credit card networks create merchant acceptance networks to ensure credit cards can be used worldwide and work with financial institutions to expand access to card payments.
- Coordinate settling and clearing transactions: Card networks don’t hold money, but they help with moving funds between acquiring and issuing banks.
- Create consumer services: They offer rewards programs, purchase protections, extended warranties, and travel benefits that card issuers can offer to incentivize consumers to use their credit cards.
How Credit Card Networks Work
Here’s how credit card networks process and route payment information behind-the-scenes.
The consumer uses their credit card to make a payment.
After the consumer initiates a credit card transaction, the merchant’s payment processor sends the transaction details to the acquiring bank (the merchant’s bank), which then forwards the request to the appropriate credit card network.
The card network routes the transaction for authorization and approval.
The credit card network routes the request to the issuing bank, which checks the available credit, potential fraud flags, and cardholder account status. When the card network is also the issuing bank, the card network decides whether to approve the transaction. If approved, the issuing bank sends an authorization back.
The acquiring bank informs the merchant that the transaction is approved, and the transaction is completed.
Transactions are settled.
At the end of the business day, the merchant batches all approved transactions and sends them to the acquiring bank. The acquiring bank then:
- Requests payment from the issuing bank through the card network.
- The issuing bank transfers the funds (minus interchange fees) to the acquiring bank.
- The acquiring bank deposits the funds (minus processing fees) into the merchant’s account.
Credit Card Network Fees
Credit card networks charge various fees to facilitate and process transactions.
- Interchange Fees: Set by the card network and paid by the merchant’s bank to the cardholder’s bank for the value merchants receive from accepting credit cards. Interchange fees help compensate the issuing bank for the risk of extending credit, handling fraud prevention, and providing rewards programs.
- Assessment Fees: Paid to the credit card network to maintain the network infrastructure, process transactions, and provide security and fraud protection services.
- Processing Fees: Charged by the merchant’s payment processor to cover the cost of handling transactions, fraud prevention, chargebacks, and customer support.
How Credit Card Networks Impact Payment Acceptance
Credit card networks open up new opportunities for businesses by offering ability to accept payments that are secure, convenient, and widely used. Credit card networks drive larger transactions which allows businesses to increase revenue without having to increase the volume of customers. Additionally, credit card payments help businesses eliminate the complexities and risks associated with cash handling.
While credit card networks offer significant advantages, they also come with processing fees. While fees can cut into profits, businesses typically find the benefits of accepting cards—such as increased sales and customer convenience—outweigh the costs. Moreover, many businesses are able to negotiate lower rates with payment processors as they scale, which can reduce transaction fees over time.
Credit card networks are at the forefront of payment innovation, helping businesses stay competitive. Businesses that adopt these new payment technologies not only provide a modern, seamless payment experience but also keep up with evolving customer expectations. Staying on top of these innovations helps businesses maintain a competitive edge in a fast-changing marketplace.
