Card schemes are payment networks linked to payment cards, such as debit or

credit card A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's accrued debt (i.e., promise to the card issuer to pay them for the amounts plus the o ...

s, of which a

bank A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets. Becau ...

or any other eligible

financial institution Financial institutions, sometimes called banking institutions, are business entities that provide services as intermediaries for different types of financial monetary transactions. Broadly speaking, there are three major types of financial inst ...

can become a member. By becoming a member of the scheme, the member then gets the possibility to issue cards or

acquire ''Acquire'' is a multi-player mergers and acquisitions themed board game. It is played with tiles representing hotels that are arranged on the board, play money and stock certificates. The object of the game is to earn the most money by developi ...

merchants operating on the network of that card scheme.

UnionPay UnionPay (), also known as China UnionPay () or by its abbreviation, CUP or UPI internationally, is a Chinese state-owned financial services corporation headquartered in Shanghai, China. It provides bank card services and a major card scheme ...

, Visa and MasterCard are three of the largest global brands, known as card schemes, or card brands. Billions of transactions go through their cards on a yearly basis.

Types

The card schemes come in two main varieties - a three-party scheme (or closed scheme) or a four-party scheme (or open scheme).

Three-party scheme

A three-party scheme consists of three main parties as described in the adjacent diagram. In this model, the issuer (having the relationship with the cardholder) and the acquirer (having the relationship with the merchant) is the same entity. This means that there is no need for any charges between the

issuer Issuer is a legal entity that develops, registers, and sells securities for the purpose of financing its operations. Issuers may be governments, corporations, or investment trusts. Issuers are legally responsible for the obligations of the issue ...

and the

acquirer An acquiring bank (also known simply as an acquirer) is a bank or financial institution that processes credit or debit card payments on behalf of a merchant. The acquirer allows merchants to accept credit card payments from the card-issuing bank ...

. Since it is a franchise setup, there is only one

franchisee Franchising is based on a marketing concept which can be adopted by an organization as a strategy for business expansion. Where implemented, a franchisor licenses some or all of its know-how, procedures, intellectual property, use of its busine ...

in each market, which is the incentive in this model. There is no

competition Competition is a rivalry where two or more parties strive for a common goal which cannot be shared: where one's gain is the other's loss (an example of which is a zero-sum game). Competition can arise between entities such as organisms, ind ...

within the brand; rather you compete with other brands. Examples of this setup are

Diners Club A diner is a small, inexpensive restaurant found across the United States, as well as in Canada and parts of Western Europe. Diners offer a wide range of foods, mostly American cuisine, a casual atmosphere, and, characteristically, a com ...

Discover Card Discover is a credit card brand issued primarily in the United States. It was introduced by Sears in 1985. When launched, Discover did not charge an annual fee and offered a higher-than-normal credit limit, features that were disruptive to the ...

, and

American Express American Express Company (Amex) is an American multinational corporation specialized in payment card services headquartered at 200 Vesey Street in the Battery Park City neighborhood of Lower Manhattan in New York City. The company was found ...

, although in recent times these schemes have also partnered with other issuers and acquirers in order to boost their circulation and acceptance, and Diners Club now operates as a four-party scheme in many regions.

Four-party scheme

In a four-party scheme (also referred to as Four Corners Model, the issuer and acquirer are different entities, and this type of scheme is open for other institutions to join and issue their own cards. This is the type of card scheme used by

brand A brand is a name, term, design, symbol or any other feature that distinguishes one seller's good or service from those of other sellers. Brands are used in business, marketing, and advertising for recognition and, importantly, to create a ...

s such as Visa, Mastercard,

Verve Card Verve International is a Nigerian Pan-African and multinational financial technology and payment card brand owned by Interswitch Group. Background It was founded in 2009, as a subsidiary of Interswitch. In 2013, it became an autonomous busines ...

and

RuPay RuPay ''(portmanteau of Rupee and Payment)'' is an Indian multinational financial services and payment service system, conceived and launched by the National Payments Corporation of India (NPCI) on 26 March 2012. It was created to fulfil the ...

. There are no limitations as to who may join the scheme, as long as the requirements of the scheme are met.

Processes

The card scheme utilizes the respective

guideline A guideline is a statement by which to determine a course of action. A guideline aims to streamline particular processes according to a set routine or sound practice. Guidelines may be issued by and used by any organization (governmental or pri ...

s to process the card exchange data from the acquiring to the

issuing bank An issuing bank is a bank that offers card association branded payment cards directly to consumers, such as credit cards, debit cards, contactless devices such as key fobs as well as prepaid cards. The name is derived from the practice of issuing ...

, and vice versa, until the

payment A payment is the voluntary tender of money or its equivalent or of things of value by one party (such as a person or company) to another in exchange for goods, or services provided by them, or to fulfill a legal obligation. The party making the ...

is fully completed (or denied). Credit and debit cards work with four-party scheme, completing an open-circle framework that permits consistent flow of transactions; thus, allowing the banks to handle the whole process. Card schemes aim to make the transaction convenient and automated for all parties involved in the loop, with the core belief that clients end up spending more than intended when the payment process is simple.

Key parties

Cardholder

A cardholder is a

consumer A consumer is a person or a group who intends to order, or uses purchased goods, products, or services primarily for personal, social, family, household and similar needs, who is not directly related to entrepreneurial or business activities. ...

, who owns the debit or credit card, issued by their bank, or other financial institution. They aren't legally obliged to use a single card scheme and may own various types of cards, issued by numerous institutions.

Card issuer

The card issuer, as the name implies, issues credit, debit, and prepaid cards from any of the available card schemes to all clients who went through a screening process and are, therefore, qualified to own a

bank account A bank account is a financial account maintained by a bank or other financial institution in which the financial transactions between the bank and a customer are recorded. Each financial institution sets the terms and conditions for each type o ...

. Card issuers can be not only banks but any other certified financial institution.

Acquiring bank

The

acquiring bank An acquiring bank (also known simply as an acquirer) is a bank or financial institution that processes credit or debit card payments on behalf of a merchant. The acquirer allows merchants to accept credit card payments from the card-issuing ban ...

(also known as obtaining bank), is the

organization An organization or organisation (Commonwealth English; see spelling differences), is an entity—such as a company, an institution, or an association—comprising one or more people and having a particular purpose. The word is derived fro ...

that provides administration consent to the merchant and validates their transaction process.

Merchant

Any business, or individual, that receives payment based on product or service, which they offer.

Payment processor

The payment processing company imparts and transfers data for a client's credit or debit card to both the issuing and acquiring bank. The processor likewise checks for security issues, ensuring that the client's card information is right and all data is entered correctly. Also, the same party deals with incorrect or accidental charges.

Payment gateway

payment gateway A payment gateway is a merchant service provided by an e-commerce application service provider that authorizes credit card or direct payments processing for e-businesses, online retailers, bricks and clicks, or traditional brick and mortar. The p ...

is a key party, responsible for online transactions, passing card data from consumer to merchant, and to a relevant bank through the card scheme. The process usually takes place at POS terminals in retail locations, or by means of online payment services for

website A website (also written as a web site) is a collection of web pages and related content that is identified by a common domain name and published on at least one web server. Examples of notable websites are Google, Facebook, Amazon, and Wikip ...

s. A payment gateway imparts whether the charge has been processed by the cardholder's bank and moves it further for settlement.

Fees

Card scheme

fee A fee is the price one pays as remuneration for rights or services. Fees usually allow for overhead, wages, costs, and markup. Traditionally, professionals in the United Kingdom (and previously the Republic of Ireland) receive a fee in contra ...

s are the expenses that are paid by acquiring banks, which, on the other hand, charge merchants through

transaction fee A fee is the price one pays as remuneration for rights or services. Fees usually allow for overhead, wages, costs, and markup. Traditionally, professionals in the United Kingdom (and previously the Republic of Ireland) receive a fee in con ...

s. Card scheme fees are not openly uncovered, and no outside parties knows the genuine figure. Those fees might incorporate quite a few charges, some of which are - fixed or transaction fees, unrelated to the individual payment. Factors, such as the card type, payment method, and geographic area might influence the variable fees.

Interchange fees

Interchange fee Interchange fee is a term used in the payment card industry to describe a fee paid between banks for the acceptance of card-based transactions. Usually for sales/services transactions it is a fee that a merchant's bank (the "acquiring bank") pa ...

s (or trade fees) are transaction charges that the acquiring bank pays when a payment is being processed via debit or credit card. The expenses are paid to issuing bank and cover costs, such as processing fees,

bad debt Bad debt, occasionally called uncollectible accounts expense, is a monetary amount owed to a creditor that is unlikely to be paid and for which the creditor is not willing to take action to collect for various reasons, often due to the debtor no ...

, and charges due to risk and potential fraudulent activities.

References

Credit cards {{econ-stub