Card schemes are payment networks linked to

payment cards Payment cards are part of a payment system issued by financial institutions, such as a bank, to a customer that enables its owner (the cardholder) to access the funds in the customer's designated bank accounts, or through a credit account and mak ...

, such as debit or credit cards, of which a

bank A bank is a financial institution that accepts Deposit account, 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 m ...

or any other eligible

financial institution A financial institution, sometimes called a banking institution, is a business entity that provides service as an intermediary for different types of financial monetary transactions. Broadly speaking, there are three major types of financial ins ...

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 board game published by 3M in 1964 that involves multi-player mergers and acquisitions. It was one of the most popular games in the 3M Bookshelf games series published in the 1960s, and the only one still published in the Uni ...

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 sch ...

Visa Visa most commonly refers to: * Travel visa, a document that allows entry to a foreign country * Visa Inc., a US multinational financial and payment cards company ** Visa Debit card issued by the above company ** Visa Electron, a debit card ** Vi ...

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) are 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. 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 busines ...

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, indi ...

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

Diners Club A diner is a type of restaurant found across the United States and Canada, as well as parts of Western Europe and Australia. Diners offer a wide range of cuisine, mostly American cuisine, a casual atmosphere, and, characteristically, a comb ...

Discover Card Discover is a credit card brand issued primarily in the United States. It was introduced by Sears in 1985 and currently issued by Capital One. Discover was the first credit card that did not charge an annual fee and offered a higher-than-norm ...

, and

American Express American Express Company or Amex is an American bank holding company and multinational financial services corporation that specializes in payment card industry, payment cards. It is headquartered at 200 Vesey Street, also known as American Expr ...

, 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 goods or service from those of other sellers. Brands are used in business, marketing, and advertising for recognition and, importantly, to create and ...

s such as

, Mastercard, Verve Card,

and

RuPay RuPay (portmanteau of Rupee and Payment) is an Indian multinational financial services and payment service system, conceived and owned by the National Payments Corporation of India (NPCI). It was launched in 2012, to fulfil the Reserve Bank ...

. 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 uses the respective

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

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 tender of something of value, such as money or its equivalent, 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 or philanthropy desir ...

is fully completed (or denied). Credit and

debit card A debit card, also known as a check card or bank card, is a payment card that can be used in place of cash to make purchases. The card usually consists of the bank's name, a card number, the cardholder's name, and an expiration date, on either ...

s work with a 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 use 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 transaction A financial transaction is an Contract, agreement, or communication, between a buyer and seller to exchange goods, ...

. 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 card issuers such as ...

(also known as obtaining bank), is the

organization An organization or organisation (English in the Commonwealth of Nations, Commonwealth English; American and British English spelling differences#-ise, -ize (-isation, -ization), see spelling differences) is an legal entity, entity—such as ...

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

Merchant

Any business, or individual, that receives payment based on the 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 payment processing for e-businesses, online retailers, bricks and clicks, or traditional brick and mortar. The ...

is a key party, responsible for

online transactions E-commerce (electronic commerce) refers to commercial activities including the electronic buying or selling products and services which are conducted on online platforms or over the Internet. E-commerce draws on technologies such as mobile comm ...

, passing card data from consumer to merchant, and to a relevant bank through the card scheme. The process usually takes place at

POS terminal A payment terminal, also known as a point of sale (POS) terminal, credit card machine, card reader, PIN pad, EFTPOS terminal (or by the older term as PDQ terminal which stands for "Process Data Quickly"), is a device which interfaces with paymen ...

s in retail locations, or by means of online payment services for

website A website (also written as a web site) is any web page whose content is identified by a common domain name and is published on at least one web server. Websites are typically dedicated to a particular topic or purpose, such as news, educatio ...

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 contrad ...

s are the expenses that are paid by acquiring banks, which, on the other hand, charge merchants through transaction fees. 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 A payment is the tender of something of value, such as money or its equivalent, 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 or philanthropy desire. Th ...

, and geographic area might influence the variable fees.

Interchange fees

Interchange fee An interchange fee is 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") pays a customer's bank (the " issuing bank"). In a ...

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 the issuing bank and cover costs, such as processing fees,

bad debt In finance, 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 ...

, and charges due to risk and potential fraudulent activities.

References

{{DEFAULTSORT:Card Schemes Credit cards