What are Card Schemes and How Do They Work? The Inside Story

Card schemes are networks that move money when you use a card. Companies like Visa, Mastercard, and American Express run these networks to ensure your payments are safe, fast, and smooth. Recently, Visa hit a significant milestone by issuing its 10 billionth token. This move generated $40 billion in extra online shopping and saved $650 million in fraud last year.

So, why should you care? When you understand how these card schemes work, you can better see the security features and any fees linked to your card. Visa’s tokenization technology replaces sensitive data with a unique key, making digital payments much safer. This technology has cut fraud rates by up to 60% and increased payment approval rates. Right now, 29% of all transactions processed by Visa use tokens, showing how much people trust this secure method.

Knowing this helps merchants manage costs and banks follow rules correctly. In this article, we’ll explain the basics of card schemes and show how they keep your daily transactions running smoothly.

Which banks are involved in card schemes?

The central card schemes in the UK are:

Visa

Visa operates in over 200 countries. It connects consumers, merchants, banks, businesses, and government entities. According to Statista, Visa had nearly 80% of the UK market share in 2021. You get Visa cards from banks and other financial institutions, not directly from Visa. These banks partner with Visa to use its payment system.

Mastercard

Mastercard was the second-largest card scheme in the UK in 2021, with 20% of the market. It connects people and businesses in over 210 countries. Mastercard doesn’t issue cards directly but provides a network for electronic payments between customers and retailers. It makes money from transaction fees charged to merchants. Maestro is a debit card brand issued by Mastercard, which processes and authorizes Maestro card payments.

American Express (AmEx)

AmEx started as a package delivery company in the US and introduced its first payment card in the late 1950s. Now, AmEx offers a wide range of credit and charge cards. According to Global Data, in 2021, AmEx will be the top card scheme globally, though Visa and Mastercard are more significant in the UK. AmEx acts as a payment network and a card issuer, making it unique. It issues its own cards and processes transactions within its network, providing a smooth service to you, the cardholder.

Who is involved in a card scheme?

Card schemes, or payment card systems, are networks that let you make payments using cards. They involve several parties, including:

• Cardholders: You are the cardholder. You use debit, credit, or prepaid cards to make payments.
• Issuers: These are the banks or financial institutions that give you the cards. They are called issuers.
• Merchants: These are the businesses where you use your cards, in-store or online.
• Acquirers: These are the payment service providers that work with merchants. They help process your card transactions.
• Card Scheme: This organization acts as an intermediary. It allows communication between the banks that issue your cards and those that work with merchants during transactions.

How Does a Card Scheme Work?

Here’s a simple explanation of how a card scheme works:

• Transaction initiation: The transaction starts when you use your payment card to purchase. You could insert it into a card machine, use contactless payment in a store, or enter your details online.
• Communication with your bank: The payment system automatically sends the purchase details to your bank.
• Authorization request to card scheme: Your bank then sends an authorization request to the card scheme, like Visa or Mastercard.
• Checking funds: The card scheme forwards the request to your bank. Your bank checks your account to ensure you have enough funds and that your card details are correct.
• Approving or denying the transaction: Your bank approves the transaction if you have enough money and the card details are valid. If not, it denies the transaction. This decision appears on the payment system, showing you and the business an apparent approval or denial message.
• Moving the money: If approved, your bank sends the payment through the card scheme, which deposits it into the merchant’s account.

What Types of Card Schemes Are There?

Three-Party Card Schemes

In a three-party card scheme, also known as a closed-loop scheme, three main parties are involved:

• The Cardholder (You, the Customer): You hold a card from a three-party scheme and use it to make purchases with the company that issued the card.
• The Merchant (The Business): Merchants agree directly with the card scheme to accept their cards. These agreements often have different fees compared to four-party schemes.
• The Issuer and Acquirer (The Bank): In a three-party card scheme, the same company issues the card and processes transactions. For example, American Express (AmEx) issues cards to customers and authorizes merchants to accept them, handling both sides of the transaction.

In this setup, both you and the stores use a special type of payment card from the same network. This setup can limit flexibility and lead to missed sales if customers prefer other card types. However, three-party schemes often allow only one business in each market, reducing competition and appealing to companies that want to dominate a particular market without facing direct competition.

Four-Party Card Schemes

A four-party card scheme works similarly but includes an acquiring (merchant’s) bank. This bank processes transactions and ensures that funds transfer from your bank to the merchant’s account.

Four-party schemes are popular because they offer various payment cards and services. These include well-known brands like Visa, Mastercard, and Union Pay.

What are Card Scheme Fees?

Card scheme fees are membership fees paid by banks or financial institutions to join a payment network. These networks connect to different types of payment cards. The card scheme charges these fees for the use and development of its services.

Card scheme fees are usually paid per transaction, often as a percentage, but some providers may charge a monthly fee. The amount of these fees depends on a few different things. One factor is the card network used. Another factor is the type of payment card, such as debit or credit. It also depends on the terms negotiated between the acquiring bank and the card network. Additionally, whether the payment is online or made at a card machine affects the cost.

Acquiring banks pass the fees they pay on to merchants, who pay them either in each transaction or as a bundled charge. Card scheme fees are not publicly disclosed and go unregulated, so no one outside the card scheme knows the actual figure.

What is the Difference Between a Card Issuer and a Card Scheme?

A card issuer is a company that gives you a debit or credit card to use. On the other hand, a card scheme is a system that helps with transactions. It connects the banks that issue cards with the stores where you use those cards.

• Card Issuer: A card issuer, also called an issuing bank, provides debit and credit cards to you. They set your credit limits, interest rates, and fees. They also handle customer service, replace lost or stolen cards, and resolve disputes. Examples of card issuers include banks and credit unions.
• Card Scheme: A card scheme, also known as a card network or card brand, is a card brand like Visa or Mastercard. The card scheme sets the rules and provides the infrastructure for the card. They manage the processing network and participant rules, ensuring everything runs smoothly.

Card Scheme vs Card Network

Here’s a table comparing a card scheme to a card network:

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