The Payments 101 series explores the payments ecosystem members.
Card Association
A Card Association is a network of card-issuing1 and acquiring banks2 that license bank card programs and perform transactional operations on behalf of its members, including transaction authorizations and processing, interchange settlements (when the merchant bank is different from the card issuer) and fee processing. The most prominent national card association companies include Visa, MasterCard, Discover, Diners Club and American Express.
To become part of the card association network, acquiring banks pay a membership fee (in addition to the Interchange fee3) to utilize the card association’s network to authorize and settle payments between banks. In turn, the card association provides a license to the issuing and acquiring banks for bank card and service mark use (putting a recognized logo on the card), as well as the authorization of debit and credit transactions, by those partner banks.
Single Issuer Image courtesy of the FDIC*
Single Issuer
In some instances the card association acts as the direct issuer of the card (often referred to as a single-issuer or ‘closed-loop system’) working directly with both the cardholder and the merchant to authorize and settle transactions. Examples of this type of model include Diners Club and, until recently, American Express and Discover.
Multi-Issuer Image courtesy of the FDIC*
Multi-Issuer
In a multi-issuer model, the card associations themselves do not directly issue debit or credit cards but allow the partner (issuing) banks to distribute cards to consumers (eg. Citi, Wells Fargo, PNC, Bank of America, etc.). As a result, these member banks in effect, ‘own’ the card association. Representatives of these banks can comprise the board of directors for the card association looking out for each others’ interest. Each association’s board of directors, or network of banks, specifies mutual terms of payment transactions and set the fees for merchants, issuers, and acquirers who utilize the credit or debit service.
A Software Company’s Relationship with a Card Association
In these structures, you’ll notice that the card association doesn’t have a direct relationship with the merchant organization accepting payments. Relationships with the merchant organization (and thus the Software Company or Developer working on behalf of the merchant) are left for the acquiring bank to establish and grow; while simultaneously enforcing the regulations and fees set by the card associations.
1Card Issuing Banks (Issuers) extend credit to a cardholder or consumer (for personal or business use).
2Acquiring Banks (Acquirers), also known as merchant banks, service merchants and process credit card transactions- serving as the link between merchants and card issuing banks.
3Interchange Fee is a fee that the acquirer pays the issuer when the merchant accepts a credit card payment.
*Imagery courtesy of the FDIC from their Banking Review.
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