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Card scheme explained – who is involved and how does it work?

As a merchant who accepts card payments through your card payment device, it would be wise to become acquainted with the term “card scheme”.

Undoubtedly, this is an important part of your payments acceptance journey, and knowing all the right players in the industry and their roles and functions can help you navigate the seas of payments acceptance more easily.

What is a card scheme?

Think of a card scheme as a payment club that has different members. Each member plays a specific role in the entire payment process by following specific rules and regulations.

Two of the world’s major card schemes are Visa and Mastercard and although they do not directly issue debit or credit cards, they do work with banks or financial institutions to help a merchant accept a payment.  

As mentioned above, there are several players involved, and these are:

Who is involved?

Card scheme

The card scheme does not issue debit or credit cards per se. Rather, they help enforce the rules and regulations in the process and they get a cut out of every transaction made. This “cut” can be either on a per transaction basis or on a per-volume basis.

Issuing bank

This is your typical bank or financial institution which issues the cardholder’s debit or credit card for their future use. The card is typically “sponsored” by one of the major card schemes.

Cardholder

The cardholder is the customer who hands over their card issued by the issuing bank in order to make a payment.

Acquiring bank

The acquiring bank is the merchant’s bank where funds received from their customer are settled into their merchant account.

How does a card scheme work?

So, how does this work in practice?

  • It all starts out with the customer making the decision to buy a product or service. They present their payment card to the merchant.
  • Once the card is tapped, swiped, or inserted in the POS terminal, or through an online payment system, a certain pathway of communication opens up. This pathway is between the card scheme, the issuing bank, and the acquiring bank.
  • In short, once there is a check that there are sufficient funds in a cardholder’s card and that all data is correct, the money is released to the acquiring bank and is placed into the merchant’s merchant account.

Conclusion

Essentially, the card scheme’s process involves four sets of parties, typically, although sometimes, there are fewer parties because one may actually serve both the function of an acquiring bank, an issuing bank, and a card scheme at the same time. This is the case with American Express, for example.

Either way, the process is almost identical, although the method of communication in the latter case will be much swifter as the card scheme really only communicates with itself to ensure there are sufficient funds to pay a merchant.

Finally, it’s important to note that there are fees involved for merchants when it comes to processing credit or debit card payments. These fees will depend on the different players in the process and will either be on a per-transaction basis where a certain fixed percentage is charged, or on a per-volume basis where a certain amount is paid after a certain volume of transactions has been reached.

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