6
Card Networks, The Interchange and all that

So far, we’ve covered how to understand your fees, payfacs, acquirers, and whether or not you should accept cards. Now it’s time to look at the bits of payment processes which you, as a merchant, won’t touch.

This will help you understand the other chapters; it’s not about your choices as a merchant but what the interchange actually IS.

Card networks are “networks” of which different banks are members, and they exist to move money from one bank to the other via the interchange.

I. The Interchange

Card Network (VISA, Mastercard)Customer BankAcquirer Your CustomerPayment FacilitatorYour Business Bank AccountYouThe Interchange

WHERE’S THE ISO?

ISOs, such as PaymentSense, (covered in C5) don’t feature in this diagram because the money never goes through them.

Their job is to broker a deal between you and an acquirer.

WHERE’S APPLE AND ANDROID?

Contactless Mobile Payments don’t actually touch the money! They just send signals around, so aren’t in this diagram.

We’ve seen this diagram a few times, but here we are – this is the interchange. There’s actually no more specific way of describing it than this diagram – an “interchange” is all these different operators moving money as depicted. This image is an overview of the whole payments process. If you were to read a guide which aimed at, say, a trainee payment consultant, this would be the first thing they would show you.

The “issuing bank” is the bank which issues the card (e.g. Barclays). They move money to the card network. They charge a fee.

Monzo, Barclays, Lloyds Bank, HSBC

The “card network” is an organisation which runs a network of banks. Their logo appears on the card too (e.g. VISA). They move the money to the acquiring bank. They charge a bigger fee. Card networks include VISA, Mastercard, UnionPay, American Express. And for the other parties in the diagram, card networks are making the real money here. Remember, the biggest component of the total fee is the interchange fee. That’s their fee.

Mastercard, VISA

The “acquirer” covered in chapter 5 in more detail, moves the money to your business bank account, sometimes via a payment facilitator. They charge a small fee as well.

Barclaycard, WireCard, Valitor, Borgun, FirstData, Worldpay, AIB

A “payment facilitator”, covered in chapter 4 holds a license to issue sub-IDs – meaning they hold an account with an acquirer on your behalf.

iZettle, Square, Sum Up

A typical card payment:

The Issuing Bank
Monzo

Monzo receive a signal that someone wants to spend some money!

They authorise the payment and send the money to their partnered card network – in this case, Mastercard.

The Card Scheme
MasterCard

Mastercard deduct the interchange fee and an authorisation fee and send to the acquirer – either that the merchant has chosen or which relates to the payment facilitator they’ve chosen.

The Acquirer
Elavon

The acquirer do their own round of security checks and then pass the money on – either to the business bank account or to a payment facilitator. They deduct their own authorisation fee.

The Payment
Facilitator
iZettle

A payfac now receives the money, minus the interchange and the authorisation fees.

They pass on a percentage of the money you were paid (around 99%) to you.

The Business Bank
Barclays

Your bank receives the money and deposits it in your bank account.

Remember, there’s no reason to choose your business bank as your acquirer and if you fail to negotiate you will be on a higher rate.

II. What’s the point of a card network?

Card Networks move money from an issuing bank to the acquirer. If you’re mainly concerned with practical questions, that’s that – and we’d advise skipping the next bit.

1) During banking settlements, card networks sometimes “front” the money. We’re not going into the way that settlements between banks work in this guide because it’s not that relevant – and it’s quite dull. Suffice to say card networks sometimes loan other parties money while they add up who’s meant to be paying who what slightly faster.

2) It’s too difficult to set up an alternative system. This isn’t exactly a “point” but it’s the real reason everybody is paying VISA and Mastercard to move money around. Remember, this is the system they set up – so the challenge is to come up with an alternative model. They don’t just courier the money – they own the road.

Today, everything is regulated and organised around cards. You’d have to do everything – including banking, in-store technology, regulation – from the ground up, to offer an alternative. But they do exist: there’s cash, cryptocurrency, peer-to-peer – then, there are some products which are designed to facilitate bank transfers, such as GoCardless. These are more popular in Europe than the UK.

3) It’s also too difficult to launch an alternative card network. That’s why there’s only two or three card networks, and why their rates are so high.

A card network is useless to merchants if customers don’t have it; useless to customers if merchants won’t take it; and useless to banks if customers aren’t using it to buy things from merchants. That’s a catch-22, known as a “network effect.” You need to be big to be successful, and you need to be successful to be big. So new attempts to launch card networks generally fail (alternatives: Discover, Diners’ Club).

A SENSE OF PERSPECTIVE

2009 – first cryptocurrency launched

1999 – first P2P launched

1958 – first credit card launched

1600 – first banks appear

c. 5000 BC – metal cash fragments found from this date

c. 30,000 BC – first known ledger

Alternatives to card networks

Bitcoin, Venmo, Cash

Alternative card networks

Bitcoin, Venmo, Cash

Anatomy of a debit card

Card Number

The 16-digit monster is comprised of different bits of information. They are –

The BIN Number. (“The bank identification number”) – that’s the first six digits, which – you guessed it – identifies the issuing bank.

The Account Identifier – this identifies the bank account, which is the rest of the card.

Generally in card payments, the card number does much of the heavy lifting identifying the account and the other datapoints help verify it.

The Chip

This is the bit of the card that a card reader would read during a chip and PIN transaction.

Contactless Symbol

To show it can take contactless payments – including mobile payments. You need to make sure your card reader has “NFC” technology to accept these.

Sort-Code

This is UK & Ireland only, because it’s a regulatory thing (they’re assigned by the Central Bank – in our case, the Bank of England). It’s about figuring out which account is yours in the minimum number of digits – it’s like the card number but for a clearing house (like BACS, or CHAPS, or cheque clearing houses). The first two digits refer to the bank.

Bank Account Number

Used by the bank to identify your account.

Expiration Date

There’s no real technical reason cards expire – the magstripe will wear out eventually, but that’s it.

An expiration date is mandated by the card network. That’s because the more complex they make validating these things, the less fraud happens – so it’s an extra datum a fraudster would have to know. (Also, they just like to add a bit more hassle).

Magstripe and Signature

This is more prone to forgeries than Chip and PIN and some newer card readers don’t support it. It’s also much more popular in the US than the UK.

HOT TIP

If a customer sends you their card details by email, tell them that’s a bad idea.

Card Verification Code/Card Identification Number

That’s the three-digit verification code on the back of your card, in the signature box. This is explicitly for the prevention of fraud. It’s called the card identification number with Amex cards (CID); the card verification code (CVC) with VISA and Mastercard. You’ll occasionally see it called the card verification value (CVV) or the card verification value 2 (CVV2), since it’s been brought up to better security standards.

It’s useful to have the security code on the back of the card so that it’s more difficult to commit fraud based on a picture which captures the front of the card only.

III. What’s the point of a card network?

  • VISA

    VISA launched in 1958 and was the first credit card company in the world. In 2015, it saw 100 billion transactions with $6.8 billion value via the network.

  • Mastercard

    mastercard launched in 1966 in response to VISA. (Then, they both had different names.) It started out as a co-operative but became a public company in 2006.

  • American Express

    Unlike VISA and mastercard, Amex is a closed network in which only it can issue cards – not any bank. That means that it operates slightly differently, whereby it charges the customer rather than the bank, and the customer must seek them out – so it trades on the basis of its superior rewards scheme.

    That’s why, if you have interchange or blended pricing, it can cost you more to accept Amex.

  • Union pay

    UnionPay launched in 2002 by the People’s Bank of China. Depending on how you measure it (because UnionPay also do some other stuff besides being a card network) – they have a scale which rivals VISA and mastercard.

    Because the world is globalising, and there is now a large Chinese middle class, we’d expect UnionPay to become a more common way people pay by card.

  • JCB

    JCB stands for the Japan Credit Bureau – and this is a card scheme to come out of Japan. This is mainly popular among people using Japanese banks and business people – they’re more likely to crop up as business cards.

  • Maestro

    Maestro is a debit card service owned by Mastercard that was founded in 1992.

  • Discover and Diners Club

    Discover is the only Western card network with a large number of users which isn’t owned by Mastercard or VISA – but it’s mainly used in the US. Diners Club International is owned by Discover, and it’s the international card – but it’s been less widely adopted.

V. WHAT’S NEXT?

1
Understand Card Fees In 5 Minutes
Learn what you’re looking at when you read your payments bills.
3
Other ways of taking payments
Accept cards over the phone and by invoice.
5
Acquirers (+ISOs) WorldPay First Data Bluebird
When would an acquirer be better?
6
Card Networks, The Interchange and all that
The academic view: how do payment actually work?
7
When Can I Negotiate?
How to get on better rates than your mates
8
E-Commerce 101
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