What is a Card Scheme?

In the most basic terms, card schemes are payment networks linked to credit and debit cards. Banks and other eligible financial institutions can become members of the scheme, which offers them the opportunities to issue cards operating on the network of the scheme.

Additionally, card schemes are part of the card payment cycle, which looks at the journey of a credit card transaction being processed and competed. Though, it may appear that a transaction happens instantly after you punch in your PIN, it’s actually much more complicated to ensure transactions are processed properly. Typically the parties involved in a credit card transaction are: the cardholder, the issuer, the merchant, and the acquirer.

To get a better understanding, it is best to know each parties role in a transaction.

Card schemes manage and control the operation and clearing of payment transactions in compliance with card scheme rules. Furthermore, card scheme are a set of functions, procedures, arrangements, rules, and devices that enable a cardholder to make a transaction with a third party, such as a retailer. Card schemes are in charge of transferring card transaction information from the acquirer to the issuer. These organizations also are responsible for passing payments back to the acquirer, which results in a merchant being paid. The issuer assumes the responsibility for purchases made on cards they have issued, and it ensures that funds are debit from the correct cardholder’s account.

A cardholder is the buyer; the person that has a debit or credit card issued by bank. A retailer is the entity selling products or services.

Banks and financial institutions are known as issuers because they issue cards from the card brands from which they have partnered.

An acquirer negotiates a merchant service agreement with a retailer to process credit card transactions. The acquirer receives card transaction details and then, passes them on to an issuer through the card scheme for authorization and settlement of the transaction. Additionally, an acquirer handles chargebacks that it may have received from issuers.

The four-party credit card scheme payment cycle is referred to an open-loop system.

In a four-party scheme, there is a separate issuer and acquirer, and this scheme is open for other members of the scheme to join in the competition. Any entity can join the scheme, as long as the requirements of the scheme are met.

When a cardholder uses a card to make a purchase, information is sent to the credit card brand’s acquirer. The issuer earns interest from the cardholder on the loan provided to the cardholder at the time of purchase, and charges a card fee for the use of its card. The issuer also earns an interchange reimbursement fee from the acquirer, who charges a merchant discount fee from the merchant.

It is important to note that transactions are slightly different for transactions completed with American Express. When this card is used, American Express acts as the card scheme, issuer, and acquirer all at the same time. Since the acquirer and issuer are the same, there are no charges between those parties. This is called a third-party credit card scheme system or closed-loop network. In this scheme, the credit card brand acts as both the acquirer and issuer, and, in this example, it issues its own cards through its banking subsidiaries, American Express Centurion Bank and American Express Bank, and FSB. American Express uses a spend-centric revenue model, meaning its revenue is based on the total amount spent by a customer than the volume of transactions processed. Also, American Express earns most of its income from the discount fees charged to retailers who accept its cards. Other credit card brands, such as Visa, generate revenues based on the number of transactions processed. American Express is able to avoid issuers and acquirers because it earns discount fees directly from retailers.

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