Card networks are financial service platforms that facilitate electronic payments by connecting merchants, acquiring banks, and issuing banks. They ensure transactions are processed quickly and securely so businesses can accept card payments both in-person and online.

Introduction to card networks

What are card networks?

Card networks provide the infrastructure for transactions between the issuing bank and the acquiring bank. When a customer makes a purchase, the card network facilitates communication between the parties and processes the transaction.

A few well-known examples of card networks are:

• Visa

• Mastercard

• American Express

• Discover

• RuPay

Zoho Payments supports payment acceptance through all major card networks. This includes Visa, Mastercard, Discover, American Express, JCB, Diner's Club, and Union Pay, in the United States. In India, Zoho Payments supports payment acceptance through Visa, Mastercard, and RuPay.

How do card networks work?

How do card networks work?

When a customer initiates a payment, an authorization request is sent from the merchant’s acquiring bank to the card network. The network then forwards this request to the issuing bank, which verifies the cardholder's details and available funds.

Upon approval or denial, the response is sent back through the network to the acquiring bank and the payment gateway, which notifies the customer of the approval or denial of the transaction. Then, the transaction is completed. The card network oversees clearing. During settlement, funds move from the issuing bank to the merchant's account.   For more detailed information on payment processing, check out our article, here.

The typical flow of communication in a card transaction involves multiple steps.

1. Customer initiates a purchase: A cardholder presents their card details for payment at the merchant’s terminal either in-person or online.

2. Authorization request: The merchant's gateway sends an authorization request to the acquiring bank, which is then forwarded to the card network.

3. Forwarding to the issuing bank: The card network routes the authorization request to the issuing bank (the customer’s bank) for approval.

4. Approval or denial: The issuing bank checks if the customer has sufficient funds and validates the card information. It notifies the network of the transaction approval or denial.

5. Transaction completion: If approved, the card network notifies the acquiring bank.

6. Notification: The payment gateway notifies the customer of the approval or denial of the transaction, and the records are updated.

7. Settlement: Once the transaction is completed, the card network facilitates the clearing, ensuring funds are transferred from the issuing bank to the acquiring bank.

Transaction security

Card networks rely on fast and secure communication technologies to process large volumes of transactions every day. Key technologies include:

• Tokenization - Sensitive card information is replaced with encrypted tokens, which can be securely processed without exposing the actual card details and then later decrypted. You can read more on transaction security with payment tokenization here.

• Encryption - Payment data is encrypted during transmission to protect sensitive information from being intercepted.

• EMV (Europay, Mastercard, Visa) chips - These smart card chips store encrypted data and help reduce fraud.

Fees associated with card networks

There are various types of fees involved with processing card payments. These include:

• Interchange fees

• Scheme or network assessment fees

Governance and regulation

Card networks operate under regulatory frameworks established by both international and domestic authorities. Global card networks are subject to regulations like PCI-DSS (Payment Card Industry Data Security Standard). PCI DSS sets security guidelines for businesses that handle card data. It is regulated by the PCI Security Standards Council (SSC) an independent body governed by the five major card networks, Visa, Mastercard, American Express, Discover, and JCB. For more detailed information on PCI DSS, check out our article on PCI compliance here.

In the United States, the Federal Reserve and Consumer Financial Protection Bureau (CFPB) oversee aspects of credit and debit card operations, and they are monitored by laws such as EFTA.

In India, card networks are regulated by the Reserve Bank of India (RBI). The RBI sets rules for transaction security, dispute resolution, and the operational standards card networks must follow.

Understanding the structure of card networks

Card networks typically follow either the four-party model (Open scheme) or the three-party model (Closed scheme). Networks like Visa and Mastercard are known as open networks, and they follow the four-party model, where the issuers and acquirers are separate financial entities, and the card network interacts with each of them distinctly. The four parties involved include the acquirers, issuers, merchants, and cardholders.

In the three-party model, acquirers and issuers function together, as a single entity. Hence, the card networks interact with the acquirers and issuers as one entity, and then the merchants and the cardholders. Networks like American Express and Discover are closed networks operating under the three-party model.

With Zoho Payments, merchants can choose to accept payments based on their preferred card networks. As different card networks are associated with varying fees, merchants have the flexibility to accept payments from their preferred card networks.

For example, in the United States, Visa and Mastercard may charge lower fees, between 1.5–2.5% of the transaction, whereas American Express may charge higher fees of around 3–3.5% of the transaction amount*. For that reason, merchants need to understand the implications of choosing various card networks for accepting card payments.

* Facts and statistics on pricing as of November 2024

Disputes and fraud prevention

Customers may dispute transactions when they are dissatisfied with the product or service, or when they wish for a refund for specific reasons. When this happens, the cardholder’s issuing bank temporarily reverses the transaction, and the merchant is required to provide evidence to contest the chargeback.

Card networks set the timelines and criteria for these disputes, making it crucial for merchants to be familiar with the process to avoid financial losses. Refunds are initiated by the merchant and handled through the same acquiring bank and payment gateway used for the original transaction, with the card network overseeing the return of funds to the customer.

Fraud remains a significant concern for card networks and merchants alike. To combat it, card networks use tools like 3D Security, tokenization, and real-time fraud monitoring systems.

Conclusion

Card networks are integral to the global payments ecosystem, ensuring the seamless and secure flow of funds between consumers and businesses. Understanding how they operate securely and their role as intermediaries in payment processing can help businesses improve their payment processes and safeguard against potential financial risks to ensure smoother, safer transactions for their customers.