What do Visa and Mastercard do? An intro to card networks
Recorded: Sept. 9, 2026, 6 p.m.
| Original | Summarized |
What do Visa and Mastercard do? An intro to card networks @ tautology.town Home What do Visa and Mastercard do? An intro to card networks Most people can recognize the Visa and Mastercard brands. Chances are, you use one of their cards to transact every day. You may have some notion that most places (in the US) take both, but some places only take Visa (e.g. Costco), and vice versa. They aren’t the company that issues the card. Those are called card issuers. Instead, Visa and Mastercard are card networks3, facilitating card transactions by connecting the cardholders and issuers to the merchants and acquirers. --- The key players in a card transaction. The card network’s job is to enable card transactions, and also to grow participation in their networks. Run the telecommunications network to route transaction messages. For the rest of the discussion, we’ll focus on Visa, as it’s what I’m most familiar with from my years in the payment industry. Mastercard is more or less the same, with different names for things. Visa takes its data centers very seriously. They are highly secure, redundant, and fitted to survive all kinds of disasters. From Inside Visa’s Data Center (Network Computing, 2013): “The company’s flagship data center, dubbed Operations Center East, or OCE, is a 140,000-square-foot facility that Visa will only say is located “somewhere along the Eastern seaboard.” “Not surprisingly, the facility, which is also designed to withstand earthquakes and gale-force winds up to 170 miles per hour, is locked down like a digital Fort Knox. The roads entering the complex have hydraulic bollards that can shoot up fast enough to stop a vehicle traveling up to 50 miles per hour dead in its tracks. (The road is too curvy to drive safely at higher speeds.) Visitors must pass through a security gate, be cleared by roving security teams, and then be subjected to a biometric scan before being admitted.” And a 2012 headline from USA Today: Top secret Visa data center banks on security, even has moat That top secret location? In Ashburn, Virginia, conveniently located by Topgolf and Trader Joe’s. I think the "moat" is the pool of water on the top center-left. Authorization and clearing messages --- Visa as an adapter Shuffling this amount of money around and timing everything right is no easy feat. Visa faces non-payment risk in addition to maintaining a significant balance to cover payouts while waiting to receive settlement payments. From Visa’s 2024 annual SEC report: Most U.S. dollar settlements are settled within the same day and do not result in a receivable or payable balance, while settlements in currencies other than the U.S. dollar generally remain outstanding for one to two business days, which is consistent with industry practice for such transactions. … As of September 30, 2024, we held $11.2 billion of our total available liquidity to fund daily settlement in the event one or more of our financial institution clients are unable to settle, with the remaining liquidity available to support our working capital and other liquidity needs. The Company’s settlement exposure is limited to the amount of unsettled Visa payment transactions at any point in time, which vary significantly day to day. For fiscal 2024, the Company’s maximum daily settlement exposure was $137.4 billion and the average daily settlement exposure was $84.3 billion. 3. Set incentives A cardholder pays for a product at a merchant for $100.00. Surprisingly, the issuing bank keeps most and the network takes the least, by an order of magnitude! This is because for the tranasction, the issuer is traditionally considered to take on most of the risk (although merchants are likely to disagree). --- The virtuous cycle of card spend. In the EU, interchange fees are restricted to 0.3%, which explains the lack of rewards cards and wider acceptance of alternative payment methods like bank payments. Nowadays they may have product offerings for some of these, or own subsidiaries that do some of these, but these are not core to the business of being a card network. ↩ Technically, these are “payment facilitators”. A bank underwites the payment company, and the payment company underwrites their merchants. The different roles in payments have historically been meaningful, but companies are increasingly blurring the lines, so these distinctions and terms are less interesting today. ↩ To be precise, we use “card networks” to colloqially refer to the companies operating their own card payment networks / schemes. For example, VisaNet is technically the network, Visa is the company/brand. Mastercard’s network is called Banknet. Both companies also own and operate specialized subsidiary networks for things like debit cards and ATMs, like Visa’s Interlink and Plus, or Mastercard’s Cirrus and Maestro, although technically VisaNet and Banknet can process debit (this is a story for another time). There are further terms to distinguish the telecommunications network with the bank network, and even subsets of each. Visa even thinks of itself as a “network of networks”. Turtles all the way down. ↩ Or four or more, depending on how you count. ↩ Similar to IPv4, 16 digit PANs are rapidly exhausting due to the use of anonymized “token” PANs used by things like Apple/Google Pay and saved payment details. ↩ Clearing includes finalizing/committing the payment and reconciliation against the authorization. “Capturing a payment” is what this is called from the merchant’s perspective. ↩ Known as a “voice authorization”. You might be able to get one today, although I don’t know if banks are staffing operators to field calls. ↩ Although interchange is short for interchange fee, technically interchange refers to the payment messages being routed by the card networks, and the fee is provided for that data. But, you almost never hear interchange used to mean payment messages except in technical specs. ↩ Although this creates trust in card payments, it has opened the doors to friendly fraud, where legitimate purchases are reported as fraudulent. Not to mention a moral hazard. ↩ Some merchants add a surcharge on card transactions to pass through the fee to customers. This used to be against Visa’s rules (and California state law) but lawsuits have challenged that. The surcharge amount is also only supposed to be the amount the merchant pays on a card transaction, but I suspect that many small merchants charge more. ↩ There are some amusing cases of this at work in large transactions, where the legal fees are much more in proportion with the transaction costs. ↩ Not that you asked, but the expansion of forced arbitration and confidential settlements are bad for society. Back in the day, you could sue your bank (for example) for doing bad stuff, but now contracts for everything include a clause for arbitration, waiving your rights as a consumer. The company pays for the arbitration, not you, so you can guess the outcome of that. Famously, Disney tried to use a forced arbitration clause in the Disney+ streaming agreement to prevent a wrongful death suit from a allergic reaction in a Disney restaurant. In the Visa case, the dispute process means the consumer tends to benefit, at the cost of the issuer and the merchant. ↩ The system is designed to encourage transactions rather than stopping fraud. It opens the door to fraud, especially friendly fraud, as explained in another footnote. Friendly fraud is a growing problem. ↩ see you 'roundtautology.town Want to become a better programmer? Join the Recurse Center! |
Visa and Mastercard operate as card networks, functioning as intermediaries that facilitate card transactions by connecting cardholders and card issuers with merchants and acquirers. They are distinct from card issuers, banks, payment processors, and hardware manufacturers; instead, they establish the underlying infrastructure for the payment ecosystem. Their role centers on enabling transactions through four key responsibilities: running the telecommunications network, coordinating the banking network, setting incentives, and establishing rules for dispute resolution. In terms of infrastructure, card networks serve as telecommunication networks, maintaining secure, redundant data centers and leasing fiber optic cables to connect issuers and acquirers electronically, effectively acting as a network switch for transaction messages. This function involves routing authorization requests from merchants to issuers and managing financial communications. The systems utilize card numbers as identifiers, leveraging the Bank Identification Number (BIN) to identify the issuing entity. Following an authorization, the process involves placing a temporary hold, followed by clearing, where the final transaction amount is initiated, demonstrating a digitized flow of communication that replaced previous manual methods. Beyond the connectivity aspect, card networks coordinate the banking network necessary for transaction settlement. This involves routing the movement of funds between participants, achieving efficiency through net settlement where daily debits and credits are reconciled. Furthermore, card networks facilitate international money movement by acting as adapters between disparate global banking systems, handling currency conversions, which significantly simplifies cross-border transactions for participants. This financial coordination requires managing significant liquidity, and the networks maintain substantial reserves to cover potential settlement failures. The network structure is heavily influenced by setting incentives, primarily through fees. The structure of interchange fees, network assessment fees, and merchant discount rates is designed to encourage specific behaviors on the network. These fees are structured in a way that traditionally allocates the largest share of responsibility and benefit to the issuers, incentivizing them to acquire customers and fund rewards programs. The network sets these rates to steer spending patterns, for example, by adjusting interchange fees to encourage the use of more secure payment methods or to promote commercial spending. Finally, card networks are responsible for setting the rules governing their operation and providing dispute resolution mechanisms. They establish comprehensive rule sets, such as the Visa Core Rules, detailing requirements for branding, data sharing, and transaction processing timelines. For disputes, networks employ a system that often involves forced arbitration, where evidence is exchanged between the issuing party and the acquiring party. If disputes remain unresolved, the network steps in to review the evidence, which involves substantial fees, incentivizing both parties to resolve matters cooperatively. This dispute mechanism, while not entirely equitable, is characterized as efficient. Ultimately, the system is designed to maximize transaction volume rather than solely prevent fraud, which has opened avenues for issues like friendly fraud. The current framework, particularly in dispute resolution, places the burden on issuers and merchants, who ultimately benefit from the system's structure, rather than ensuring absolute consumer protection. While the lines between these entities are increasingly blurred by the rise of payment facilitators, the foundational concept of card networks remains a complex, highly regulated system that underpins modern commerce. |