What Is a Credit Card Network and How Do They Work?

A credit card network serves as the infrastructure connecting parties in a financial transaction. It is an intermediary that facilitates the secure exchange of information and funds between banks and merchants. This network operates distinctly from the financial institution that issues a credit card to a consumer. Its primary function is to enable seamless processing of credit and debit card payments globally.

The Network’s Central Role

A credit card network fulfills core functions in the payment ecosystem. It handles authorization, verifying a cardholder has sufficient credit or funds for a transaction. The network quickly routes these requests between the merchant’s bank and the cardholder’s bank for approval.

The network also manages the clearing process, exchanging transaction data between the acquiring bank and the issuing bank, including details like transaction amount, date, and merchant information. Following clearing, the network facilitates settlement, the financial transfer of funds. This ensures the merchant receives payment and the issuing bank debits the cardholder’s account, typically within one to three business days.

Participants in a Network Transaction

Entities collaborate within a credit card network to complete a transaction. The cardholder is the individual who uses their credit card for a purchase. The merchant is the business accepting credit card payment.

The acquiring bank, also known as the merchant bank, processes transactions for the merchant. This financial institution receives transaction data and forwards it through the network. The issuing bank, or cardholder bank, provides the credit card to the consumer. This bank approves or declines transactions and manages the cardholder’s account.

The Transaction Flow

A credit card transaction begins when a cardholder initiates payment at a merchant, whether by swiping, tapping, or entering card details online. The merchant’s point-of-sale system or online gateway sends the transaction data to their acquiring bank. This acquiring bank then routes the authorization request to the credit card network.

The network identifies the correct issuing bank based on the card’s unique identification number and forwards the request. The issuing bank then evaluates the transaction, checking for sufficient funds or credit and assessing for potential fraud. An approval or decline response is generated by the issuing bank and sent back through the credit card network.

The network transmits this response to the acquiring bank, which then relays it to the merchant’s terminal, completing the immediate transaction. If approved, the network facilitates the clearing and settlement process, ensuring the transfer of funds from the issuing bank to the acquiring bank and ultimately to the merchant’s account.

Major Credit Card Networks

Major credit card networks operate globally, each with its own business model. Visa and Mastercard are open-loop networks. These companies license their brands and technology to issuing and acquiring banks worldwide, acting as intermediaries that process transactions. They do not issue cards directly to consumers or acquire merchants.

American Express and Discover operate as closed-loop networks. These companies function as both the network and, in most cases, the issuing and acquiring bank. This means they directly handle all aspects of the transaction, from issuing the card to the consumer to processing payments for the merchant. Their integrated model allows them to maintain direct relationships with both cardholders and merchants.