F1 The payment ecosystem
Needs: Supporter
Cardholder, merchant, acquirer, network and issuer: who does what, and who earns what.
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What this module covers
You will be able to
- Name the parties of a card payment and what each one does
- Tell three-party from four-party schemes
- Follow the money at a high level: interchange, merchant discount, scheme fees
- Know where the flows of track B start
The lesson
- Why it matters
- The concept
- In the real world
- Common mistakes
- What to test
In the module
- The lesson, with diagrams, common mistakes and what to test
- A worked example you can change: Who handles a card payment
- Practice: 2 kinds of generated exercise, each with a step-by-step solution
- A quiz of 8 questions
Key terms
- Acquirer
- The bank or processor that signs up merchants, receives their card transactions and gets them paid. It sends each authorisation to the network and is paid by the network at settlement.
- Card network (Card scheme, brand)
- The organisation that connects acquirers and issuers, sets the rules, routes authorisations by BIN and runs clearing and settlement between them.
- Cardholder
- The person the card is issued to. Only they should know the PIN.
- Four-party model
- The usual card model: cardholder, issuer, merchant and acquirer, joined by the card network in the middle.
- Interchange fee
- The fee the acquirer pays the issuer on each purchase, set by the network. It is part of what the merchant pays.
- Issuer
- The bank that gives the card to the cardholder, holds the account, approves or declines each authorisation and pays the network at settlement.
- Merchant (Card acceptor)
- The business that accepts the card. It is identified in messages by its merchant ID (field 42) and its terminals by their terminal IDs (field 41).
- Merchant discount rate (MDR)
- What the acquirer charges the merchant per transaction: interchange, network fees and the acquirer's margin.
- Payment facilitator (PayFac)
- A company that signs up many small merchants under its own acquirer agreement, so they can accept cards without each having their own merchant account.
- Payment gateway
- A service that takes e-commerce or terminal transactions from merchants and forwards them to the acquirer, usually through an API instead of ISO 8583.
- Processor
- A company that runs the systems for an acquirer or an issuer: authorisation hosts, card management, clearing files. The bank keeps the licence and the risk.
- Switch
- A system that routes messages between terminals, hosts and networks, often converting formats on the way. National debit networks and acquirer front ends are switches.
- Three-party model (Closed loop)
- A model in which the network is also the only issuer and acquirer, so there is no interchange between separate banks.
The lesson, worked example, practice and quiz open with a supporter pass, which you can try free for 7 days.