In payments, a card network refers to a financial network that enables the processing and authorization of electronic transactions made using payment cards such as credit cards and debit cards. The card network acts as an intermediary between the cardholder’s bank (issuing bank) and the merchant’s bank (acquiring bank), facilitating the secure transfer of funds.
Here’s how a card network typically works:
- Card Issuance: When a person applies for a payment card from a bank, the issuing bank creates an account and issues a physical card or a virtual card associated with that account.
- Cardholder’s Transaction: When the cardholder makes a purchase at a merchant’s location or online, they present their payment card. The merchant uses a card terminal or an online payment gateway to initiate the transaction.
- Authorization Request: The merchant’s payment system sends an authorization request to the card network, which includes the card details, transaction amount, and other relevant information.
- Routing and Validation: The card network receives the authorization request and verifies the transaction details, ensuring it meets the necessary security protocols. It also checks for any potential fraud indicators.
- Issuing Bank Authorization: The card network forwards the authorization request to the cardholder’s issuing bank. The issuing bank validates the transaction by verifying the available funds, checking for any suspicious activity, and evaluating the cardholder’s creditworthiness.
- Authorization Response: The issuing bank sends an authorization response back to the card network, indicating whether the transaction is approved or declined. If approved, the response includes an authorization code.
- Merchant Authorization: The card network relays the authorization response to the merchant’s payment system, indicating whether the transaction is approved or declined. If approved, the merchant can proceed with completing the transaction.
- Settlement and Clearing: After the transaction is authorized, the settlement process begins. The card network transfers the funds from the cardholder’s issuing bank to the merchant’s acquiring bank. This is typically done through a series of clearing and settlement processes, where the funds are transferred between the banks involved.
- Post-Transaction: Once the settlement is complete, the cardholder’s issuing bank records the transaction in the cardholder’s account, and the merchant’s acquiring bank credits the merchant’s account with the transaction amount, minus any applicable fees.
Card networks, such as Visa, Mastercard, American Express, and Discover, are responsible for establishing and maintaining the technical infrastructure that enables secure and efficient payment processing between different banks, merchants, and cardholders. They set rules and standards for transactions, facilitate communication between parties, and play a crucial role in ensuring the smooth functioning of the payment ecosystem.