What are Card Schemes?
Within a card scheme a group of entities all agree to the set conditions, within which retail sales happen.
A card scheme is like a financial club which contains various members. Card schemes are in place for both credit cards and debit cards. There are subtle differences in the transactional rules depending on the type of card used. To see how a card scheme works, you will find it helpful to understand who is involved.
Who is involved in a Card Scheme?
Four roles make up a card scheme. These roles are known as the cardholder, issuer, merchant, and acquirer.
There are two types of card scheme in existence. In one kind the issuing bank and the acquiring bank are the same entity. In the other type, there is a separate issuing bank and an acquiring bank.
The concept of a card scheme can be a bit confusing if you don't fully understand what those entities do. Let's break down the two types of scheme into separate parts, and see what each role is.
A three-party card scheme
In a three-party card scheme, the members are:
The Cardholder:
The cardholder is the person who wishes to buy something and is going to use their card to do so.
The issuing bank:
The issuing bank is the bank that created the card holder's account and posted the card to the cardholder. The issuing bank may be the cardholders leading bank, or it may be a separate institution that attracted the cardholder with a special offer for a credit card, or bank account.
The Merchant:
The merchant is the retailer where the cardholder is looking to spend some money. A merchant can include retail premises, or e-commerce and online services.
A three-party card scheme is also known as a closed-loop scheme. A closed-loop scheme means that the issuing bank, and acquiring bank are the same entity. An excellent example of a closed-loop scheme is when a cardholder uses and American Express card. In this transaction, the members are; the cardholder, the merchant and American Express. There is no outside financial organisation involved, as the merchant AND the cardholder are both customers of American Express.
A four-party card scheme:
A four-party card scheme is the same as a three-party card scheme with the added addition of an acquiring bank. An acquiring bank is the bank that tots up all of the merchant's sales for the day, approaches the issuing bank, and says; "Hey, you owe our merchant £X for today. Can you settle up please"?
Look at an example of a four-party card scheme below.
Let's call it "The Merchants Arms" -
It is one of the cardholders round, and they purchase drinks on their TSB debit card.
There is no joke here; however, there is now a bunch of administration that needs doing.
The Merchants Arms landlord is two drinks down on their inventory.
The cardholder has, by authorising the sale, agreed to the purchase. The money needs to leave their TSB account.
This agreement is all well and good, but business remains unresolved until the money lands in the Barclays account of "The Merchants Arms" hard-working landlord.
The acquiring bank and the issuing bank need to talk. The issuing bank and acquiring bank will sort out how much needs to go into the "Merchant Arms" bank account. All three of those parties; the merchant, the acquirer and the issuing bank; will agree to the commissions or fees to deduct.
Ultimately, everyone within the card scheme gets what they want. The landlord has sold drinks, the acquiring bank has taken their little piece, the issuing bank have theirs, and the cardholder?
Well, in this case, the cardholder is the only one who got something they didn't want. That hang-over was very unnecessary!
By the close of business on any given day, the "Merchants Arms" may have taken on hundreds of these little transactions. It is simply not possible for the landlord to keep track of everything. That is why a card scheme exists.
Card Scheme rules apply internationally, and so it is now possible for the cardholder to use their credit or debit card at any retailers, wherever they are in the world.
Which banks are involved in Card Schemes?
American Express, Diners Club, JCB, Maestro, China UnionPay International, MasterCard and Visa (including Debit) are the card schemes that operate in the UK.
Visa
Visa facilitates electronic funds transfers throughout the world, most commonly through services such as Visa-branded credit cards, gift cards, and debit cards. Visa doesn't issue credit or debit cards, nor do they set rates and fees for customers; they provide financial institutions with Visa-branded payments options.
MasterCard
A MasterCard card is any electronic payment card that uses the MasterCard network for processing transaction communications. These cards carry the MasterCard logo. MasterCard, formerly known as "Interbank" from 1966 to 1969 and "Master Charge" from 1969 to 1979, was created by an alliance of several regional bankcard associations. This alliance was in response to the BankAmerica service issued by Bank of America. Bank America, which later became known as the Visa credit card issued by Visa Inc.
China Union Pay
China Union Pay is an electronic payment system, which is considered the only national payment system in China. Founded in 2002, China Union Pay has issued roughly 7.5 billion cards. That is more than both Visa and MasterCard. UnionPay International, (UPI), is a subsidiary of China UnionPay. UnionPay focusses on the global expansion of China Union Pay.
Diners
Founded in 1950, Diners Card members come from over 60 different countries and can use their card in over 185 countries. Diners Club members receive many exclusive benefits related to travel and leisure activities, including complimentary lounge access and full primary coverage for rental car collision and damage insurance. Travel is central to the Diners Club philosophy and marketing strategies.
American Express
American Express or AMEX is one of the largest credit card providers in the world. AMEX process nearly 22% of all credit and debit card transactions worldwide. AMEX is not only a credit card provider but also a processor and an acquiring bank.
American Express offers card processing for Amex Cards, as well as a merchant service agreement and an online payment gateway for e-commerce merchants.
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