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Card scheme

A card scheme, also known as a payment card scheme, is a technical and commercial arrangement that establishes rules, standards, and networks for processing transactions involving credit, debit, and prepaid cards, enabling secure and efficient payments between cardholders, merchants, and financial institutions.^[1] These schemes serve as the backbone of global card-based payment systems by facilitating communication, authorization, and fund transfers while ensuring compliance with security protocols and operational guidelines.^[2] Card schemes operate through a structured process involving key parties: the cardholder initiates a transaction, the merchant's acquiring bank routes the request via the scheme's network to the cardholder's issuing bank for authorization, and upon approval, funds are cleared and settled.^[3] The primary role of these schemes is to manage the interchange of transaction data and fees, promoting interoperability across borders and reducing fraud through features like encryption and real-time monitoring.^[4] There are two main types of card schemes: three-party schemes, where a single entity acts as both issuer and acquirer (which can operate in closed-loop systems for proprietary cards accepted only at affiliated merchants or in open systems like American Express allowing broader acceptance), and four-party schemes, which involve separate issuing and acquiring banks in an open system allowing broader acceptance.^[5] Four-party schemes dominate international payments due to their scalability and network effects.^[6] Prominent examples include Visa and Mastercard, which together process the majority of global card transactions, alongside American Express and UnionPay, each offering distinct networks tailored to regional or premium markets.^[3] These schemes have revolutionized commerce by supporting $36.7 trillion in purchase volume in 2024, with debit cards accounting for 50% of all payments in the UK in 2022, rising to 53% by 2024.^[6]^[7]^[8]

Overview

Definition

A card scheme is a payment network that establishes rules, standards, and infrastructure for processing debit, credit, and prepaid card transactions on a global scale.^[4] It serves as the central framework connecting various participants in the payment ecosystem, including financial institutions and merchants, to enable seamless and standardized transaction handling.^[9] By defining protocols for authorization, clearing, and settlement, card schemes ensure that payments are processed efficiently across borders and currencies.^[6] The primary functions of a card scheme include facilitating secure data exchange between involved parties, such as verifying transaction details and fund availability in real time.^[6] It enforces compliance with regulatory and security standards, including measures like encryption and tokenization, to mitigate fraud risks.^[4] Additionally, card schemes promote interoperability among diverse financial institutions, allowing cards issued by one entity to be accepted worldwide through a unified system.^[9] This interoperability is crucial for maintaining trust and reliability in the broader payment ecosystem, where billions of transactions occur annually.^[10] While card schemes operate the underlying networks for transaction transmission, they extend beyond mere connectivity by defining operational rules, such as transaction routing paths and dispute resolution procedures.^[11] This dual role distinguishes them from standalone networks, as schemes actively govern the entire payment flow to ensure consistency and fairness.^[12] At the core of a card scheme's structure is its membership model, through which banks and eligible financial institutions join to either issue cards to consumers or acquire payment acceptance from merchants.^[9] Members must undergo approval processes, adhere to scheme-specific licenses—such as principal or affiliate status—and pay associated fees to gain access to the scheme's global acceptance network.^[10] This model fosters a collaborative environment where participants benefit from shared infrastructure while contributing to the scheme's ongoing development and compliance enforcement.^[6]

Examples

Visa, founded in 1958 as the BankAmericard program by Bank of America, operates as the world's largest four-party card scheme and processed 234 billion transactions in fiscal year 2024.^[13]^[14] Mastercard, originated in 1966 as the Interbank Card Association, functions as a four-party card scheme and emphasizes innovations in digital payments and contactless technology, processing approximately 160 billion transactions in 2024.^[15]^[16] American Express (Amex), launched in 1958 as a charge card, employs a three-party scheme model in which it directly handles both issuing and acquiring functions, and is recognized for its premium rewards programs and focus on travel-related services.^[17] Discover, introduced in 1985 by Sears, operates primarily as a three-party scheme with strategic partnerships for broader acceptance, maintaining a strong presence in the U.S. market through its cashback rewards features.^[18]^[19] UnionPay, founded in 2002 by the People's Bank of China, is a four-party scheme that has become the world's largest by cards in circulation, processing over 228 billion transactions in 2023 with significant global expansion beyond China.^[20] As of 2025, Visa and Mastercard together account for more than 80% of global card payment volume outside China (Visa approximately 50%, Mastercard 25%), while UnionPay dominates within China at around 20-30% globally and American Express accounts for approximately 5%.^[21]^[22]^[23]

History

Early development

The origins of modern card schemes trace back to the mid-20th century, evolving from limited, merchant-specific credit arrangements to broader networks that facilitated payments across multiple vendors. In the 1920s, oil companies pioneered early credit cards as "courtesy cards" redeemable exclusively at their affiliated dealers, reflecting a fragmented system tied to individual industries rather than universal acceptance.^[24] This marked an initial shift from purely in-store charge accounts to semi-networked options, but acceptance remained siloed by company or retailer, limiting convenience for consumers seeking cross-merchant use.^[25] A pivotal innovation occurred in 1950 with the launch of the Diners Club card, the first general-purpose charge card, founded by Frank McNamara after he famously forgot his wallet during a business dinner at New York's Major's Cabin Grill restaurant.^[26] McNamara, a credit executive, addressed the embarrassment by negotiating a charge with the restaurant owner, inspiring him to create a card system that allowed payment deferral at participating establishments, initially limited to about 27 New York restaurants and hotels.^[27] This venture, operated through Diners Club Inc., represented the birth of modern card schemes by establishing a centralized billing mechanism for multi-merchant transactions, quickly expanding to 10,000 cardholders within a year and laying the groundwork for network-based payment processing.^[28] Building on this model, banks entered the fray in 1958 when Bank of America introduced the BankAmericard in Fresno, California, as the first bank-issued general-purpose credit card distributed on a large scale.^[29] Unlike prior merchant cards, BankAmericard enabled revolving credit—allowing cardholders to carry balances with interest—and was mailed unsolicited to 60,000 households, revolutionizing access by shifting issuance from individual retailers to financial institutions and fostering widespread adoption across diverse merchants.^[30] This innovation democratized credit, transitioning from regional or industry-specific cards to a scalable, bank-backed network that emphasized convenience and interoperability.^[31] To counter BankAmericard's dominance, a consortium of banks including Wells Fargo formed the Interbank Card Association (ICA) in 1966, which evolved into Mastercard and introduced the Master Charge card.^[32] This cooperative structure allowed participating banks to issue cards under a shared brand, promoting competition through a four-party model involving issuers, acquirers, merchants, and the association, and accelerating the move toward universal networks by enabling nationwide acceptance without reliance on a single issuer.^[33] By pooling resources, ICA standardized rules for interchange and authorization, further solidifying card schemes as interconnected ecosystems beyond proprietary systems.^[34] The 1970s brought technological standardization with the introduction of the magnetic stripe on credit cards, developed by IBM engineer Forrest Parry and adopted industry-wide around 1970 for automated data encoding.^[35] This ferrite-oxide strip on the card's reverse allowed machines to read account details swiftly, replacing manual imprinting and enabling real-time transaction authorization via emerging electronic networks.^[36] By standardizing data formats across schemes like Visa (BankAmericard's rebranded network) and Master Charge, the magnetic stripe facilitated scalable processing, reduced errors, and supported the growth of point-of-sale verification, marking a foundational step in automating card scheme operations.^[37]

Modern evolution

The 1980s marked a pivotal expansion in card schemes, driven by the widespread adoption of automated teller machines (ATMs) and the introduction of debit cards, which enabled direct access to bank accounts for cash withdrawals and point-of-sale transactions. ATMs, initially piloted in the late 1960s, became a core feature of banking infrastructure during this decade, with most major banks deploying them to enhance customer convenience and reduce branch costs.^[38] Debit cards emerged alongside this growth, leveraging ATM networks for broader use and laying the groundwork for electronic funds transfer at retail locations. A notable innovation was the launch of Discover Card in 1985 by Sears, the first U.S. credit card network to offer cashback rewards without an annual fee, which quickly differentiated it in a market dominated by traditional charge cards.^[19] Entering the 1990s and 2000s, card schemes prioritized security enhancements to address rising fraud from magnetic stripe vulnerabilities, such as skimming. The EMV chip standard was first implemented in France in 1994, embedding microprocessors in cards to generate dynamic authentication data and significantly reducing counterfeit fraud.^[39] This technology saw gradual global rollout through the 2000s, with widespread adoption in Europe by the mid-2000s and acceleration into the 2010s in regions like the U.S., where liability shifts incentivized issuers and merchants to migrate.^[40] Complementing these efforts, the Payment Card Industry Data Security Standard (PCI DSS) was established in 2004 by major schemes including Visa, Mastercard, American Express, Discover, and JCB to standardize data protection practices across the payment ecosystem.^[41] The 2010s witnessed a surge in contactless payment capabilities within card schemes, fueled by near-field communication (NFC) technology that allowed tap-to-pay transactions without physical insertion. This shift was accelerated by integrations like Apple Pay, launched in October 2014, which enabled secure mobile wallet use at over 220,000 U.S. contactless-enabled merchant locations from day one.^[42] Concurrently, tokenization emerged as a key innovation, replacing sensitive card numbers with unique digital tokens for online and in-app transactions, thereby minimizing exposure to data breaches; EMVCo formalized this approach around 2014 to support mobile and e-commerce growth.^[43] In the 2020s, as of 2025, card schemes have emphasized real-time payments, biometric authentication, and the prominence of domestic networks to meet demands for speed and localization. Real-time payment systems, now operational in over 100 countries, are projected to handle 575 billion transactions by 2028, representing 27% of global non-cash volumes and integrating with card rails for instant settlements.^[44] Biometrics, including fingerprint and facial recognition, have become standard for fraud prevention in digital transactions, enhancing user verification without passwords.^[45] Domestic schemes like China's UnionPay, the world's largest card network by issuance volume, continue to dominate local markets while expanding globally.^[46] The COVID-19 pandemic accelerated this evolution, boosting e-commerce to over 20% of global retail sales by 2024, up from pre-pandemic levels, as consumers shifted to digital channels.^[47] A defining trend across this period is the transition from predominantly physical card schemes to hybrid and digital models, where physical cards coexist with virtual provisioning in wallets, supporting seamless omnichannel experiences. This shift has propelled global non-cash transaction values to approximately $1.8 quadrillion in 2023, with card-based payments forming a substantial portion of approximately $29 trillion annually as of 2024.^[48]^[49]^[50]

Types

Three-party schemes

In three-party card schemes, a single entity functions as both the card issuer and the merchant acquirer, managing the full transaction lifecycle from card issuance to payment processing. This closed-loop model limits participation to three core parties: the cardholder, the merchant, and the scheme operator, which directly connects consumers and merchants without intermediary banks.^[51]^[52] The structure enables streamlined operations, as the operator maintains direct relationships with both cardholders and merchants, facilitating integrated services such as customized rewards and loyalty programs. Examples include American Express, JCB, and Diners Club. American Express exemplifies this model by issuing cards to consumers while acquiring payments from merchants, allowing for cohesive control over the payment ecosystem. Advantages include simpler integration for participants and faster dispute resolution, as there is no need to coordinate between separate issuing and acquiring institutions. However, this approach often results in higher merchant costs due to the absence of competitive fee structures and more restricted global acceptance, as the network relies on its own proprietary infrastructure.^[53]^[4] Three-party schemes are predominantly used for charge cards, which require full payment at the end of the billing cycle, and they hold a notable presence in premium market segments. As of 2024, these schemes account for approximately 5% of global purchase volume within the broader "others" category of networks, but they process a larger share—around 25%—in the premium credit card segment through operators like American Express.^[54]^[52] Operationally, fees are not divided into separate interchange components between banks; instead, they are consolidated into a single merchant discount rate applied by the scheme operator.

Four-party schemes

In the four-party card scheme, transactions involve four primary participants: the cardholder, the merchant, the cardholder's issuing bank (which provides the payment card), and the merchant's acquiring bank (which processes payments for the merchant). The card scheme, such as Visa or Mastercard, serves as a neutral intermediary network that routes authorization requests, responses, and settlement information between the issuer and acquirer, ensuring secure and standardized processing without directly handling funds.^[55]^[51] This model promotes broader merchant acceptance by enabling participation from numerous independent banks as issuers and acquirers, creating an open network that supports widespread card usability across diverse financial institutions. It facilitates competitive pricing through the interchange fee mechanism, where the acquirer compensates the issuer for transaction costs and risks, encouraging issuers to offer attractive card products like rewards programs. Additionally, the structure scales globally, with schemes like Visa and Mastercard connecting thousands of member banks and processors to handle billions of transactions annually.^[51]^[55] However, the separation of issuing and acquiring functions introduces greater complexity in coordinating multiple parties, including compliance with varying regional regulations and technical integrations. This can lead to potential delays in resolving disputes or chargebacks, as resolution requires communication across the issuer, acquirer, and scheme, prolonging timelines compared to more integrated systems.^[55]^[51] As the dominant framework for card payments worldwide, four-party schemes process over 85% of global transaction volume as of 2024, exemplified by networks like Visa, which alone accounted for nearly 40% of worldwide purchase transactions in 2023. This prevalence also supports integration with open banking initiatives, allowing third-party providers to participate via standardized APIs for enhanced interoperability.^[56]^[51] Operationally, the scheme enforces a comprehensive set of rules governing transaction routing, security standards, and dispute handling, such as preferred routing paths to optimize efficiency, while settlement funds flow bilaterally between the issuer and acquirer without the scheme acting as a financial intermediary.^[55]^[51]

Key participants

Cardholder

A cardholder is the individual consumer or business entity to whom a payment card, such as a credit, debit, or prepaid card, is issued by a financial institution and who uses it to initiate transactions for purchasing goods or services.^[57]^[58] This role positions the cardholder as the primary user in the card scheme ecosystem, relying on the card as a convenient payment instrument accepted by merchants worldwide. Cardholders bear key responsibilities to ensure secure and compliant usage of their cards. They must provide card details—such as the card number, expiration date, and security code—only through trusted and encrypted channels during transactions to prevent fraud.^[59] Additionally, cardholders are required to adhere to the card issuer's terms, including using a personal identification number (PIN) for authentication where mandated, and to immediately report any lost or stolen cards to the issuer to minimize potential unauthorized charges.^[60]^[61] Failure to report a lost card promptly can increase liability, though federal protections apply if notification occurs within specified timeframes, such as two business days in the U.S.^[62] In terms of rights, cardholders benefit from statutory protections that limit their financial exposure and ensure transparency. Under the U.S. Fair Credit Billing Act (FCBA) and implementing Regulation Z, liability for unauthorized credit card use is capped at the lesser of $50 or the amount of unauthorized charges if reported timely, with no liability for charges after notification.^[63] Cardholders also have the right to receive periodic account statements detailing transactions and to initiate disputes for billing errors, such as unauthorized or incorrect charges, within 60 days of statement issuance, prompting issuer investigations.^[64] These rights extend to access to account information and resolution processes, fostering trust in the payment system. As of 2025, over 3 billion Visa payment cards are in circulation worldwide, underscoring the scale of cardholder participation, with card payments accounting for a substantial share of global retail spend—exceeding 50% in developed markets like North America where cash usage accounts for about 14% of consumer payments.^[65]^[66] In practice, a cardholder interacts with the scheme by presenting the physical card at a point-of-sale (POS) terminal for contact, contactless, or chip-based verification, or by entering details for online purchases; the issuer then responds with an authorization decision, typically within seconds, confirming funds availability.^[67] This process highlights the cardholder's direct relationship with the issuer, who manages account funding and risk assessment.^[68]

Merchant

A merchant in a card scheme is defined as a retailer or service provider that contracts with an acquiring bank, either directly or through a payment facilitator, to accept payments using scheme-branded cards such as Visa or Mastercard.^[69]^[70] This contractual relationship enables the merchant to offer card payments as a method for customers to purchase goods or services, distinguishing the merchant as the entity responsible for the point-of-sale interaction.^[71] Merchants bear several key responsibilities to facilitate smooth card transactions. They must install and maintain point-of-sale (POS) terminals or online payment gateways capable of capturing card data securely, supporting features like chip-and-PIN verification, contactless payments, and EMV compliance to ensure transaction authorization.^[72]^[71] Additionally, merchants verify transactions by obtaining online authorizations from the card issuer via the acquirer, validating cardholder details such as PIN or CVV, and retaining records for dispute resolution.^[73]^[71] For chargebacks, merchants are required to respond promptly—typically within 30 days of notification—and handle disputes initiated by cardholders within scheme timelines, such as Visa's 120-day filing window from the transaction date.^[74]^[75] Accepting card payments provides merchants with significant benefits, including expanded customer reach and increased sales volume, as cards offer convenience over cash or checks. As of 2025, card acceptance has become nearly ubiquitous, with over 90% of merchants in major markets like the United States and Canada enabling card payments, driving higher transaction values and customer loyalty.^[76] In exchange, merchants incur a merchant discount rate (MDR), which averages 1.5% to 3% of the transaction value, deducted by the acquirer to cover processing costs.^[77]^[78] In the transaction flow, the merchant captures essential card data—such as the primary account number, expiration date, and transaction amount—through POS devices or digital interfaces, then submits this information to the acquirer for routing to the card network and issuer for approval.^[79]^[80] This submission ensures secure and efficient processing, with the merchant receiving funds net of fees upon settlement.^[81]

Card issuer

A card issuer, also known as an issuing bank, is a financial institution licensed by a card scheme to provide credit, debit, or prepaid cards to consumers and businesses, while managing the underlying accounts and associated credit lines or funds.^[82] These institutions evaluate and approve card applications based on creditworthiness, assign card numbers, and issue physical or virtual cards branded with the scheme's logo, such as Visa or Mastercard.^[83] The primary responsibilities of a card issuer include setting spending limits tailored to the cardholder's profile, processing real-time transaction authorizations by verifying available funds or credit, and managing billing cycles to collect payments from cardholders.^[84] Issuers also handle risk assessment, fraud monitoring, and customer support, bearing the financial liability for approved transactions until settlement.^[85] They earn revenue mainly through interest charges on revolving credit balances and a portion of interchange fees paid by merchants on each transaction, which can represent a significant income stream for large-scale operations.^[86] Major card issuers, such as JPMorgan Chase, which maintains over 149 million cards in circulation in the United States alone, must adhere strictly to the card scheme's operational rules, including mandatory support for security standards like EMV chip technology to enable secure contactless and chip-based payments.^[87]^[88] This compliance ensures interoperability across the scheme's global network and minimizes fraud liability shifts.^[89] In transaction processing, the card issuer receives authorization requests routed through the card scheme's network from the merchant's acquirer, performs instant checks on the cardholder's account status, and responds with an approval or decline decision typically within 1-2 seconds to facilitate seamless payments.^[90] The issuer's role varies by scheme type: in three-party schemes like American Express, a single entity combines issuing and acquiring functions for direct control over the entire process, whereas in four-party schemes like Visa or Mastercard, the issuer operates separately from the acquirer to enable broader participation by multiple financial institutions.^[91]

Acquiring bank

An acquiring bank, also known as a merchant acquirer or acquiring processor, is a financial institution that contracts with merchants to enable them to accept electronic payments via credit, debit, or prepaid cards. This role involves establishing merchant accounts, providing the necessary infrastructure for transaction processing, and ensuring the settlement of funds from card issuers to the merchant. Acquiring banks act as the intermediary between merchants and the card payment networks, facilitating the flow of transaction data and funds in a secure manner. The primary responsibilities of an acquiring bank include integrating point-of-sale (POS) systems and payment gateways for merchants, which allows for seamless capture of card details during transactions. They submit authorization requests to the card scheme operator on behalf of the merchant, routing the transaction details to the card issuer for approval or denial. Additionally, acquiring banks manage risk through fraud monitoring, chargeback handling, and compliance with security standards such as the Payment Card Industry Data Security Standard (PCI DSS). For instance, they deploy tools to detect suspicious patterns in transaction data, reducing potential losses for merchants. In the transaction flow, the acquiring bank routes the merchant's authorization request through the card scheme to the issuer, which approves or declines the payment based on the cardholder's account status. Upon approval, the acquiring bank facilitates clearing and settlement, crediting the merchant's account with the transaction amount minus applicable fees after a short delay, typically one to two business days. As part of this process, the acquiring bank pays the interchange fee to the card issuer to compensate for the credit risk and processing costs involved. Prominent acquiring banks handle enormous transaction volumes; for example, as of 2025, Worldpay processes over $2 trillion annually across global merchants, underscoring their scale in the payments ecosystem. Other major players like FIS and Global Payments similarly manage billions in volume, supporting diverse merchant segments from small retailers to large enterprises. In three-party card schemes, such as those operated by American Express, the acquiring bank role is often combined with the issuer function within the same entity, simplifying the process by eliminating the need for separate intermediaries. This integrated model contrasts with four-party schemes, where distinct acquiring and issuing banks interact via the scheme operator. Acquiring banks may also reference merchant contracts briefly to outline service agreements, but their core focus remains on operational processing and settlement.

Scheme operator

The scheme operator is the organization that owns and operates a card scheme, establishing and enforcing the global rules, standards, and infrastructure for processing payments across networks of issuers, acquirers, merchants, and cardholders.^[4]^[10] For instance, Visa Inc. serves as a prominent scheme operator, managing a vast ecosystem that includes credit, debit, and prepaid card transactions worldwide.^[92] Key responsibilities of the scheme operator include defining operational rules such as transaction limits, routing protocols for authorizations and settlements, and compliance standards for participants.^[93]^[94] They provide the core technical infrastructure for secure messaging and data exchange between parties, while also certifying members like issuers and acquirers to ensure adherence to scheme protocols.^[10]^[92] This certification process verifies that participants meet security, operational, and risk management requirements before integrating into the network.^[95] As a central switchboard, the scheme operator facilitates interoperability by routing transaction requests from acquirers to issuers and vice versa, enabling seamless global payments regardless of the participating financial institutions.^[10]^[96] This role ensures efficient authorization, clearing, and settlement across diverse networks, reducing friction in cross-border and domestic transactions.^[3] Operators generate revenue primarily through assessment fees, typically ranging from 0.1% to 0.15% of transaction volume, which fund network maintenance and operations.^[97]^[98] As of March 2025, major operators like Visa support 3.3 billion cards in circulation, underscoring their scale in the global payments landscape.^[65] In four-party schemes, which dominate modern card payments, operators typically operate as for-profit entities, a shift from their non-profit origins in early bank associations designed to share infrastructure costs among members.^[99] This evolution has allowed operators to invest heavily in technology and expansion while maintaining the foundational goal of standardized, interoperable processing.^[3]

Payment service providers

Payment service providers (PSPs) are third-party entities that facilitate the acceptance of electronic payments for merchants, encompassing payment processors and payment gateways as key components within card schemes.^[100]^[101] These providers act as intermediaries, enabling businesses to process credit and debit card transactions without needing direct connections to financial institutions or scheme networks.^[102] Payment processors handle the backend aspects of transaction management, including batching payments, exchanging clearing data between parties, and settling funds on behalf of merchants and their acquiring banks.^[103] In contrast, payment gateways focus on the frontend for e-commerce, securely encrypting sensitive card data and routing authorization requests to the appropriate card networks.^[104]^[105] Providers such as Stripe and Adyen exemplify this by integrating support for multiple card schemes, including Visa and Mastercard, to streamline operations for merchants.^[103]^[100] PSPs are essential for the majority of online transactions, enabling merchants to accept diverse payment methods while adding value through features like fraud detection and risk management.^[102]^[106] They position themselves between the merchant and the acquirer or scheme operator, processing requests and providing tools for transaction monitoring to mitigate risks such as chargebacks.^[103] This integration with acquiring banks allows for seamless fund transfers, though PSPs remain distinct from the core banking entities.^[100] Unlike scheme operators or direct members, PSPs are not formal participants in card networks but must achieve certification for compliance with standards like the Payment Card Industry Data Security Standard (PCI DSS) to handle cardholder data securely.^[107]^[108] This certification ensures adherence to security protocols across the payment lifecycle.^[108] By aggregating multiple merchants under shared accounts and offering simplified onboarding, PSPs particularly empower smaller businesses to participate in card schemes without establishing individual relationships with acquirers or networks.^[109]^[110]

Transaction processes

Authorization

Authorization in card schemes refers to the real-time process by which a merchant's request to charge a cardholder's account is approved or declined by the issuer, ensuring sufficient funds or credit availability while mitigating fraud risks. When a cardholder presents their card—whether physically, via chip insertion, contactless tap, or online entry—the merchant captures the card details through a point-of-sale terminal or payment gateway. This data is immediately transmitted to the merchant's acquirer, which forwards the authorization request to the card scheme operator using standardized messaging protocols. The scheme then routes the request to the card issuer for validation.^[111]^[112] The issuer performs a rapid risk assessment, verifying account status, available balance or credit limit, transaction history, and potential fraud indicators such as unusual spending patterns or mismatched location data. Authentication methods integrate into this phase to confirm the cardholder's identity: physical transactions may require a personal identification number (PIN) entry or signature verification, while online purchases often employ 3D Secure protocols, which add an extra layer of customer verification via one-time passwords or biometrics. If approved, the issuer reserves the funds and sends an approval code back through the scheme to the acquirer and merchant, typically within less than 2 seconds for the 90th percentile of transactions; declines occur if risks are detected or limits exceeded. This end-to-end process handles the vast majority of card transaction volume in real time, enabling seamless commerce.^[113]^[111] The ISO 8583 messaging standard underpins this communication, defining the structure for authorization messages between acquirers, schemes, and issuers, including data elements like transaction amount, card number, and merchant identifier to ensure interoperability across global networks. For valid, low-risk transactions, approval rates are approximately 97% in card-present scenarios as of 2025, reflecting robust system reliability; however, declines—often due to fraud suspicions or insufficient funds—affect about 3% of attempts in such cases, leading to lost sales and customer friction for merchants.^[112]^[114]^[115] Variations in authorization speed depend on the interaction method: contactless payments, leveraging near-field communication (NFC), complete the process in approximately 300–600 milliseconds, prioritizing convenience for low-value transactions without mandatory PIN entry. In contrast, chip-and-PIN methods take 1-2 seconds for the authorization response, as the chip generates a dynamic cryptogram for enhanced security, though total transaction time may extend slightly longer due to PIN input. These differences optimize user experience while maintaining security, with subsequent clearing and settlement processes handling the batch reconciliation of approved authorizations.^[116]^[117]^[118]

Clearing and settlement

Clearing in card schemes entails the end-of-day batching of transaction data obtained during authorization. Acquiring banks aggregate details from merchants—often submitting batches around midnight—and forward them to the scheme operator, which facilitates the exchange of information with issuing banks to reconcile accounts and compute net positions through multilateral netting, thereby minimizing the volume of interbank transfers required.^[119] This reconciliation phase typically completes within several hours, enabling the processing of vast transaction volumes; global card purchase volumes totaled $36.741 trillion in 2024, with continued growth expected into 2025, netting playing a key role in operational efficiency.^[120]^[119] Settlement follows clearing and involves the actual movement of funds, generally on a T+1 (next business day) timeline. The scheme operator directs transfers from issuing banks to acquiring banks via secure interbank networks, such as Fedwire in the United States, with deductions for fees like interchange; funds are usually available to acquirers by noon the following day, after which they credit merchants within 24 hours.^[119]^[121] The system also manages post-settlement adjustments, including partial refunds via supplemental clearing files. Disputes are addressed through chargeback mechanisms, with cardholders able to file within scheme-specific timeframes of up to 120 days (typically 45–120 days depending on the dispute reason and network rules), after which resolution follows additional issuer and acquirer response periods.^[122]^[75]

Economics

Interchange fees

Interchange fees represent the primary payment made by an acquiring bank to a card issuer for each card transaction processed through a payment scheme, typically ranging from 1% to 3% of the transaction value plus a small flat fee, such as $0.10 to $0.15.^[123] These fees are designed to compensate issuers for costs associated with transaction processing, including credit risk assessment, fraud prevention, customer rewards programs, and operational expenses like authorization and settlement.^[51] By transferring funds directly from the acquirer to the issuer, interchange fees help sustain the issuance of cards and encourage broader participation in the payment ecosystem.^[124] The calculation of interchange fees is determined unilaterally by the card scheme, with rates varying based on factors such as card type, transaction channel, and merchant category. For instance, Visa's rates for rewards credit cards in the United States as of October 2025 include 1.65% plus $0.10 for traditional rewards cards and 2.10% plus $0.10 for Visa Signature Preferred rewards cards in retail card-present transactions, while card-present transactions generally incur lower rates than card-not-present ones due to reduced fraud risk.^[123] Similarly, premium or corporate cards command higher fees to account for enhanced benefits and risks.^[125] These tiered structures ensure that fees align with the perceived value and costs of different card products. A proposed settlement between Visa, Mastercard, and merchants, announced on November 10, 2025, would temporarily reduce average interchange fees by 0.1% and cap rates for standard consumer credit cards at 1.25% for five years, pending court approval.^[126] The core purpose of interchange fees is to incentivize card issuance by providing issuers with a reliable revenue stream, which supports competitive offerings like rewards and low-interest financing to attract cardholders. This revenue model has been pivotal in expanding card adoption, though it also forms a significant portion of the overall costs passed to merchants. Regional regulations, such as the European Union's Interchange Fees Regulation (effective 2015), cap fees at 0.2% for debit and 0.3% for credit transactions, influencing global economics by lowering averages in regulated markets.^[127] Interchange fees were first introduced in the 1960s as credit card networks like Bank of America and others sought to cover the growing expenses of processing plastic-based payments, marking a shift from cash and checks to electronic transactions.^[128] A key historical controversy arose from the schemes' "honor all cards" rules, which required merchants accepting one card from a network to accept all, effectively mandating payment of varying interchange fees without negotiation and amplifying merchant costs.^[129] Unlike other components of payment processing costs, interchange fees are non-negotiable by merchants, as they are fixed by the scheme and automatically applied per transaction; merchants ultimately absorb them indirectly through the merchant discount rate (MDR), which bundles interchange with acquirer markups.^[124] This pass-through mechanism ensures issuers receive the full fee regardless of merchant objections, reinforcing the scheme's economic structure.^[130]

Scheme assessment fees

Scheme assessment fees are charges levied by the card scheme operator, such as Visa or Mastercard, directly on acquirers for facilitating transactions through the network. These fees typically amount to a percentage of the transaction volume, ranging from 0.1% to 0.15%, and are deducted from the acquirer's share of each payment. For instance, Visa's acquirer assessment fee stands at 0.1017% of the transaction amount, while Mastercard applies a similar rate of 0.1017% across its transactions.^[97]^[131] The primary purpose of these fees is to fund the maintenance and development of the scheme's infrastructure, including secure network operations, technological innovations like advanced fraud detection tools, and overall system enhancements to support growing transaction volumes. These rates are established and periodically reviewed through the scheme's governing bylaws, ensuring consistency and alignment with operational needs. By keeping assessment fees significantly lower than interchange fees—which compensate issuers for card usage—the schemes incentivize higher transaction volumes to maximize overall network participation and revenue.^[132]^[133]^[134] As of 2025, these fees generate substantial revenue for major operators; for example, Mastercard reported approximately $10 billion from domestic assessments alone in fiscal year 2024, with cross-border assessments contributing an additional $11 billion or more when annualized from quarterly figures, totaling over $20 billion network-wide. In some cooperative or member-owned schemes, these revenues may be shared or reinvested among participating financial institutions, though in for-profit models like Visa and Mastercard, they primarily support corporate operations. Transparency is maintained through detailed disclosures in annual financial reports, allowing stakeholders to track fee contributions to scheme sustainability.^[133]^[135] Variations in scheme assessment fees occur based on transaction characteristics, particularly for cross-border payments, where rates can exceed 0.5% due to added complexities like currency conversion and regulatory compliance. For example, Mastercard imposes a 0.60% cross-border assessment surcharge on transactions involving cards issued outside the merchant's country when denominated in USD, with similar add-ons for non-USD currencies. These elevated fees account for heightened risks and processing demands in international transfers, often layered atop the base assessment rate.^[131]^[136]

Regulation and standards

Security requirements

Card schemes impose stringent security requirements to safeguard cardholder data throughout the payment ecosystem, primarily through standardized protocols developed and enforced by industry bodies. The Payment Card Industry Data Security Standard (PCI DSS), established in 2004 by major card brands including Visa, Mastercard, American Express, Discover, and JCB, outlines 12 core requirements for organizations handling card data. These requirements, formalized in version 1.1 by 2006 and mandated by the schemes for compliance, focus on building and maintaining secure networks, protecting cardholder data, implementing vulnerability management, ensuring strong access controls, regularly monitoring and testing networks, and maintaining an information security policy.^[41] For instance, Requirement 4 mandates encryption of cardholder data transmission over open networks, while Requirement 7 enforces access controls based on need-to-know principles. Compliance with PCI DSS requires annual audits or self-assessments, depending on transaction volume, with level 1 merchants (over 6 million transactions yearly) undergoing external audits by qualified security assessors. A cornerstone of physical card security is the EMV standard, developed by EMVCo—a consortium founded in 1999 by Europay, Mastercard, and Visa, later joined by American Express, Discover, JCB, and UnionPay. EMV chip technology embeds microprocessors in cards to generate dynamic authentication data for each transaction, significantly reducing counterfeit fraud compared to magnetic stripe cards. Adoption of EMV has led to a 76% reduction in counterfeit fraud losses for fully chip-enabled merchants, as reported by Visa in its Q1 2018 analysis of U.S. data.^[137] Globally, EMV migration has progressed rapidly, with over 95% of card-present payments using chip technology by 2025 and nearly complete adoption across major markets by the early 2020s.^[138]^[139] For digital and card-not-present transactions, schemes mandate advanced protections like tokenization and 3D Secure 2.0. Tokenization, specified under EMV Payment Tokenisation standards managed by EMVCo, replaces the primary account number (PAN) with a unique, non-sensitive token that cannot be reversed to reveal the original data, thereby limiting exposure if data is compromised.^[140] Complementing this, 3D Secure 2.0—also governed by EMVCo—provides frictionless online authentication by sharing transaction risk data between merchants, issuers, and schemes, enabling risk-based decisions without always requiring customer intervention. Implementation of 3D Secure 2.0 has significantly reduced fraud rates on protected transactions compared to non-3DS flows.^[141] Enforcement of these requirements is rigorous, with non-compliance triggering escalating penalties from the schemes. Fines for PCI DSS violations typically range from $5,000 to $100,000 per month, assessed by card brands based on breach severity and duration, while repeated or severe infractions can lead to suspension of processing privileges or outright expulsion from the scheme.^[142]^[143] Schemes like Visa further incentivize adherence through liability shift mechanisms; under the EMV liability shift effective since 2015, merchants not supporting EMV chip transactions bear full liability for counterfeit fraud, shifting responsibility from issuers to non-compliant parties.^[144] This structure ensures widespread adoption, minimizing fraud risks across the payment chain.

Interchange regulations

Interchange regulations impose legal limits on interchange fees charged in card schemes to foster competition, reduce costs for merchants, and prevent anti-competitive practices in payment networks. These rules primarily target four-party schemes, where issuers, acquirers, cardholders, and merchants interact, and focus on capping fees that are passed along the payment chain. By addressing the economic imbalances in card ecosystems, such regulations aim to enhance transparency and efficiency in global payment systems.^[145] In the European Union, the Interchange Fee Regulation (EU) 2015/751, adopted in April 2015 and effective from December 2015, establishes caps on interchange fees for consumer debit and credit card transactions. The regulation limits debit card interchange fees to a maximum of 0.2% of the transaction value, with options for national authorities to impose lower domestic caps or a flat fee equivalent to €0.05. For credit cards, the cap is set at 0.3% of the transaction value. These limits apply specifically to four-party payment card schemes that set explicit multilateral interchange fees, excluding most three-party schemes unless they operate in a four-party model. The regulation seeks to curb excessive fees that inflate merchant costs and hinder cross-border payments.^[145] In the United States, the Durbin Amendment, enacted as Section 1075 of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 and implemented via Federal Reserve Regulation II in 2011, originally regulated debit card interchange fees for large financial institutions by capping them at $0.21 plus 0.05% of the transaction value, with an additional one-cent adjustment available for issuers demonstrating effective fraud prevention. This applied to both PIN and signature debit transactions in covered networks, exempting smaller issuers and certain single-entity networks, and addressed concerns over high fees disproportionately burdening merchants and consumers. However, in August 2025, a U.S. District Court vacated Regulation II's interchange fee standards, eliminating the cap on debit fees for large issuers effective immediately.^[146] Antitrust enforcement has also shaped interchange regulations by challenging restrictive rules in card schemes that limit merchant options and competition. In 2010, the U.S. Department of Justice filed a civil antitrust lawsuit against Visa, Mastercard, and American Express, alleging that their "no-surcharge" and "no-discounting" rules violated Section 1 of the Sherman Act by prohibiting merchants from informing customers about lower-cost payment alternatives or adding surcharges to card transactions. The case resulted in consent decrees that eliminated these rules, allowing merchants to surcharge up to the cost of acceptance and steer customers toward cheaper methods, thereby promoting competition in the payments market. Ongoing private antitrust litigation, including multidistrict cases against Visa and Mastercard, continues to address similar issues related to fee-setting and network restrictions. Globally, similar regulatory measures have been adopted to control interchange fees and encourage domestic innovation. In Australia, the Reserve Bank of Australia implemented reforms in 2003, including a standard that capped average credit card interchange fees at around 0.50% of transaction value and required transparency in fee structures, while also mandating zero fees for domestic EFTPOS debit transactions to favor lower-cost options. In India, the government and Reserve Bank of India promote the RuPay scheme, launched in 2012 by the National Payments Corporation of India, mandating its use for certain government payments and direct benefit transfers to bolster domestic payment infrastructure and reduce reliance on international networks. These international efforts, alongside those in the EU and U.S., cover substantial global card transaction volumes and are designed to significantly lower merchant processing costs through fee reductions and competitive reforms.

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Sep 9, 2024 · Average Credit card interchange fee in the U.S.: 1.97% (Visa) and 1.79% (Mastercard) · Average Credit card interchange fee in Canada: 1.58% (Visa) ...
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[PDF] The Evolution of Interchange Fees
Jan 25, 2010 · Interchange fees began in the 1960s for banks to cover credit card processing costs. In 2007, US consumers held over 694 million credit cards.
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The Role of Interchange Fees on Debit and Credit Card ...
For example, merchants historically have been held to "honor-all-cards" rules, which state that a merchant who accepts, for example, one type of Visa ...
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What are interchange fees & who gets them? - TrueLayer
Dec 15, 2022 · This is also known as the merchant service charge (MSC) or merchant discount rate (MDR). ... Interchange fees are non-negotiable by merchants.
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Credit Card Assessment Fees: A Quick Merchant Guide
Rating 4.7 (1,042) Credit and Debit Assessment Fees (For transactions under $1,000). $0.0195 per MasterCard transaction + 0.1275% of the transaction amount ; Credit and Debit ...Missing: scheme | Show results with:scheme
[125]
Credit Card Processing Fees & Interchange Rates - Visa
Visa uses interchange reimbursement fees as transfer fees between acquiring banks and issuing banks for each Visa card transaction.
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Mastercard Revenues: How Does MA Make Money? - Trefis
Mastercard's Revenues have seen a significant increase of 26.7% from around $22 Bil in FY2022 to $28 Bil in FY2024 · We expect it to increase to $33 Bil in ...
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What are Card Scheme Fees: Everything you Need to Know
Nov 11, 2024 · Card scheme fees are charges set by card networks such as Visa, Mastercard, and American Express. These fees are applied to every card transaction.
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Mastercard Q2 Proves It's In A League Of Its Own (NYSE:MA)
Aug 1, 2025 · Mastercard's Q2 2025 Financials ... Mastercard's revenue for the quarter came in at $8.1 billion, beating market estimates of $7.98 billion by ...
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What Is a Cross-Border Assessment Fee? - Rapyd
Jul 3, 2025 · Cross-border assessment fees cover the additional risks, regulatory complexities and processing costs involved in international transactions.
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Why EMV chip cards are replacing magnetic stripes - Worldpay
In 2018 Visa reported that businesses who implemented chip card technology saw a remarkable 80 percent drop in counterfeit fraud dollars in the three years ...
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Worldwide EMV® Deployment Statistics - EMVCo
The statistics below show worldwide EMV Chip Card deployment figures as of Q4 2022, 2023, and 2024. The figures represent the latest statistics.
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EMV Tokenization in 2025:The Complete Guide - IntelliPay
May 12, 2025 · According to the EMVCo 2025 Global Adoption Report, EMV technology has reached unprecedented adoption levels, with over 95% of worldwide ...Missing: 2020s | Show results with:2020s
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EMV® Payment Tokenisation - EMVCo
EMV Payment Tokenisation enhances security by replacing primary account numbers (PANs) with unique, limited-use tokens, protecting payment data.
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EMV® 3-D Secure | EMVCo
### Summary of EMV® 3-D Secure 2.0 and Fraud Reduction Statistics
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3D Secure Payment Authentication Market Size, Share & Trends
Visa Secure (3D Secure 2.0) reported $14.1 billion in total payment volume in FY2023, with fraud rates on Visa Secure transactions being 70% lower than non-3DS ...Missing: 0.1%
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PCI DSS Failure to Comply and Fines | ISMS.online
These fines can range from $5,000 to $100,000 per month, depending on the severity and duration of the non-compliance. It's important for you to recognise that ...
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[PDF] Payment Card Industry standards: Compliance burden or opportunity?
Companies that fail to comply by the deadlines face substantial fines and penalties as well as potential expulsion from payment card programs. Beyond the ...
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What is EMV Liability Shift & Has It Helped With ... - Chargeback.io
Nov 20, 2024 · The EMV liability shift makes merchants liable for fraud if they don't provide certain secure payment methods. Here's how it may impact you.What Are Emv Chips & How Do... · How Effective Is Emv In... · Other Fraud Prevention...
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L_2015123EN.01000101.xml
### Summary of Interchange Fee Caps and Applicability to Four-Party Schemes