What is a Card Scheme and how do they work?

A card scheme is a central payment network that uses credit and debit cards to process payments. Its primary role is to manage payment transactions, including operations and clearing. Transactions are managed according to a set of procedures, rules, and arrangements that allow cardholders to use their cards with third parties (e.g., retailers and service providers). 

Visa and MasterCard, two of the largest global brands, offer credit and debit cards that have become synonymous with a payment type that is accepted around the world; these two huge brands are known as card schemes. In 2018, consumers around the world spent USD$ 368.92 billion on transactions for goods and services using their Visa, Mastercard, American Express, and UnionPay cards, these are just some examples of card schemes, also known as "card brands."

Even though hundreds of millions of consumers use these schemes, there is no direct relation between the card scheme and consumers. This is due to the fact that there are different players involved in any given credit card transaction - not just the consumer and the card scheme. This is all the more evident in online, cross-border transactions, as you can see in the Payment Processing flow.

Banks and other official financial institutions apply for membership to the scheme and then issue the scheme’s credit or debit cards directly to consumers, acquiring money from transactions. For example, a bank may apply to be a member of a Visa scheme and then issue Visa debit or credit cards directly to the bank’s customers.

The card scheme uses its rules to transfer the card transaction information from the acquiring bank to the issuing bank (from the merchant to the consumer). It then passes the payment back to the acquirer to confirm the payment.

Credit and debit card schemes work with four parties. Together, these four parties make up an open-loop system that allows consumers to seamlessly purchase items or services from merchants by letting the banks do all the work on their behalf.

The cardholder:

Is the buyer. They hold the debit or credit card offered by their bank.

The card issuer:

It provides debit or credit cards from the card scheme to its qualifying customers. Issuers are banks (and other qualifying institutions). Even when the card is branded (such as an airline loyalty card), there is a bank or financial institution backing the card.

The merchant:

Is a retailer or a business that sells goods or services to the cardholder.

The acquirer:

Is the institution that provides a merchant service agreement to the merchant and processes the card transactions on their behalf. 

Although these are the four primary players, there are also intermediaries that facilitate the transaction, including the payment gateway and the payment processor.

The job of card schemes is to make the transaction as simple as possible for all four players in the loop. When a transaction is effortless, customers spend more: all four players win.

When a merchant wants to expand their business internationally by taking local payment methods, they need to have partners within the open payment loop, like the acquirer and payment processor, to accept those payments. 

These players (scheme, acquirer, issuer) can be international or local only, so by hiring a local partner, you can reach a larger range of customers.

These partnerships open up emerging markets like Latin America, where payment methods tend to reflect a national network, but don’t translate well in other markets. A payment processor not only offers a common payment method but also connects local and international open loop parties, including the card scheme, on behalf of both the merchant and consumer. This can help companies to expand their business and start to sell online to Latin Americans.

Card scheme fees are the fees paid by acquirers to be members of the scheme. Acquiring banks then pass the fees they pay on to the merchants (through credit card merchant fees), which each merchant pays either in each transaction or as a bundled charge.

While many of the average credit card processing fees are published, card scheme fees go unregulated and, thus, are not publicly disclosed. No one outside the card scheme knows the true figure.

Learn more about Acquiring vs. Issuing Banks

What does the fee include?

A card scheme fee may include any number of charges including either variable fees per transaction or fixed fees unrelated to the transaction. Variable fees change according to the card type, acceptance method, and geographic location. Fixed fees may depend on the card scheme services used and the volume processed.

Roughly, card scheme fees make up a fraction of a percent of each transaction value (an estimated 0.02% for Visa and 0.04% for MasterCard).

The card scheme fee is separate from the interchange fee. An interchange fee is a transaction fee paid by the acquiring bank account (the merchant’s account) to the issuer whenever customers use a card to pay for a transaction. An interchange fee includes a handling fee and as many as 300 other individual charges, usually changing once a year.