MasterCard and Visa are among the most popular payment gateways in the country. While these two companies don’t extend or issue any cards, they do partner with banks to offer products including credit, debit, and prepaid card options.
So, how do they work?
Both of these have similar functioning and work as ATM cards.
The key players involved in authorisation and settlement are the cardholder, the merchant (business), the acquiring bank (the business’s bank), the issuing bank (the cardholder’s bank), and the card associations (MasterCard and Visa.)
While using these cards, customers first pay with either of them and the payment is authenticated. The merchant point-of-sale system captures the customer’s account information and securely sends it to the acquirer.
After the transaction is completed, the merchant acquirer asks card associations (Mastercard and Visa) to get an authorisation from the customer’s issuing bank.
The issuing bank authorises the transaction and routes the response back to the merchant. The issuing bank routes the payment to the merchant’s acquirer who deposits the payment into the merchant’s account.
They generate revenue by offering a wide range of services, which include authorization, clearing and settlement services for financial institutions and merchants.
Every time, a customer uses cards of these companies, the data is sent to the company’s server, which is located overseas for processing and verification.
The banks that issue a MasterCard or a Visa card are obliged to pay a fee every quarter for joining these foreign payment networks.
And, how do they make money?
According to Adhil Shetty, CEO, BankBazaar, every transaction carries something called the “interchange fee”.
“This amount is a small percentage of the transaction and is paid by the merchant. This can range from 0.5–3.5 percent per transaction and is locked into the agreement from the start. This fee is shared with the acquiring bank, the issuing bank and any agencies or organizations that facilitated the transaction,” Shetty explains.
The card network – be it Visa or MasterCard – gets a part of this fee for every transaction.
“This is the primary source of their revenue,” Shetty says.
In addition, they derive annual licensing fees from banks and other card issuers for use of their name, logo, and brand.
Also, they provide their certification for all software and hardware that is involved in the transaction process. Such certification for software and hardware is mandatory before it can be inserted into the transaction infrastructure.