Many people today use free Credit Cards for shopping, bill payments, hotel bookings or more. If you look closely at your card, you will see Visa, MasterCard or American Express printed on it.
But have you ever wondered what these names actually mean? Understanding how these networks work can help you better understand how your card transactions happen every time you make a payment.
Table of Contents
What are Credit Card networks and their types?
Credit Card networks are electronic payment systems that provide an environment for card-related transactions to take place. These networks act like the communication highway for transaction-related messages to pass between the necessary parties.
There are two mainly types of networks which cards use for transactions:
Open networks (Visa, MasterCard)
Open networks are used by companies like Visa and Mastercard. These companies do not provide their own free Credit Cards or regular cards and rely on banks and NBFCs to do so. The banks and NBFCs work with them to enable transactions.
Closed networks (American Express, Diners Club)
Closed networks are used by companies like American Express and Diners Club. These companies provide their own cards and initiate transactions between the vendor and the customer.
How does a Credit Card network function: A detailed look
Initiation of payment
You will need to first apply for a Credit Card as a first-time owner and activate it before you make a payment. Once you have activated your card, you can use it to purchase your preferred items or pay your bills.
Authorisation
When you initiate that request, the merchant sends the request to the payment processor for authorisation. Simply put, the merchant is the website or application you are making a payment at, and the processor is the payment gateway.
This network first verifies whether the free credit card has enough available credit. It then sends a message back to the processor. If there is enough credit, the transaction is approved with a code. If not, the payment is declined.
Authentication
During this stage, the cardholder’s identity is verified by the merchant, even if the bank has proven the account’s validity. This verification is done through address verification, validation of the CVV and geo-location.
Batching
The merchant combines several transactions into one single batch or report and sends it to the processor for additional processing. Some merchants may do this monthly or daily, depending on their needs.
Clearing
During this stage, the processor receives the batch from the merchant and sends it ahead to the card network. The card network handles the routing of the transaction and sends the batch to the cardholder’s bank.
Once the bank receives the transaction details, it processes the payment and deducts the amount from the cardholder’s available credit limit. The bank may also apply applicable transaction or processing fees as per its terms.
Settlement
This stage sees the merchant company’s bank, or the acquiring bank receive payment from the cardholder’s or originating bank.
Billing
As part of the billing stage, the bank or card issuer creates a billing statement. It contains all the applicable transactions, charges, fees, interest, total and minimum account due. You can then choose to pay either the total or the minimum amount due, as per your convenience.
Conclusion
In simple terms, Credit Card networks like Visa, Mastercard, and American Express act as the highways that connect merchants, banks, and cardholders, making payments possible. Understanding how these networks work helps you see how your free Credit Cards function behind the scenes, giving you more confidence in using them for everyday purchases.
