Explaining the Payment Networks

As you can see in the payment landscape, the payment networks play an important role in the industry, connecting all the financial institutions (either be the card issuer or the merchant acquirer) and the payment processors/gateways.  Most check transactions go through the ACH (maintained by NACHA) while most creditcard/debitcard/chargecard transactions go through the Visa, Mastercard, Amex or Discover in the US.

While Visa, Mastercard, Amex and Discover have their networks operating in several countries, there are some local networks that are dominant. For example, JCB is a popular network in Japan while China Union Pay has an exclusive network operating in China.

Visa and Mastercard networks facilitate a 4-party model. Visa and Mastercard DO NOT issue credit to the consumers. The financial institutions issue the credit and take the associated gains/risks. Visa and Mastercard generally get their revenue through “brand related fees” and “transaction fees”.  They do not make any money on credits or debits. The revenue/gains/risks on the credits/debits are shared between the issuing bank and the acquiring bank. They also provide additional value added services (such as fraud detection and cross border fee)  and charge a premium to the issuing bank and the acquiring banks.

In the case of Amex and Discover, they act as the issuing and the acquiring bank and have direct relationships with the customers and merchants. As a result, their revenue per transaction is high compared to Visa and Mastercard. (Off late, they have also started working with other FIs who act as the issuing bank and just provide the network services – as in the 4 party model. )

3-Party Model


The typical unit of measurement  that represents the size of these payment networks is the total number of cards issued, total number of transactions handled and the total payment value (TPV).

The following graph indicates the size of each of the major payment networks (global) as of 2009. (Source: 2011 Visa Annual Report)

Payment Networks Comparison


The revenues of these companies give a different picture (as explained in the 4-party model vs. 3-party model).  These were the revenues of these companies in 2011.  Note that these revenues may not be apples to apples comparison as Amex and DFS revenues consist of other components, but this indicates the relative sizes of the top payment gateway companies.

2011 Revenues

2011 Revenues


Another difference between these payment gateways is the payment instruments these networks support. Visa, Mastercard and Discover support debit cards but Amex does not. We will talk about these in the later posts and the related implications due to the recent Durbin amendment.

Original author: phanee