What is a credit card network and how do they work?

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In a Nutshell

A credit card network makes using your credit card possible. Some credit card networks process transactions directly, or will work with card issuers so that your transactions can be completed. The four major credit card networks in the U.S. are Visa, Mastercard, Discover and American Express.

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If you’ve ever wondered how your credit card works, understanding the concept of a credit card network and how it works is the first step.

When you look at your credit card, you might wonder why there are so many company names on it. Your card might be issued by Chase, be branded by Marriott, and process transactions through the Visa credit card network. So it’s easy to see why it can be difficult to understand how a credit card works.

A credit card network functions in different ways, depending on how it’s set up. If the credit card network is both the network and the card issuer, the network will both process and approve purchase requests. This is how it works for American Express and Discover cards.

If the credit card network is different from the card issuer, the credit card network acts as an intermediary that connects the merchant with the financial institution that issued the card to process and approve credit card transactions. Visa and Mastercard work as intermediaries.

The four major credit card networks are American Express, Discover, Mastercard and Visa.


How do credit card networks work?

When you use your credit card to buy something, many things happen behind the scenes. First, the merchant processes your credit card by having you insert the credit card chip (also known as an EMV) or swipe the card in the point-of-sale machine. This is when the merchant’s credit card terminal talks to the credit card network to see if the transaction can be approved.

If your credit card has an issuing bank separate from the credit card network, the credit card network then talks to the issuing bank to determine whether to approve or deny the transaction. And then the credit card network notifies the merchant if your purchase was approved or denied.

So imagine you’re paying with a Wells Fargo Cash Wise Visa® Card at your local grocery store. In this case, the players would be …

  • Card issuer: Wells Fargo
  • Card network: Visa
  • Merchant: Grocery store

The grocery store’s credit card machine contacts Visa, which then talks to Wells Fargo. Wells Fargo approves or denies the charge, and then Visa lets the merchant know the decision.

Visual showing the process a consumer's purchase goes through, from consumer to merchant, credit card network, credit card issuer, and back to merchant.

It’s important to note that merchants that accept credit cards don’t have to accept credit cards from all networks — which is why a store sometimes won’t take your American Express or Mastercard.

Make sure you understand which credit card networks a store accepts before checking out. You might see signs near the entrance of the store, near the store’s checkout area or on a gas pump stating which credit card networks are accepted.

This is especially important if you have only a single credit card with one credit card network as your only form of payment. Otherwise, you may find out you don’t have a way to pay for your purchase if the store doesn’t accept cards from that credit card network.

What’s the difference between a credit card issuer and a credit card network?

A credit card issuer is the financial institution that gives you a credit card. When you swipe your card to buy something from a merchant, the card issuer decides whether to lend you the money to buy something. If the issuer lets the charge go through, eventually you repay the issuer for the money you borrowed — with interest — to make your purchase.

A credit card network is the company that provides a communication system between a merchant and an issuer in order to complete a credit card transaction. And remember, some credit card networks are also issuers, but not all credit card networks issue credit.

For example …

  • Discover and American Express are issuers and networks
  • Mastercard and Visa are only credit card networks
  • Capital One and Wells Fargo are only credit card issuers

That means you can have a Capital One card that’s also a Visa card. But you won’t see a card that’s only a Visa card. Visa and Mastercard work with banks and other companies to issue credit cards.

American Express, on the other hand, is both an issuer and a network, so you’ll see some cards that have only American Express on them in terms of branding. Interestingly, sometimes American Express will agree to be the network for a card, but not the issuer. For example, the USAA® Cashback Rewards Plus American Express® Card is issued by USAA and works on the American Express network.

FAST FACTS

Which are the largest credit card issuers by volume?

According to The Nilson Report, the top eight issuers of general-purpose credit cards accounted for $3.02 trillion in purchase volume in 2018. Here’s how that total breaks down among the top eight issuers.

  • American Express ($754.92 billion)
  • Chase ($739.48 billion)
  • Citibank ($410.43 billion)
  • Bank of America ($360.73 billion)
  • Capital One ($336.91 billion)
  • U.S. Bank ($145.69 billion)
  • Discover ($139.03 billion)
  • Wells Fargo ($134.06 billion)

What’s the difference between an open network and a closed network?

Things get even more confusing when you dig into the details of how credit card networks operate. There are two major types of credit card networks to keep track of: open and closed.

Remember how we mentioned that Visa and Mastercard work with issuers to issue credit cards? These types of networks are called open networks, because they allow many financial companies to participate.

In a closed network, the credit card network also acts as the acquirer. An acquirer is the bank that pays the merchant the amount of the credit card transaction less any applicable fees. American Express and Discover are examples of closed networks.

American Express’ and Discover’s closed networks are large and are accepted fairly widely in the United States. But some closed networks are extremely small.

In fact, some store-issued credit cards operate on closed networks that allow you to make purchases only from the company that issued the card. Common examples include big box-store credit cards like the My Best Buy Credit Card and the JCPenney Credit Card.


Bottom line

Now you know what a credit card network is, how it works and how it differs from a credit card issuer. You can use that information to help you choose your next credit card. Think about where you regularly shop. And before you choose a card, make sure that your local stores will accept it. Also, it’s a good idea to have cards from different networks. That way, you’re more likely to be able to pay anywhere you go.