Since banks handle and process payments for credit and debit cards, what do Visa and MasterCard actually do?
In: Economics
Visa and Mastercard are networks. The banks are issuers.
Sure, the banks handle most of the parts you think of when you complete a card transaction. They are the ones who handle actually paying the merchants on your behalf, and of course, keep track of your account balance and set interest rates and credit limits.
The networks take care of the things most people don’t think about. Fraud prevention/detection, physical card standards (eg. new chip cards vs mag swipe). They also take care of the secondary benefits that a card offers such as travel coverage and rented car insurance.
Networks, on the other hand, are kind of like your ISP. When you visit a website, you’re communicating directly with that website’s servers. From the outside, it seems like your isp doesn’t do much, and that most of the work is being done when visiting a website is done by the website itself. The ISP at first glance just hooks the two together. However, on the backend of things its a pretty big undertaking to direct your internet traffic to the right server then back again in milliseconds the moment you ask for it. There are billions of devices to connect.
The credit card networks do the same thing, connect banks to the merchants. It would be a huge task for every merchant to connect with all the possible banks of the world. Inevitably, some of those banks will be lax on security and have poor reliability. Big merchants may refuse to work with smaller credit union type banks, while large banks may refuse to work with small merchants. Networks take care of these problems by offering one point of contact to both the small networks and the big banks. Small merchants don’t need to spend millions to satisfy the banks that the cardholder data being sent to them is reliable and secure as the networks spend billions of dollars doing just that.
The network-issuer system is easier and cheaper for everyone involved. It would get messy pretty fast without the networks.
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