Card Network: The POWERHOUSE of Payment Ecosystem
We are all well-familiar with the names of Visa, MasterCard, or RuPay, as they often take up our wallet space. But do we really know what they mean? What do they stand for? And how did they come into existence? Well, that’s what we have taken it upon ourselves to uncover.
If we put it in simple terms, a Card network is the central connection between banks and payments. Anything that happens in the payment ecosystem must be powered by a card network. And what if we tell you that the origin of card networks has close ties to the origin of credit cards?
It is common knowledge that credit cards started with Frank McNamara, and as a Domino effect, many credit card players came into existence. So, like any banking boom, this domino effect also created a need for a regulatory and enabling infrastructure to facilitate the smoother distribution of credit cards.
Before we understand the principal dynamics of how a card network works and what role it plays, let’s see about the different card networks in existence.
The Origin of Card Networks
Visa
First and foremost, Visa Inc. is the predominant open card network available across continents. It is also the preferred card network for many banks and financial institutions worldwide, as it has many advantages such as Visa Direct, Dispute management, and other perks like concierge services, hotel discounts, rental car privileges, etc. Currently, Visa is spread around 200 countries worldwide. It covers everything from security to data products, fraud management, consulting, analytics, etc.
Timeline Of Visa
· 1958: Bank of America (BofA) launched the first consumer credit card program, BankAmericard, the first revolving credit card.
· 1966: BofA begins to license the BankAmericard program to other financial institutions in the US and abroad to compete with Master Charge (now Mastercard).
· 1968: Dee Hock, manager at the National Bank of Commerce, an important person in Visa’s history, entered the picture. He supervised the bank’s launch of a licensed version of BankAmericard in the Pacific Northwest. Dee Hock observed loopholes in the BankAmericard licensee program and pushed to address those loopholes.
· 1970: BofA gave up control of the BankAmericard program. It formed a cooperative with other issuer banks called National BankAmericard Inc (NBI).
· 1973: NBI launches the precursor version of Visa Net. The protocol allowed the e-transfer of payments between cardholders and merchants.
· 1974: To oversee the global BankAmericard program, the International Bankcard Company (IBANCO), a multinational member corporation, was established.
· 1975: The First debit card was launched.
· 1976: Birth of Visa. Subsequently, Hock created the name “Visa” as a coalition of international companies. He believed that the name was easy to say, recognizable in any language, and signified international acceptance.
Mastercard
Mastercard is the next one on our list, and like its competitor, Visa, it is also an open card network. MasterCard boasts many benefits and has built-in features such as protection against identity theft, lounge access, extended warranties, Masterpass, etc. For more than five decades, Mastercard has made payments smart, accessible, and safer!
Timeline of MasterCard:
- 1940: In the late 1940s, Mastercard had its origin in the US. It issued paper-like material to its customers, which could be used as currency in local stores.
- 1966: The Interbank Card Association (ICA) [regional banking association] was formed, which later became MasterCard International. ICA was run by member committees. It established its own set of rules and regulations. It handled every aspect of the cards, from authorization to security, single-handedly.
- 1968: ICA laid the foundation for its global reach by collaborating with Banco Nacional in Mexico. It further expanded its network by joining hands with Eurocard of Europe.
- 1970: In the late 1970s, Interbank had its membership with Africa, Japan, and Australia.
- 1979: Birth of MasterCard. The name evolution happened; ICA became “MasterCard International”.
American Express
American Express aka Amex is a closed card network where customers can directly apply to Amex for a credit card. It provides benefits to their cardholders like travel insurance, dining and airport lounge access, entertainment, purchase protection, etc. Amex is now making progress with its cutting-edge financial services and solutions. From mail business to financial business, Amex has come a long way, and the chronicle of Amex is spellbound!
Timeline of American Express:
- 1850: American Express was founded as an express mail company by Henry Wells, William G. Fargo, and John Butterfield through the merger of three regional firms.
- 1878: American Express introduced tailored financial products to their business.
- 1891: Introduced the Traveler's cheque for customers traveling abroad.
- 1915: Entered the travel business and offered travel services, sold tickets, and helped customers in planning their trips.
- 1918: Due to World War 1, American Express retained only their travel and financial businesses and exited from the express mail business.
- 1958: Launched the first Charge Card to add flexibility of credit to customers owning travelers’ cheques.
- 1966: Launched the Corporate Card and offered it to commercial customers.
Discover
Like Amex, Discover is also a closed network. More than a card network, it also operates Discover Bank (not operated worldwide). Discover also offers benefits like car collision insurance for second-hand cars and many more. Currently, Discover is used by over 300 million cardholders. The origin of the trailblazer of commerce solution is fascinating!
Timeline of Discover:
- 1981: Sears purchased a real estate franchise to add financial services to its customer service portfolio.
- 1985: Sears acquired the Greenwood Trust Company (currently known as Discover Bank).
- 1986: Discover Financial Services was founded, and Discover Card was launched. The card was launched with a zero annual fee and provided a higher credit limit than normal.
Rupay
Rupay was born as a result of the RBI’s (Reserve Bank of India) objective of a “Less cash economy”. It is our native payment card network. Compared to Visa and MasterCard, Rupay debit cards have a higher incursion rate in India. It also facilitates e-payment across all banks and financial organizations at the domestic level.
Rupay also offers various deals in the travel, shopping, and retail domains. Currently, it is popularly used by tech-savvy payment products and services and has an enormous reach in Tier-2 and Tier-3 cities. And the notable point is, only Rupay credit cards can be linked to the UPI (Unified Payments Interface) payment system.
Timeline of Rupay:
- 2012: RuPay was launched by the National Payments Corporation of India (NPCI).
- 2014: Rupay’s financial and payment services system became operational.
Moving on to what card networks do?
Card networks authorize, process, and set the terms for card transactions. It acts as the technical backbone of cards and the payment ecosystem. In short, Card networks superintend all aspects of card usage;
· Provides communication between issuing banks and acquiring banks to facilitate card transactions.
· It maps and routes payments.
· Connect issuers with payment processors, payment gateways, and acquirers.
· Formulate and impose protocols for activity conducted on their networks, which banks must abide by.
· Determines where a cardholder’s card can be accepted.
· Expedite different forms of card transactions:
Ø Swipe/dip/tap of a physical card,
Ø Paying through virtual cards on a mobile device
Ø Online transactions via e-commerce websites
Open and Closed network
The two types of card networks to keep track of are Open and Closed networks. Both types of approach card issuance in different ways.
Open Network:
Open card networks allow banks/financial institutions to issue their cards to customers. The major open card networks are:
· Visa
· MasterCard
Closed Network:
In a closed network, the Card network is the card issuer. The card network plays the role of acquirer and credits the amount directly to the merchant’s bank, excluding the transaction fee. The major closed card networks are:
· Discover
· American Express
Know the facts:
While making an online payment, you would have entered your card number. Within a few seconds of entering the first few digits, the payment app must have auto-recognized your card network, and in the corner, it would have displayed whether it is a
Visa/Mastercard/Amex/Discover/Rupay.
Apart from this, when looking at the full bank card number,
- 1st digit identifies the card issuer’s industry.
Meanwhile the
- 1st six digits — identify the institution that issued the card.
- The remaining 16 or 15 (in some cases) digits- identify the cardholder’s account number.
Conclusion
While all this has been said and done, we still haven’t explored the intricate workings of how card networks communicate with bankers, end customers, and merchants in facilitating the transaction. But that is a topic for another day.
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