Credit card networks: What are they & how do they work?

When you use your credit card or a digital wallet to make a purchase, a credit card network goes to work behind the scenes. In seconds, it connects your card issuer and the merchant’s bank to process the transaction.

Here’s some helpful information about credit card networks and how they work during transactions.

What you’ll learn:

• Credit card networks help facilitate credit card payments between merchants and card issuers.

• The four major U.S. credit card networks are American Express®, Mastercard®, Visa® and Discover®, which Capital One acquired recently.

• Credit card networks have a hand in processing fees, fraud protections and card benefits.

• Open networks work with third-party financial institutions to issue cards, while closed networks issue their own cards.

Credit card networks build and maintain the technology that sends transaction information between merchants’ banks and credit card issuers to help authorize and process credit card payments. For example, the network checks with the issuing bank to make sure the cardholder has enough available credit to approve the purchase.

The four major credit card networks in the U.S. are:

• American Express
• Discover
• Mastercard
• Visa

The credit card network logo can usually be found on the front or back of a credit card. Many merchants and websites will clearly label the networks they accept. So if you see the same logo, you should be good to use your card.

Credit card issuers are financial institutions that supply credit cards. Credit card networks run the technology that processes card payments—among other functions. In other words, the credit card issuer is the one you’ll be paying back for your purchases. For example, Capital One is a credit card issuer that works with the networks Mastercard, Visa and Discover.

Yes, it’s possible for a credit card issuer to also be a credit card network. Although credit card issuers and networks are usually separate entities, there are two exceptions: American Express and Discover. These credit card networks also issue credit cards.

Networks that also issue cards act as the acquirer, which means they process the transactions and also pay the merchant what’s owed for each transaction, minus any fees.

Generally speaking, there are two major types of credit card networks:

• Open networks: These credit card networks rely on third-party financial institutions, such as banks, to issue and distribute cards to customers. Examples of open credit card networks include Visa and Mastercard. Open networks are also known as four-party networks because there are four parties involved in a transaction: the cardholder, the merchant, the cardholder’s bank and the merchant’s bank.

• Closed networks: These credit card networks act as the card-processing network and the card issuer. Closed networks process payments on behalf of merchants and generally don’t allow third-party institutions to issue their credit cards. Examples include American Express and Discover. Closed networks are also called three-party networks because there are three parties involved in a transaction: the cardholder, the merchant and the network.

Here are the three main steps during a transaction that involve the credit card network:

1. It receives transaction information. After you initiate a payment with your credit card, the payment system sends the transaction data through the credit card processor to the merchant’s bank, or acquiring bank. The acquiring bank sends the data to the credit card network. 

2. It sends the request to the issuer. The credit card network then sends transaction information to the credit card issuer, which checks that the account is valid and has enough available credit.

3. It confirms authorization. The network communicates to the credit card processor whether the issuer approved or declined the transaction.

To better understand how credit card payment networks work, it may help to look at an example transaction.

Let’s say you’re filling up your car at the gas station. Here’s how a credit card network makes the purchase happen:

1. Using a card or digital wallet, you tap, swipe or insert a credit card at the gas pump or inside the store at the register. 

2. The gas station’s point-of-sale (POS) system reads your card information and sends it to the gas station’s bank to request a charge.

3. The acquiring bank sends the request to the credit card network.

4. The credit card network contacts the card issuer to authorize and approve the transaction.

5. If the card issuer approves, the credit card network gives the go-ahead to the acquiring bank and charges a processing fee.

6. The acquiring bank sends the authorization to the payment processor and, finally, the gas station’s POS system to complete the transaction.

Credit card networks work with credit card issuers and merchant banks to process cardholder transactions quickly and securely. It helps to know which credit card network is linked to your card—just check the logo on the front or back. And keep in mind that it may be a good idea to have cards from different networks so you’re more likely to be able to pay with a card anywhere you go. 

In the market for a new credit card? You could compare Capital One credit cards and see if you’ll be approved, with no impact on your credit scores.