What Is MasterCard?
The MasterCard business is responsible for one of the four largest payment networks in the global payments industry. MasterCard partners with institutions all over the world to offer MasterCard branded network payment cards.
MasterCard payment cards exclusively use the MasterCard network for processing all transaction communications. Payment cards may be credit, debit, or prepaid cards.
- MasterCard is a payment network processor.
- MasterCard partners with institutions to issue MasterCard payment cards that are processed exclusively on the MasterCard network.
- MasterCard’s primary source of revenue comes from the fees it charges issuer based on each card’s gross dollar volume.
MasterCard itself is a financial services business that primarily generates revenue from gross dollar volume (GDV) fees. MasterCard cards are often issued with the MasterCard logo. Closed-loop, retail store cards usually don’t include the logo. Open-loop cards that are accepted anywhere often carry the MasterCard logo to help identify their eligibility for use.
Across the payments industry, there are four major payment card processors. These four card processors are MasterCard, Visa, American Express, and Discover. Each company operates a payments network and partners with a variety of institutions for card offerings.
All electronic payment cards have cardholder numbers that begin with an issuer identification number (IIN) distinguishing the network processor for electronic payments. The IIN can help to identify the card brand if a logo is not visible.
The MasterCard Business
In 2019, MasterCard reported $6.5 trillion worth of gross dollar volume, which shows the amount of money comprehensively transacted on all of its card offerings. The company partners with a variety of institutions to offer several types of cards. Comprehensively, its card offerings span across credit, debit, and prepaid cards. The majority of MasterCard’s business is through partnerships with financial institutions and retailers to offer both open-loop and closed-loop options.
MasterCard does not have a banking division, as discussed in its 2019 10-K filing:
We do not issue cards, extend credit, determine or receive revenue from interest rates or other fees charged to account holders by issuers, or establish the rates charged by acquirers in connection with merchants’ acceptance of our products.
Co-Branded Cards: Financial Institutions
All of MasterCard’s business is involved in co-branded relationships. Co-branded relationships can typically be segregated between either financial institutions or retailers.
When MasterCard partners with a financial institution, the institution serves as the issuer. That institution has the privilege of determining the terms and benefits a cardholder can receive on their card. A financial institution may choose to partner for the issuance of a credit card, debit card, or prepaid card.
To attract different types of consumers, financial institutions offer numerous features on a MasterCard branded card. Some popular credit card features may include no annual fee, rewards points, cash back, and 0% introductory rates. MasterCard partners with the financial institutions issuing cards and therefore may take part in the structuring of the card’s features which are typically outlined in a customized business agreement.
In a co-branded relationship with a financial institution, cards are typically characterized as open loop. This means the card can be used anywhere the MasterCard brand is accepted. The financial institution is primarily responsible for all of the underwriting and issuance of the card.
Co-Branded Cards: Retailers
Co-branded cards with retailers typically require a third-party bank to get involved as the issuer. Co-branded retailer cards may be either open loop or closed loop.
Open-loop retailer cards are approved for use anywhere the MasterCard brand is accepted. Open-loop cards carry the same benefits to cardholders as closed-loop cards, but they may come with additional perks as well.
Closed-loop cards are only available for use at the designated retailer. These cards usually come with a rewards program that ties into spending at the retailer exclusively.
Whether a cardholder is approved for an open loop or closed loop card will depend on their credit profile and their card application. Higher credit quality cardholders will typically be approved for open-loop cards while other cardholders are restricted to only closed loop cards.
MasterCard Network Processing and Fees
Cards within the MasterCard network have different relationship maps depending on the type of card offered and the agreements in place. Regardless, MasterCard charges fees for usage of each MasterCard.
Typically, cardholders, merchants, acquiring banks, issuers, and MasterCard as the network processor are the five entities involved in a transaction. Fees can vary depending on card and merchant agreements.
As a network processing service provider, MasterCard is responsible for the processing of a transaction. MasterCard may charge the issuer of a MasterCard a switching fee at the time of a card authorization, but generally, most fees involved with the transaction process are known as interchange fees and negotiated between the issuer and acquirer.
Merchant Discounts and Issuers
In order to accept MasterCard electronic payments, a merchant must have their own (acquiring) bank that is capable of receiving electronic payments on the MasterCard network. When a cardholder uses their MasterCard, the funds are routed from the cardholder’s (MasterCard issuing) bank to the merchant’s bank account. The merchant pays the issuer a fee on each transaction, known as the merchant discount.
For MasterCard, the majority of the company’s revenue is generated from the issuer. Issuers pay MasterCard based on GDV. The GDV fee is a percentage of the total GDV. Issuers may also be required to pay MasterCard a fee based on the co-branded card agreement. Each co-branded card agreement has different terms for fees, but in general, the GDV fee is a basic standard. MasterCard may also charge the issuer a switching fee for each card authorization, which can be a factor in determining the issuer’s interchange fee for the merchant.