What Is Mastercard?
Mastercard is the second-largest payments network, ranked behind Visa, in the global payments industry. Other major payments networks include American Express and Discover. Mastercard partners with member financial institutions all over the world to offer Mastercard-branded network payment cards.
Mastercard uses its proprietary global payments network, which it refers to as its core network, to facilitate payment transactions, which usually involve the Mastercard account holder and a merchant, along with their respective financial institutions. Payments can be made via credit, debit, or prepaid cards.
- Mastercard is a payment network processor.
- Mastercard partners with financial institutions that issue Mastercard payment cards processed exclusively on the Mastercard network.
- Mastercard’s primary source of revenue comes from the fees that it charges issuers based on each card’s gross dollar volume.
Mastercard itself is a financial services business that primarily generates revenue from gross dollar volume fees. Mastercard cards are issued by member banks with the Mastercard logo and are characterized as open loop. This means that the card can be used anywhere that the Mastercard brand is accepted.
Across the payments industry, there are four major payment card processors: 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) that distinguishes 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 2020, Mastercard reported $6.3 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 include credit, debit, and prepaid cards. The majority of Mastercard’s business is through partnerships with financial institutions and their organizational co-brand partners to offer open-loop credit card options.
Mastercard does not have a banking division, as discussed in its 2020 Form 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.
Branded and co-branded cards through financial institutions
Mastercard partners with member financial institutions that, in turn, issue Mastercard-branded cards to consumers, students, and small businesses. Member financial institutions often partner with organizations in co-branded relationships to issue Mastercard-branded rewards cards to their customer bases. These organizations can include airlines, hotels, and retailers.
When Mastercard partners with a financial institution, the institution serves as the issuer. That institution determines the terms and benefits that 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 Mastercard-branded cards. Some popular credit card features may include no annual fee, issuer-branded or custom organization–branded rewards points, cash back, and 0% introductory rates.
When credit, debit, and prepaid Mastercard cards are issued through partners, the financial institution is primarily responsible for all of the underwriting and issuance of the card.
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, the five entities involved in a transaction are the cardholders, merchants, acquiring banks, issuers, and Mastercard as the network processor. 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 are negotiated between the issuer and the acquirer.
Merchant discounts and issuers
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 transaction fees charged to issuers and acquirers, which pay Mastercard based on gross dollar volume (GDV). The GDV fee is a percentage of the total GDV. Issuers also may 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.