What Is Mastercard?
Let me explain Mastercard to you directly: it's the second-largest payments network in the global industry, right behind Visa, with others like American Express and Discover in the mix. I see Mastercard partnering with member financial institutions around the world to offer payment cards branded with the Mastercard logo.
Mastercard relies on its proprietary global payments network, which they call their core network, to handle payment transactions. These typically involve you as the Mastercard account holder, a merchant, and both of your financial institutions. You can make payments using credit, debit, or prepaid cards.
Key Takeaways
- Mastercard functions as a payment network processor.
- It partners with financial institutions that issue Mastercard payment cards processed only on the Mastercard network.
- The primary revenue for Mastercard comes from fees charged to issuers based on each card’s gross dollar volume.
Mastercard Explained
Here's how Mastercard works as a business: it's a financial services company that mainly earns revenue from gross dollar volume fees. The cards issued by member banks carry the Mastercard logo and are open-loop, meaning you can use them anywhere Mastercard is accepted.
In the payments industry, there are four major card processors: Mastercard, Visa, American Express, and Discover. Each runs its own network and teams up with various institutions for card products.
All electronic payment cards have numbers starting with an issuer identification number (IIN) that identifies the network processor. If you can't see the logo, the IIN tells you the brand.
The Mastercard Business
In 2020, Mastercard handled $6.3 trillion in gross dollar volume, which is the total amount transacted across all its card offerings. The company partners with various institutions to provide credit, debit, and prepaid cards. Most of its business comes from partnerships with financial institutions and their co-brand partners for open-loop credit cards.
As stated in its 2020 Form 10-K filing, Mastercard doesn't have a banking division. 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 teams up with member financial institutions that issue Mastercard-branded cards to consumers, students, and small businesses. These institutions often collaborate with organizations like airlines, hotels, and retailers in co-branded setups to offer rewards cards to their customers.
When partnering with a financial institution, that institution acts as the issuer and sets the terms and benefits for the cardholder. They might issue credit, debit, or prepaid cards.
To appeal to different consumers, institutions add features like no annual fee, rewards points, cash back, or 0% introductory rates to Mastercard-branded cards. The financial institution handles all underwriting and issuance for these cards.
Mastercard Network Processing and Fees
Cards in the Mastercard network have varying relationships based on the card type and agreements. Regardless, Mastercard charges fees for each card's usage.
Typically, five entities are involved in a transaction: the cardholder, merchant, acquiring bank, issuer, and Mastercard as the processor. Fees vary by card and merchant agreements.
As the network processor, Mastercard handles transaction processing. It may charge issuers a switching fee during authorization, but most fees are interchange fees negotiated between issuers and acquirers.
Merchant Discounts and Issuers
For a merchant to accept Mastercard payments, they need an acquiring bank that can receive electronic payments on the network. When you use your Mastercard, funds move from your issuing bank to the merchant’s account. The merchant pays the issuer a fee per transaction, called the merchant discount.
Mastercard generates most revenue from transaction fees charged to issuers and acquirers based on gross dollar volume (GDV). This GDV fee is a percentage of the total GDV. Issuers might also pay based on co-branded agreements, with terms varying but generally including a standard GDV fee. Mastercard could charge a switching fee per authorization, influencing the issuer’s interchange fee to the merchant.
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