Discover and American Express are different from Visa and Mastercard in a very important way.
- Visa and Mastercard process credit card transactions, but they don't actually issue credit cards. Your card might say "Visa" or "Mastercard" on it, but it is issued by a bank, like Chase or Citi. You don't have an account with Visa or Mastercard. You have an account with the bank, which sends you your statement, receives your payments, gives you rewards and so on.
- Discover and American Express, by contrast, process transactions and issue their own cards. You can have an account with Discover or an account with American Express.
None of this matters much to most consumers. The difference is mostly invisible as far as the cardholder is concerned. But it's a big deal behind the scenes, where it affects how credit card transactions are handled and how fees generated by those transactions are paid and received. By issuing credit cards as well as processing transactions, Discover and American Express can get a bigger cut of that fee revenue.
Who's involved
When you use a credit card, there are several steps between your card going through the reader and the charge showing up on your statement. These steps, many of which are instantaneous, involve multiple parties, including you. The participants in a typical transaction are:
- The cardholder. This is the person who makes charges on the credit card and pays the bill.
- The issuer: This is the bank that provides the card to the cardholder. The card account is maintained by the issuer.
- The merchant: The store, service provider or other person or business who gets paid with a credit card.
- The merchant's bank: Also known as the "acquirer," this bank provides the merchant with equipment to accept cards. Payment for card transactions is deposited in the merchant's account there.
- The payment network: The intermediary that processes the transaction. It verifies with the issuer that the card is valid, then makes sure that the charge is attributed to the proper cardholder and that payment makes it to the merchant's bank.
Of course, merchants aren't in a position to work directly with every single bank that issues credit cards. That would be impossible, as there are thousands of issuers. Instead, merchants work with the four payment networks — Visa, Mastercard, Discover and American Express. To accept Visa cards, regardless of issuer, a store just needs a contract with Visa, and Visa handles things between the store and the issuing banks.
» MORE: Credit cards 101
Fees make it all go
The whole system is paid for with fees charged on each credit card transaction. Merchants pay these fees and, typically, pass them on to customers the same way they pass on other costs of doing business — in their prices. These fees are divided among the financial institutions handling the transaction: the issuer, the merchant's bank and the payment network. (Rewards cards also kick back some of this money to the cardholder.)
Here's where the difference becomes apparent:
- Visa and Mastercard are payment networks only. Cards with their logos are issued by banks — big ones like Chase, Citi and Wells Fargo, but also small ones.
- Discover and American Express are both payment networks and issuers (although some of their cards might also be issued by banks; Wells Fargo, for example, has offered several American Express cards).
By operating their own payment networks and issuing their own cards, Discover and American Express simplify the transaction process, reduce the fees they have to pay and collect more fees than they otherwise would. Although their networks are expensive to set up and maintain, the extra fee revenue offsets those costs.
