Consumers may not realize that when they use credit cards, the actual transaction is not as simple as just swiping a card and the charge showing up on a statement. There are several steps in the process. Many of them are instantaneous, but may involve multiple parties. Few of these steps are free. So there are fees along the way, some of which may get passed on to you.
Discover and American Express set up their own networks so that they can receive some of these fees. More on that in due course. First, let’s start by tracking a transaction from beginning to end.
Charging it — from start to finish
It starts with you, the NerdWallet reader, also known as Cardholder Jane. You have obtained a credit card from a bank.
You hand that card to a merchant for a purchase. Specifically, that merchant is a person or a business that accepts credit cards for purchases. They will also have to have a merchant account with the bank to get the charge accepted. The merchant will transmit your information to the acquiring bank, or the acquiring bank’s processor.
The processor is an intermediary (except for Discover and Amex) that sends all the customer’s information to the acquiring bank, which confirms the information is correct, and sends the information over a card network and then to the issuing bank, which authorizes the charge. The processor then tells the merchant everything is OK and permits the merchant to complete the transaction. However, the charge may be declined for any number of reasons (fraud, information is not entered accurately, credit limit exceeded, etc).
As for the acquiring bank, it maintains accounts that permit the merchant to accept the credit cards. Those are the banks that give the merchants all the equipment and software to accept cards. Most importantly, the acquiring bank is the entity that deposits the funds from customer sales into the merchant’s account.
Back to the card network, which is the communications network maintained by Visa or MasterCard, where the transaction data is routed to the next step in the chain, the issuing bank, or the issuer. The bank is also a member of the Visa or MasterCard network (but, again, Discover and Amex are not). The issuer approves the purchase over the card network to the merchant. It also pays the acquiring bank for the purchases cardholders make, reimbursing the acquiring bank for the money it paid the merchant for the sale.
Now the issuing bank is owed money by Cardholder Jane. It issues her a monthly statement and awaits her payment.
» MORE: What is a credit card?
Leaving out the middlemen
Discover and Amex have their own networks to simplify the transaction process and to accrue fees they would otherwise pay to all those intermediaries. Although there was substantial cost to set up their own networks, and it costs a lot to maintain them, these brands are able to charge fees themselves to offset those costs.
An acquiring bank will pay an issuing bank an interchange fee. Acquiring banks, in turn, charge merchants a discount fee for the privilege of being able to accept credit cards. By operating their own networks, Discover and Amex save themselves fees and can charge others.
Paying the bill image via Shutterstock