How card payments settle, and who takes a cut

Paying by card is designed to feel instantaneous. The customer taps, the terminal beeps, and both sides move on. Behind that moment is a chain of four or five institutions, a set of messages that travel around the world and back, and a fee structure that has been argued over for decades.

The parties

The cardholder has a card issued by their bank, the issuer. The merchant has an account with an acquirer, a bank or payment company that accepts card payments on its behalf. Between them sits a card network, which sets the rules and routes the messages. Often a processor sits between the merchant and the acquirer, handling the technical side, and a payment gateway connects an online store to the processor.

Some companies play more than one role. A large payments firm may be gateway, processor and acquirer at once. The roles are still distinct even when one company fills several.

Authorisation

When the card is tapped, the terminal sends a message through the processor to the acquirer, which forwards it via the network to the issuer. The issuer checks that the card is valid, the account has funds or credit available, and the transaction does not look fraudulent. It sends an approval or decline back along the same path. This round trip usually takes one to two seconds.

At this point no money has moved. The issuer has placed a hold on the cardholder's funds, and the merchant has a promise to pay.

Clearing and settlement

At the end of the day, the merchant's terminal or system sends a batch of approved transactions to the acquirer. The acquirer submits them to the network, which sorts them by issuer and calculates what each issuer owes. This is clearing.

Settlement is the movement of money. Issuers pay the network, the network pays the acquirers, and the acquirers credit their merchants, minus fees. Depending on the market and the acquirer's terms, the merchant receives funds one to three business days after the sale. Some acquirers offer faster settlement for a fee, advancing the money from their own balance sheet.

Who takes what

The merchant pays a merchant discount rate, typically between one and three per cent of the transaction value, sometimes plus a fixed amount per transaction. That fee is divided three ways.

The largest share is interchange, which the acquirer pays to the issuer. It compensates the issuer for the credit risk, the fraud risk and the cost of running the card programme, and it funds cardholder rewards. Interchange rates are set by the networks and vary by card type, merchant category and whether the card was present. In some jurisdictions they are capped by regulation, commonly at a fraction of a per cent for consumer cards.

The network takes a smaller assessment fee for routing the transaction and maintaining the system. The acquirer and processor keep the remainder as their margin, out of which they cover their own costs, including fraud losses and the cost of chargebacks.

Chargebacks

If a cardholder disputes a transaction, the issuer can reverse it, pulling the money back from the acquirer, which in turn debits the merchant. The merchant can contest it with evidence. Chargebacks exist to protect cardholders, but they are a cost for merchants and acquirers, and merchants with high chargeback rates face higher fees or lose the ability to accept cards.

Why it matters

The structure explains several things merchants and consumers notice. Premium rewards cards cost merchants more because their interchange is higher. Card-not-present transactions cost more because fraud is more likely. Small merchants pay higher rates than large ones because they have less bargaining power. And the debate over interchange, between merchants who pay it and banks that receive it, is likely to continue for as long as cards exist.

This guide is general information, not financial advice.