What is a Credit Card Network and How Does it Differ From an Issuer?

FT Contributor  | 

If you wish to learn more about credit cards or are looking to apply for a new one, then you will encounter the terms “credit card issuer” and “credit card network” during your search. These terms sometimes seem interchangeable, but there is a distinct difference that is important to keep in mind.

A credit card network is an organization that facilitates communication between merchants and lenders to enable credit card transactions. You do not choose between a network and an issuer; each plays a role in facilitating credit card transactions, and their intersection helps determine which card is the best for you. Continue reading to learn how networks differ from issuers.

What Are the Major Credit Card Networks?

The differences between credit card networks are slight enough to overlook for most consumers. However, while many networks overlap in terms of functionality and offerings significantly, there are a few nuances. The list of major payment card networks is as follows:

American Express

American Express is both a credit card network and an issuer, meaning it loans money via revolving credit and also verifies payments. As such, American Express is a “closed-loop” network because it does not often partner with other lenders. In other words, the money the company loans is its own.

American Express cards offer a variety of privileges and rewards programs, but they are not necessarily the best options for individuals hoping to build or rebuild their credit. The company also provides a range of business-oriented cards as well as consumer-focused options.

Discover

Discover is another closed-loop network. Not as many merchants accept Discover cards, so Discover attempts to make up for this with its perks:

  • None of Discover’s cards carry annual fees;
  • Discover offers a robust range of credit card options for those who qualify;
  • Most of Discover’s cards have 0% annual percentage rates (APRs) for at least a few months;
  • Discover enables holders to access their FICO scores with information from Transunion (one of the three major credit bureaus) for free.

Mastercard

Mastercard is an example of an “open-loop” network because it only processes payments. You do not borrow money from Mastercard; you borrow from a card issuer that the company partners with. Countless banks, credit unions, and other lenders issue Mastercard accounts; this competition often inspires them to provide an assortment of privileges and promotions to their customers.

Visa

Visa, another open-loop network, is the oldest credit card network around. Most merchants accept Visa, so you are unlikely to encounter a business that turns your card away because it cannot accept it and forces you to pay in cash.

You do not always get a choice in what credit card network you use, though. If you are considering opening a new account and want to take advantage of a specific card’s perks, then whichever network the issuer partners with is the one you will be using.

How Does a Credit Card Network Work?

Credit card networks are generally the intermediaries between merchants and financial institutions. When a consumer makes a purchase, the merchant swipes the card or inserts it into a chip reader, and the machine reaches out to the card’s network. The network then asks the issuer if it will approve the transaction, and if so, the network communicates the decision back to the merchant. This can all happen within seconds, but you may also see a “pending transaction” on your account for larger purchases, transactions made after business hours, or another reason.

As mentioned previously, some credit card payment networks can be open or closed. Visa and Mastercard are open because they collaborate with other financial organizations. Discover and American Express are closed because they double as both network and issuer—they loan money while also approving transactions.

Closed-network companies serve as “acquirers,” which means they pay merchants (minus applicable fees) the amount of a consumer’s credit card transaction. This way, merchants can factor in credit card purchases into their cash flow and are unaffected by an individual consumers’ debt or carried balance.

Smaller closed-loop networks exist besides the four major companies. Companies sometimes offer credit cards that can only be used to purchase their goods or offer the most rewards when you do so, such as Ulta Beauty and the restaurant BJ’s.

Credit Card Issuer vs. Network

Credit card issuers are institutions that provide you with a physical credit card and its associated account. Essentially, they are who you borrow money from. CapitalOne, Chase, and US Bank are all examples because when you swipe your card to buy your $4.50 morning coffee, that $4.50 doesn’t come immediately out of your checking account.

Instead, you accumulate expenses over the course of the month and pay back the total. It is possible to borrow more money than what you have available, which is why credit card issuers charge interest rates if you take longer than 30 days to pay off your debt.

Credit card networks are the companies that process transactions. If you pay for your coffee with a CapitalOne card, for instance, then it is CapitalOne you are borrowing from, but it is Mastercard that makes the transaction possible. In the cases of Discover and American Express, they are both lending you $4.50 and authenticating the purchase.

Choosing a Credit Card Network

If your credit card network is important to you, you will want to consider these factors:

  • Global acceptance: More international merchants will accept Visa and Mastercard purchases than any other network. If you travel often, then not only will you want a card from an issuer that offers a broad range of travel perks, you want a network business owners in other countries are capable of accepting.
  • Store acceptance: Different stores accept a different combination of networks, even in the U.S. CNBC reports that 10.6 million U.S. merchants accepted American Express cards at the end of 2019. However, some merchants will only accept one or two networks. Costco, for example, only accepts Visa payments.

Card issuers and networks are distinct, and there are countless of the former and only a few of the latter, so pay attention to both brands and how they intersect when applying for or closing a credit card account. Consider what benefits, rates, terms, and fees work best for you, as well as how acceptable a card may be depending on where and how you will use it.


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This post was updated March 17, 2020. It was originally published March 17, 2020.