The four-party card model is the arrangement under which most card payments in the world are made. Four parties take part in every transaction: the cardholder, the bank that gave the cardholder the card (the issuer), the merchant, and the bank or processor that accepts card payments for the merchant (the acquirer). A card network such as Visa or Mastercard sits in the middle, writing the rules and routing messages and money between issuer and acquirer.
The model is also called an open-loop system, because any licensed bank can join on either side. It is usually contrasted with the three-party card model, in which one company acts as network, issuer and often acquirer. The network itself is not one of the four parties; it is the rulebook and the switch that connects them.
Four-party card model in plain terms
Think of an international postal system. You hand a letter to your local post office, it travels across borders, and a different post office in another country delivers it. The two post offices have never met, but they both follow the same rules on stamps, addresses and who pays whom. The postal union does not deliver the letter; it only sets the rules both sides follow.
A card payment works the same way. The shopper's bank and the shop's bank are often strangers, sometimes on different continents. Because both have signed up to the same network's rules, the shop can accept a card from a bank it has never heard of and still be sure the money will arrive. In return, each party along the route keeps a small slice of the payment.
How a transaction moves through the four parties
When a cardholder pays, the merchant's terminal or website sends the card details to the acquirer, usually through a payment gateway and a processor, often run by the acquirer itself or by a company it hires. The acquirer forwards the request to the network, which identifies the issuer from the bank identification number and passes the request on. The issuer checks the account and approves or declines. That is the authorization step.
Later, in clearing and settlement, the issuer pays the network, the network pays the acquirer, and the acquirer credits the merchant, minus fees. The issuer then collects from the cardholder: at once for a debit card, or through the monthly bill for a credit card. Disputes run the same path in reverse as a chargeback.
The merchant pays the acquirer a merchant discount rate on each sale. Out of that, the acquirer passes most of the cost on to others:
- Interchange. A fee set by the network and paid by the acquirer to the issuer. It is usually the largest part of the cost and is explained in interchange.
- Scheme fees. Charges the network collects from both issuers and acquirers for using its rails, covered in scheme fees.
- Acquirer margin. Whatever the acquirer keeps after interchange and scheme fees, which pays for processing, risk and customer service.
Issuers use interchange income to fund fraud losses, credit risk and rewards programmes. How that income moves from shoppers who pay with cash to those who earn rewards is discussed in card rewards cross-subsidy.
History and main networks
The model grew out of bank card associations formed in the United States in the 1960s. Bank of America began licensing its BankAmericard to other banks in 1966, and that programme was renamed Visa in 1976. A group of rival banks formed the Interbank Card Association the same year, whose Master Charge brand became Mastercard in 1979. Both were owned by their member banks for decades and became listed companies in the 2000s: Mastercard in 2006 and Visa in 2008.
Many domestic schemes also follow the four-party structure, including China's UnionPay, India's RuPay and France's Cartes Bancaires. Each runs its own rules and fees, but the roles of issuer and acquirer are the same. In many countries a domestic scheme carries local payments while Visa or Mastercard carries the same card abroad, a pairing known as co-badging.
Regulation
Because the network sets interchange collectively for thousands of banks, regulators and competition authorities have focused on it. In the United States, the Durbin Amendment to the Dodd-Frank Act led to the Federal Reserve's Regulation II, which from October 2011 capped debit interchange for issuers with at least $10 billion in assets and required each debit card to work on at least two unaffiliated networks (see debit routing). US credit card interchange is not capped.
In the European Union, the Interchange Fee Regulation (EU) 2015/751 caps interchange on consumer cards at 0.2% of the transaction value for debit and 0.3% for credit, with those limits applying from December 2015. It also requires acquirers to show merchants the interchange and scheme fees separately. Other countries, including Australia, set their own interchange benchmarks through the central bank.