Mastercard stands as the second-largest payments network globally, trailing only behind Visa in the expansive payments industry landscape. It collaborates with an array of financial institutions worldwide to offer Mastercard-branded payment cards, facilitating seamless transactions through its proprietary global payments network.
Mastercard’s core network handles transactions involving the account holder and merchant, alongside their respective financial institutions. Payment methods may include credit, debit, or prepaid cards.
Key Takeaways
- Mastercard functions as a payment network processor.
- It collaborates with financial institutions to issue Mastercard payment cards, which are processed solely through the Mastercard network.
- The company’s primary revenue stream is derived from fees charged to issuers based on each card’s gross dollar volume.
Mastercard Explained
Mastercard operates as a financial services entity, primarily generating income from gross dollar volume fees through its embedded open-loop card system. An open-loop card means usability anywhere Mastercard is accepted. Beyond Mastercard and Visa, American Express and Discover also play significant roles in the payments sector.
All electronic payment cards serve unique cardholder numbers starting with an issuer identification number (IIN). This number denotes the network processor, elucidating the card’s brand, even if the logo isn’t apparent.
The Mastercard Business
In 2020, Mastercard reported a monumental $6.3 trillion in gross dollar volume, representing the comprehensive sum of transactions on all its cards. Mastercard’s partnerships with various institutions lead to a spectrum of card types, focusing significantly on open-loop credit card offerings through financial institution alliances.
Mastercard does not function as a banking entity. Within its 2020 Form 10-K filing, Mastercard clarifies its role stating: “We do not issue cards, extend credit, determine or receive revenue from interest rates or other fees charged to account holders by issuers, or establish the rates charged by acquirers in connection with merchants’ acceptance of our products.”
Branded and Co-branded Cards Through Financial Institutions
Mastercard partners with financial institutions which issue Mastercard-branded cards to diverse groups, from consumers to small businesses. These institutions often engage in co-branding with organizations like airlines, hotels, and retailers, further diversifying rewards card offerings.
The partnering financial institution serves as the card issuer, setting terms and benefits for cardholders. The cards, whether credit, debit, or prepaid, highlight attractive features aiming to cater to various consumer needs. Popular options include no annual fee, rewards points, cashback, and 0% introductory rates.
Financial institutions bear the responsibility for the underwriting and issuance of these cards primarily.
Mastercard Network Processing and Fees
Cards within the Mastercard ecosystem encompass a network of relationships, with varying terms based on card types and agreements. Mastercard accrues fees from their network usage, regardless of the specific partnerships.
A typical transaction involves multiple parties: cardholders, merchants, acquiring banks, issuers, and Mastercard as the network processor. The ensuing fees reflect the agreements between cards and merchants.
Merchant Discounts and Issuers
Merchants accepting Mastercard payments need an acquiring bank to manage these transactions. Funds are then routed from the cardholder’s issuing bank to the merchant’s account, with a merchant discount fee applied per transaction.
For Mastercard, a substantial portion of revenues stems from transaction fees imposed on issuers and acquirers, varying by gross dollar volume (GDV). Specific co-branded agreements lay varying fee terms, with the GDV fee representing a constant standard. Mastercard might also levy a switching fee during card authorization, influencing the issuer’s interchange fee for merchants.
Related Terms: Visa, American Express, Discover, Electronic Payments, Financial Partnerships.
References
- U.S. Securities and Exchange Commission. “Form 10-K Annual Report for the Fiscal Year Ended December 31, 2020, Mastercard Incorporated”, Page 6.
