The four roles create a card scheme. These roles are known as cardholder, issuer, merchant and acquirer.
Two types of card schemes exist. The issuing bank is the same entity and the acquiring bank is the same entity. Other types include a separate issuing bank and an acquiring bank.
The idea of a card scheme can be a bit confusing if you don’t fully understand what those entities do. Let’s divide the two types of schemes into separate sections and see what each role is
A three-party card scheme:
Members of a tripartite card scheme are:
Cardholder:
A cardholder is a person who wants to buy something and is using their card to do so.
Issuing bank:
The issuing bank is the bank that creates the cardholder’s account and posts the card to the cardholder. The issuing bank could be the cardholder’s top bank, or it could be a separate entity that attracted the cardholder with a special offer for a credit card, or bank account.
Merchant:
The merchant is the retailer where the cardholder is looking to spend some money. A merchant may include retail premises, or e-commerce and online services.
A three-party card scheme is also known as a cloud-loop scheme. A closed-loop scheme means that the issuing bank and the acquiring bank are the same entity. A great example of a closed loop scheme is when a cardholder uses an American Express card. The members in this transaction are; Cardholders, merchants and American Express. No financial institution is involved outside of this, as both the merchant and the cardholder are customers of American Express.
A four-party card scheme:
It’s equivalent to a three-party card scheme with the added addition of an acquiring bank. An acquiring bank is the bank that raises all the merchant’s sales for the day, the issuing bank comes and says; “Hey, you owe our Merchant-X for today? Can you decide please”?
See an example of a four-sided card scheme below.
Let’s call it “Merchant’s Arms” –
This is one of the cardholders, and they buy drinks on their TSB debit card.
There is no joke here; However, now there is a team in the administration that needs to be done.
Merchants Arms Landlords get two drinks on their list.
The cardholder, through the approval of the sale, has agreed to the purchase. The money needs to be left in their TSB account.
The deal is all well and good, but the business remains unresolved until the money lands in the Berkeley account of “The Merchants Arms” hard-working landlord.
Need to talk to acquiring bank and issuing bank. The issuing bank and the acquiring bank will select how much to go into the “Merchant Arms” bank account. All three parties. Merchant, acquirer and issuing bank; Agree to deduct commission or fee.
In the end everyone on the card gets what they want. The landlord has sold the drink, the acquiring bank has taken their small piece, does the issuing bank have them, and the cardholder?
Well, in this case the cardholder is the one who got what they didn’t want. The hang-over was very unnecessary!
“Merchant’s Arms” can accept hundreds of small transactions any day the business closes. It is not easy for a landlord to find everything. That is why a card scheme exists.
Card scheme rules apply internationally and so cardholders can now use their credit or debit cards at any type of retailer in the world.