In the four-party model, exemplified by Visa and Mastercard, four main entities are involved in transactions: (i) the customer making a purchase; (ii) the customer’s bank or issuing bankIssuer Issuer (or Issuing bank) A bank that issued a card for a shopper to make cashless payments via an ecommerce website, inside a mobile app, or in a physical store. To be able to issue a card, an issuer must be a member of one or several card networks. Sometimes a shopper’s bank is referred to as an issuer even if there is no card issued. This is to distinguish between a shopper’s bank, which sends funds, and a merchant’s bank, which acquires funds., which holds the customer’s funds and has issued the payments instrument (typically card) being used; (iii) the merchant accepting the payment; (iv) and the merchant’s bank or acquiring bankAcquirer (or Acquiring bank) Acquirer (or Acquiring bank) A bank or a financial institute, which acquires funds for its merchant from a shopper. To accept card payments, an acquirer should be licensed by corresponding card networks and either partner with a payment processor, or be a payment processor itself. , which holds the merchant’s account, ensures that the merchant has the necessary facilities, such as point-of-sale (POS) hardware, and initiates the processing of transactions.
In a transaction, (1) the customer swipes the card and authenticates the payment, after which (2) the merchant sends the transaction to the acquiring bank, (3) which in turn processes the transaction by passing it to the relevant payments network (e.g., Visa or Mastercard), and the network, which also sets the overall rules for the payments scheme, runs automated fraud checks and forwards the transaction to the issuing bank for authorization.
If the issuing bank authorizes the transaction, (4) it debits the customer’s account and (5) settles the payment to the acquiring bank, minus an interchange fee. Finally, (6) the acquiring bank pays the merchant, minus a merchant discount fee, which covers the acquiring costs, including interchange, terminal depreciation, risk, merchant servicing, operating expense, and some profit margin for the acquirerAcquirer (or Acquiring bank) Acquirer (or Acquiring bank) A bank or a financial institute, which acquires funds for its merchant from a shopper. To accept card payments, an acquirer should be licensed by corresponding card networks and either partner with a payment processor, or be a payment processor itself. itself.
Difference vs the Three-Party Model
In a four-party model, the transaction fee relating to a merchant payment typically must be split among the issuerIssuer Issuer (or Issuing bank) A bank that issued a card for a shopper to make cashless payments via an ecommerce website, inside a mobile app, or in a physical store. To be able to issue a card, an issuer must be a member of one or several card networks. Sometimes a shopper’s bank is referred to as an issuer even if there is no card issued. This is to distinguish between a shopper’s bank, which sends funds, and a merchant’s bank, which acquires funds., the acquirer, and the payments network. In a three-party model, the payments provider doesn’t need to share revenue with anyone else; it retains the entire transaction fee. Since MDRs are not necessarily lower for three-party models, this can mean higher margins for payments providers. However, the three-party model also requires the issuer to grow its own merchant network, which increases the cost and challenge of scaling.