What are card networks? How do they work? Should card network matter to you?

What are card networks? How do they work? Should card network matter to you? | Vrid

Recently, there have been a lot of talks about RuPay. The Government and RBI have been promoting it. They are in discussions to allow you to switch your card networks on your debit and credit cards from Oct 1, 2023.

Not only this, you can now add your RuPay credit cards to UPI.

And we wanted to talk about why the authorities are promoting RuPay and whether you should add your credit cards to UPI. But before that, we need to understand what RuPay is – that is what a card network is.

Let’s discuss what card networks are and how they make your transactions smooth, secure, and efficient.

Estimated read time: 3 minutes and 19 seconds

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Buckle up. Here we go!

What are card networks?

Imagine you’re at your favourite local café, about to pay for that delightful cup of coffee with your debit or credit card. You swipe or tap your card on the payment terminal, wait for a brief moment, and voilà – your transaction is complete!

Behind this seamless exchange, a payment network is silently at work, ensuring that your payment reaches the correct destination securely.

In simple terms, a card network is a sophisticated system that connects various parties involved in a transaction.

Who are the various parties involved in a transaction?

  1. Cardholder: That’s you, the individual making the payment using your debit or credit card.
  2. Merchant: The café owner, or any other business, offering goods or services and accepting card payments.
  3. Issuer: This is typically a bank that issues the card to the cardholder. It’s the institution responsible for providing you with the card and managing your account.
  4. Acquirer: The bank or financial institution that partners with the merchant, enabling them to accept card payments.
  5. Network Provider: This is the core of the system. Companies like VISA, Mastercard, American Express, Diners Club, and RuPay are well-known card payment network providers. They create and maintain the technology and infrastructure that allows all the parties involved to communicate and process transactions smoothly.

How do card networks work?

When you swipe, dip, or tap your card, a sequence of events takes place behind the scenes:

  1. Authorization: The merchant’s payment terminal sends a request to the network provider to check if your card is valid and has sufficient funds (in the case of a debit card) or a credit limit (for a credit card).
  2. Routing: The network provider routes this request to the card’s issuer bank. The issuer bank confirms the card’s validity, and either approves or declines the transaction.
  3. Approval or decline: The issuer bank sends its response back through the network provider. If approved, the network provider relays this to the merchant through the payment terminal, allowing the transaction to proceed. If declined, the merchant informs you that the transaction was unsuccessful.
  4. Clearing and settlement: Once the transaction is complete, the funds are transferred from your account to the merchant’s account. This process involves clearing (verifying the transaction’s accuracy) and settlement (the actual transfer of funds). And for this, the card network charges an interchange fee from the merchant.

Why do card networks matter?

Card networks play a pivotal role in modern commerce. They offer several key benefits:

  1. Convenience: With a card payment network, you can make transactions without carrying large amounts of cash. It’s a convenient and secure way to pay for goods and services.
  2. Global access: Networks like VISA and Mastercard have international reach. This means you can use your card to make purchases worldwide, enjoying a consistent and familiar payment experience.
  3. Security: Card payment networks employ advanced encryption and security measures to protect your financial data during transactions, reducing the risk of fraud.
  4. Record keeping: Each transaction leaves a digital trail, allowing both cardholders and merchants to keep track of their spending and sales history.

How to choose the right card network?

When you choose a debit or credit card, you’re also indirectly choosing a payment network. Factors to consider include:

  1. Acceptance: Opt for a card that’s widely accepted. VISA and Mastercard are usually more universally recognized, especially for international transactions.
  2. Local vs. Global: If you prioritize supporting domestic initiatives, a local network like RuPay might align better with your values.
  3. Benefits: Different networks offer varying perks and rewards. Research the benefits associated with each network to find the one that suits your lifestyle.

The next time you use your card to pay for a meal, remember that a card payment network is at the heart of that transaction. It’s the digital bridge connecting you, the merchant, the issuer, and the acquirer. 

Now, after understanding what card networks are, it will be easier to discuss why the authorities are promoting RuPay in this post

Remember to share these insights with your buddies. Until next time!

Still Curious?

If you are like us, who likes to analyse a little more or check out content in different formats, well you are in luck. Below you can find some suitable content we found.

11:FS – How do card networks operate? | Decoding: Banks | Episode 3

Mint – Change Your Credit Card Network In Minutes; How Credit Card Portability Benefits You | Explained

Stripe – How do credit card networks work?

Note: We don’t have any affiliation with them. We are sharing links only for educational purposes. The opinions expressed by them belong solely to them and do not reflect the views of Vrid.

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DISCLAIMER: This newsletter is strictly educational and is not an investment advice or a proposal to buy or sell any assets. Please be careful and do your own research.

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