About MasterCard

MasterCard, a widely recognized name in the world of finance, operates as a payment network facilitating transactions between banks and merchants. It’s important to note that MasterCard, along with other major players, doesn’t issue or distribute credit cards. Instead, these cards are issued by banks, which play a pivotal role in setting interest rates, managing payments, and offering various rewards to cardholders.


Overview of MasterCard

MasterCard, a global financial services company, is renowned for its role in the payment processing ecosystem. While it may seem like MasterCard directly provides credit cards, the reality is that it functions as a payment network.

Clarifying the Role of Service Providers

Contrary to common misconceptions, neither MasterCard nor its counterparts issue credit cards. Banks take on this responsibility, determining interest rates, handling payments, and administering rewards programs for cardholders.

MasterCard Functions

Payment Network Operations

  1. Facilitating Transactions: One of MasterCard’s primary functions is to facilitate seamless transactions between banks and merchants. This involves the intricate process of processing payments made with MasterCard-branded cards.
  2. Relationship Between Banks and Merchants: MasterCard serves as a mediator between banks and merchants. It ensures that the payment made by a cardholder reaches the merchant’s bank account efficiently.

Standardized Exchange

  1. National Borders: MasterCard has the authority to establish a standardized exchange not only within a single country but also between national borders. This standardized exchange plays a crucial role in the company’s operations.
  2. Within a Single Country: Adopting a consistent approach, MasterCard employs a standardized exchange system within a country. This strategy aims to ensure regular card issuance and widespread acceptance at various outlets.

MasterCard Fees

Definition of Conversion

In the financial realm, the term “conversion” refers to a commission paid by the acquiring bank of the trader for the execution of a payment transaction. This commission serves to compensate the card-issuing bank for the associated risks and costs linked to maintaining cardholder accounts.

Acquiring Bank’s Commission

The acquiring bank, responsible for handling transactions for merchants, pays a commission as part of the conversion process. This commission is a mechanism to share the responsibilities and risks associated with processing payments.

Risk and Cost Coverage for Card-Issuing Banks

The conversion fees contribute to covering the risks and costs faced by card-issuing banks. These financial institutions take on the responsibility of managing cardholder accounts and ensuring the smooth operation of the payment system.


Purpose of Standardized Exchange

Regular Card Issuance

MasterCard’s commitment to a standardized exchange system is driven by the need for regular card issuance. This ensures that MasterCard-branded cards are consistently available to consumers, fostering a dynamic financial ecosystem.

Increased Acceptance at Various Outlets

The standardized exchange implemented by MasterCard aims to enhance the acceptance of its cards across a broad spectrum of outlets. This widespread acceptance contributes to the convenience and accessibility of MasterCard for consumers.

Universal Acceptance of MasterCard

Comparison with Other Credit Card Companies

  1. Visa Acceptance: MasterCard and Visa, two of the leading payment networks, share almost universal acceptance. Merchants accepting credit cards typically welcome both MasterCard and Visa, creating a seamless experience for consumers.
  2. Limited Acceptance of American Express and Discover: In contrast, American Express and Discover may face challenges in acceptance, especially in foreign countries. MasterCard’s global recognition positions it favourably in comparison to these competitors.

Exceptions to Universal Acceptance

Trader Agreements

  1. Exclusive Agreements: Some traders enter into exclusive agreements with payment networks. A notable example is Costco Wholesale Clubs, which historically only accepted Visa cards, later transitioning to American Express.
  2. Costco Wholesale Clubs Case Study: While Costco initially had an exclusive arrangement with American Express, it eventually shifted to accepting Visa cards as well. These exclusive agreements, though rare, can influence the acceptance of specific payment networks.

Rare Exclusions

  • Changes in Acceptance Over Time: The landscape of credit card acceptance can evolve. What might be a rare exclusion today could see changes in the future. Merchants may reconsider their agreements with payment networks, impacting card acceptance.

Comparison Between MasterCard and Visa

Business Model Similarities

MasterCard and Visa operate with a business model that shares striking similarities. Both companies utilize a four-part system to simplify financial transactions, creating an efficient and streamlined process.

Four-Part System for Financial Transactions

  1. Issuers: The system involves issuers, typically product-issuing banks, responsible for providing credit cards to consumers. These issuers play a crucial role in initiating the financial transaction process.
  2. Account Holders: Account holders, individuals who possess credit cards issued by banks, form a key component of the financial transaction system. Their interactions with the credit cards set the process in motion.
  3. Buyers: Buyers, engaging in contracts with payment acceptance operators, contribute to the flow of financial transactions. These contracts create the framework for payment processes to occur seamlessly.
  4. Operators: Operators, including retailers and billers, serve as the final link in the four-part system. They facilitate the acceptance of payments, ensuring that transactions between consumers and merchants are completed.

Revenue Sources for MasterCard and Visa

Unlike banks or credit card issuers, MasterCard and Visa do not issue cards or charge account holders. Their revenue streams are derived from the payments made with their cards. This unique business model sets them apart in the financial industry.

Simplified Financial Transactions

Non-Issuance of Cards

MasterCard and Visa operate on a model where they do not issue credit cards. This responsibility falls on banks, allowing payment networks to focus on their core function of facilitating transactions.

No Charges to Account Holders

Unlike banks, MasterCard and Visa do not charge account holders for the usage of credit cards. This distinguishes them from traditional financial institutions and contributes to their appeal among consumers.

Absence of Interest Income

In an unconventional approach, MasterCard and Visa do not earn income from the interest paid by account holders. Instead, their primary source of revenue stems from the transactions processed through their payment networks.

In conclusion, understanding the dynamics of MasterCard involves delving into its role as a payment network, the intricacies of standardized exchange, and the unique business model it shares with other major players like Visa. As consumers navigate the world of credit cards, recognizing the nuances of MasterCard’s operations enhances their financial literacy and decision-making.