Mastercard: Definition and Ranking in Global Payments Industry

What Is Mastercard?

Mastercard is the second-largest payments network, ranked behind Visa, in the global payments industry. Other major payments networks include American Express and Discover. Mastercard partners with member financial institutions worldwide to offer its network payment cards.

Mastercard utilizes its proprietary global payments network, referred to as its core network, to facilitate payment transactions between Mastercard account holders, merchants, and their respective financial institutions. Payments can be made using credit, debit, or prepaid cards.

Key Takeaways

• Mastercard is a payment network processor.
• Mastercard partners with financial institutions issuing Mastercard payment cards processed exclusively on its network.
• Mastercard primarily generates revenue from fees charged to issuers based on each card’s gross dollar volume.

Mastercard Explained

Mastercard is a financial services business that earns revenue from gross dollar volume fees. Mastercard cards are open loop and can be used wherever the Mastercard brand is accepted.

In the payments industry, there are four major payment card processors: Mastercard, Visa, American Express, and Discover. Each company operates a payments network and partners with various institutions for card offerings.

All electronic payment cards have cardholder numbers starting with an issuer identification number (IIN) that identifies the network processor for electronic payments.

The Mastercard Business

In 2020, Mastercard reported $6.3 trillion in gross dollar volume. The company partners with different institutions to offer credit, debit, and prepaid cards. The majority of Mastercard’s business comes from partnerships with financial institutions and their co-brand partners for open-loop credit card options.

Mastercard does not have a banking division, as stated in its 2020 Form 10-K filing:

We do not issue cards, extend credit, determine or receive revenue from interest rates or other fees charged 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 that issue Mastercard-branded cards to consumers, students, and small businesses. Financial institutions also collaborate with organizations for co-branded relationships, offering Mastercard-branded rewards cards to their customers, including airlines, hotels, and retailers.

When Mastercard partners with a financial institution, the institution serves as the issuer and determines the terms and benefits for cardholders. Different features such as no annual fee, rewards points, cash back, and 0% introductory rates are available on Mastercard-branded cards.

Underwriting and issuance of credit, debit, and prepaid Mastercard cards are primarily the responsibility of the partnering financial institution.

Mastercard Network Processing and Fees

Cards within the Mastercard network have different relationship maps based on card type and agreements. However, Mastercard charges fees for card usage.

Typically, the five entities involved in a transaction are cardholders, merchants, acquiring banks, issuers, and Mastercard as the network processor. Fees may vary depending on card and merchant agreements.

As a network processing service provider, Mastercard is responsible for processing transactions. The issuer may be charged a switching fee by Mastercard during card authorization, while interchange fees negotiated between the issuer and acquirer generally cover other transaction process fees.

Merchant Discounts and Issuers

Merchants accepting Mastercard electronic payments must have their own acquiring bank capable of receiving electronic payments on the Mastercard network. When a cardholder uses their Mastercard, funds are routed from the cardholder’s bank to the merchant’s account. The merchant pays the issuer a fee for each transaction, known as the merchant discount.

Mastercard generates the majority of its revenue from transaction fees charged to issuers and acquirers based on gross dollar volume (GDV). The GDV fee is a percentage of the total GDV. Issuers may also pay Mastercard a fee based on the co-branded card agreement. Each agreement has varying terms, but the GDV fee is generally standard. Mastercard may additionally charge the issuer a switching fee for each card authorization, which can influence the issuer’s interchange fee for the merchant.