MasterCard is a technology firm in the global electronic payment industry responsible for processing electronic payments, through its full range of payment programs and services. It partners with various institutions worldwide to connect different participants in various types of transactions, including businesses, financial institutions, merchants, and consumers using its branded electronic payment cards.
MasterCard provides the technology and network that facilitate electronic forms of payments. It may use credit, debit, or prepaid cards as its core payment cards.
MasterCard is a branded network that processes electronic payment services to merchants on behalf of its member financial institutions.
The company partners with multiple players to offer a variety of electronic payment cards.
MasterCard does not issue or extend cards, and it also does not generate revenues from interest. Instead, the company assesses its clients to generate income from GrossDollar Volume (GDV) fees.
MasterCard generates its revenue by assessing customers based on Gross Dollar Volume (GDV) fees. The GDV is an aggregate dollar amount of cash disbursements and purchases made using MasterCard-branded cards.
Payment cards issued by MasterCard usually come with the MasterCard logo, and they are called closed-loop cards. Such cards are accepted anywhere, and the logo helps to indicate their eligibility for use.
Four major companies facilitate electronic card payments in the United States. The companies are responsible for handling most of the world’s card payments – American Express, MasterCard, Discover, and Visa. Each company offers its services through some form of co-branded relationship by partnering with various institutions.
All electronic payments cards are assigned a Bank Identification Number (BIN) or issuer identification number (IIN). It is a unique eight-digit number that distinguishes the network processor for electronic transactions. The issuer identification number is used during the verification steps of a transaction to verify the account’s funds before authorizing the cardholder to make a transaction.
The MasterCard Business
MasterCard releases its quarterly and annual reports that show revenues and gross dollar volume. The values show the sum of money comprehensively transacted on all its branded cards issued. Strategic partnership with key market players helps MasterCard to offer several types of cards while diversifying its customer base in the new and existing markets. Its electronic payment cards comprehensively include debit, credit, and prepaid cards.
Most of its business involves partnerships with governments, financial institutions, technology companies, merchants, and other businesses to provide both closed-loop and open-loop services. MasterCard does not issue cards, generate revenue from interest rates, or extend credit, given that it does not have a banking division.
The following are the two main ways in which MasterCard operates:
1. Co-branded cards with financial institutions
MasterCard’s businesses operate in the form of co-branding with retailers or financial institutions. Institutions that partner with MasterCard act as the issuer. The institution is given the prerogative to determine the cardholder’s terms and conditions. In addition, a partner may decide to issue debit, credit, or prepaid cards.
The financial institution customizes the MasterCard-branded card using various features to attract a variety of customers. For example, payment cards may include a 0% introductory rate, reward points, cash back program, or no annual fees.
However, the partnership may allow MasterCard to participate in designing the card’s features. Cards issued through co-branding relationships with financial institutions are typically open-loop in nature. It implies that the card can be used wherever MasterCard is accepted. The financial institution determines all the underwriting and issuance of the payment card.
2. Co-branded cards with retailers
A third-party bank is required to be the issuer in the case of co-branded cards with retailers. As with co-branded cards with financial institutions, the cards may also be open-loop or closed-loop. Open-loop cards can be used in any place, provided MasterCard brand is accepted there. Cardholders benefit from open-loop retailer cards the same way they benefit from the closed-loops cards, except that they are guaranteed additional perks.
Conversely, the use of closed-loop retailer cards is restricted to designated retailers. Their reward programs are exclusively based on spending at the retailer. Approval for the two cards will depend on a cardholder’s credit profile. Holders with higher ratings will usually qualify for the open-loop cards, while low credit quality cardholders can only access closed-loop cards.
MasterCard Operation, Network, and Fees
A transaction network comprises different relationship maps that collect clients’ fees, depending on the agreement and the type of card issued. A typical transaction on MasterCard’s network involves five participants – MasterCard, the cardholder, the issuer, the merchant, and the acquirer.
In most cases, an agreement between the cardholder and the merchant determines the fees to be charged. At the time of the card’s authorization, MasterCard may impose switching fees to the issuer of a payment card, but generally, interchange fees determine the amount cardholders incur and issuers earn during a transaction. The issuer authorizes the transaction and pays the acquirer an amount equivalent to the transaction’s value, minus the interchange fees.
Merchants Discounts and Issuers
A merchant must maintain a bank account that can receive electronic payments on the MasterCard network. During a transaction, from the cardholder’s end, MasterCard routes funds from the cardholder’s bank to that of the merchant. The issuer parts with a fee – a merchant discount – upon each transaction.
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