Mastercard
Mastercard is a global payments network that enables electronic payments between consumers, merchants, issuers (card-issuing banks) and acquirers (merchant banks). It provides the infrastructure and processing rules that route transactions for Mastercard-branded credit, debit, and prepaid cards issued by partner financial institutions.
How it works
- Mastercard operates an open-loop network: cards bearing the Mastercard brand can be used anywhere the network is accepted.
- It does not issue cards, extend credit, or set cardholder interest rates. Those functions are performed by partner banks and financial institutions.
- When a cardholder pays a merchant, the transaction is routed through Mastercard’s network to authorize, clear and settle the payment between the issuer and the acquirer.
Key components and participants
- Issuer: the bank or financial institution that issues the card and underwrites the cardholder.
- Cardholder: the consumer or business using the Mastercard-branded card.
- Merchant: the business accepting payment.
- Acquirer: the merchant’s bank that receives payments.
- Network (Mastercard): the processor that routes authorizations, clears transactions, and applies network rules and fees.
- Issuer Identification Number (IIN): the prefix on card numbers that identifies the issuing network and bank.
Business model and revenue streams
Mastercard’s primary revenue sources are fees related to transaction volume and network services:
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- Gross Dollar Volume (GDV) fees: a percentage-based fee applied to the total dollar value transacted on Mastercard cards. GDV fees are a major revenue driver.
- Switching/authorization fees: fees charged for routing and authorizing transactions on the network.
- Network and processing fees: charges for use of Mastercard’s infrastructure and value-added services.
- Co-brand and partner fees: negotiated fees tied to co-branded card agreements.
Mastercard does not earn interest income or directly underwrite cardholder credit risk; those revenue streams belong to issuing banks.
Partnerships with financial institutions
- Mastercard partners with banks and other financial institutions to issue branded cards (credit, debit, prepaid).
- Issuers set card terms, rewards, fees, underwriting criteria and customer-facing features (e.g., cash back, points, promotional APRs).
- Many cards are co-branded with airlines, retailers or other organizations; fee terms for co-branded agreements vary by contract.
Fees and merchant relationships
- Merchants must contract with an acquirer to accept Mastercard payments.
- Merchants pay a merchant discount fee (a portion of which is interchange) for accepting card payments.
- Interchange fees are primarily negotiated between issuers and acquirers and compensate the issuer; network fees are separate and paid to Mastercard.
- Overall transaction economics are affected by card type, merchant category, geographic region and contract terms among issuer, acquirer and network.
Key takeaways
- Mastercard is a payments network that provides processing and rules for Mastercard-branded cards; it does not issue cards or lend to cardholders.
- Revenue is driven mainly by transaction-related fees indexed to gross dollar volume and by network/processing charges.
- Issuing banks and acquirers handle customer-facing services, underwriting and settlement arrangements; Mastercard provides the technological and network infrastructure to connect them.
Sources
- Mastercard Incorporated, Form 10‑K (SEC filings)