What are card schemes and how do they work? A guide for small businesses

The UK Finance Payment Markets Report 2023 found 50% of all payments in the UK were made using debit cards in 2022. What's more, over 95% of the UK population owns a debit card.

With card payments on the rise, it's crucial for businesses to understand the pivotal role card schemes play in ensuring secure transactions.

Find out more about how they work, the different types on offer, and the fees involved, so you can make informed decisions for your small business.

What are card schemes?

When a customer makes a purchase using a card, card schemes play a vital role in managing the transaction process. Visa, Mastercard and American Express (AmEx) are examples of top card schemes, each providing a specific network that processes card payments globally. They ensure that the communication between your bank and your customers is secure and efficient, checking the availability of funds and verifying transaction data.

Read our guide to learn more about how small businesses can secure their payment methods.

Which banks are involved in card schemes?

The top card schemes that operate in the UK include the following:

Visa

Visa is a global digital payment technology company that operates in over 200 countries, connecting consumers, merchants, financial institutions, businesses, strategic partners, and government entities with its payment solutions.

According to Statista, Visa is the largest card scheme in the UK, with nearly 80% of the market share in 2021.

Cards with the Visa logo are distributed to the public by banks and other financial institutions rather than directly from Visa. These entities partner with Visa to utilise its payment system.

Mastercard

Mastercard is a payment network processor, and it was ranked the UK's second largest by Statista in 2021, with 20% of the market. It connects individuals, businesses and organisations in over 210 countries globally.

Mastercard works in the same way as Visa. They don't actually issue cards; they just provide the underlying network that facilitates electronic fund transfers between the customer and the retailer. Their primary source of revenue comes from transaction fees charged to merchants for processing these payments.

Maestro is a brand of debit card that's issued by Mastercard. While Maestro represents the actual physical card used for transactions, it's Mastercard that provides the infrastructure to process and authorise the payments made with the Maestro card.

American Express (AmEx)

Beginning as a company that delivered packages in the US, AmEx introduced its first payment card in the late 1950s. Today, AmEx has established itself as a major player in the global financial services sector, offering a wide range of credit cards, charge cards, and financial solutions.

While Visa and Mastercard are the top card schemes in the UK, American Express comes in first globally, according to 2021 research by Global Data.

AmEx is a payment network as well as a card issuer. This dual role allows it to issue its own cards and process transactions within its network, offering a streamlined service to its cardholders.

Who is involved in a card scheme?

In a card scheme, several key parties are involved to ensure smooth and secure payment transactions. These parties include:

Cardholder (customer) — The person who uses the payment card, whether it's a credit card, debit card, or prepaid card.

Merchant (business) — The entity or business that accepts a form of payment for goods or services. Merchants use card payment systems to process transactions.

Issuer (bank or financial institution) — The bank responsible for issuing payment cards to customers. Issuers manage cardholder accounts, authorise transactions, and handle billing.

Acquirer (merchant's bank) — The bank or financial institution that partners with merchants to process card transactions. Acquirers facilitate the transfer of funds from the cardholder's bank to the merchant's account.

Card scheme — The organisation that acts as an intermediary, enabling communication between issuing and acquiring banks during transactions.

How does a card scheme work?

Here's an explanation of how a card scheme works:

1. Transaction initiation — The transaction begins when your customer uses their payment card for a purchase, either by inserting it into a card machine, using a contactless payment method in your physical store, or entering their details online.

2. Communication with your bank — Your payment system automatically sends the purchase details to your bank.

3. Authorisation request to card scheme — Your bank then forwards the authorisation request to the relevant card scheme, like Visa or Mastercard.

4. Checking funds — After receiving the request, the card scheme directs it to your customer's bank. Their bank then reviews the account to ensure there are enough funds and that the card details are valid.

5. Approving or denying the transaction — If the funds are sufficient and the card details are accurate, the customer's bank approves the transaction. If not, it will be denied. This decision will show on your shop's payment system, providing a clear indication via an approval or denial message to both the customer and your business.

6. Moving the money — If approved, the customer's bank sends the payment through the card scheme, which deposits it into your merchant account.

What are the different types of card schemes?

Three-party card schemes

In a three-party card scheme — also known as a closed-loop scheme — the three main parties involved are:

The cardholder (the customer) — Customers who hold a card from a three-party scheme can use it to make purchases with the same company that issued the card.

The merchant (the business) — In this setup, merchants directly enter into agreements with the card scheme to accept their cards. These agreements often involve different fee structures compared to four-party schemes.

The issuer and acquirer (the bank) — In a three-party card scheme, the same company issues the card to customers and also acts as the acquirer, processing transactions made with the card. An example of this type is the American Express (AmEx) card scheme. AmEx issues its cards to consumers and authorises merchants to accept them, essentially handling both sides of the transaction.

In this type of card scheme, both you and your customers need to use a specific kind of payment card from a single card network. This is because it operates like a franchise, allowing only one card type to be used in the scheme at a time. This may limit flexibility and could result in missed sales opportunities from customers who prefer alternative card types.

However, since three-party schemes typically allow only one franchisee or business in each market, it can limit competition. The exclusivity may appeal to companies that want to dominate a particular market without facing direct competition from other businesses accepting the same card type.

Four-party card schemes

A four-party card scheme works in a similar way to a three-party card scheme but with the addition of an acquiring bank (the merchant's bank). This processes transactions for the merchant, ensuring that funds are transferred from the customer's bank to the merchant's account.

Four-party schemes are favoured in the payment industry because various types of payment cards and services are offered. These schemes include well-known card brands like Visa, Mastercard, and Union Pay.

What are card scheme fees?

Card scheme fees are charges imposed on the acquiring bank for using their network to process transactions. These fees are usually paid per transaction, often as a percentage, although some providers may opt for a monthly charge instead.

The cost of these fees varies depending on several factors, like the card network used, the type of payment card (debit or credit), and the terms negotiated between the acquiring bank and the card network. Online payments also usually have higher scheme fees compared to card machines because they involve added security measures and come with increased risk factors for card-not-present transactions.

Take secure payments for your business with takepayments

At takepayments, we offer payment solutions with all the latest technology so that you can take secure card payments for your business. From traditional chip and pin machines to mobile card machines, we’ve got a wide range of different options to choose from.

Or, if you need help deciding which terminal is right for you, want to know more about how we work, or you’re ready to book your consultation, get in touch with our payment experts at 0808 274 2017.

John Clark

Product Manager