What Do Visa and Mastercard Do? Card Networks Explained

Picture this common scenario: you are standing at a checkout counter in a retail store in Bengaluru or paying for groceries online. You tap your credit card against a point-of-sale terminal, or submit an OTP on a payment gateway. In less than two seconds, the machine beeps, the screen flashes approved, and you receive an SMS confirming that Rs. 2,500 has been debited from your account.

Take a closer look at the plastic or metal card in your wallet. While the primary branding belongs to your bank—such as HDFC Bank, ICICI Bank, State Bank of India (SBI), or Axis Bank—there is another familiar emblem stamped in the corner: the interlocking circles of Mastercard or the blue-and-gold flag of Visa.

A common misconception among consumers is that Visa and Mastercard are massive global banks. People often wonder if Visa decides their credit limit, or if Mastercard holds their savings deposits. In reality, if you were to call Visa customer care asking for a waiver on your annual fee or an increase in your credit line, they could not help you. Visa and Mastercard do not issue cards, do not set interest rates, and do not hold a single rupee of consumer deposits. Instead, they build and maintain the global digital highways that allow money to move securely between institutions in milliseconds.

The Fundamental Myth: What Card Networks Actually Are

To understand what Visa and Mastercard do, it helps to first understand what they do not do. They are not lenders, they are not depository banks, and they do not manufacture payment hardware.

Instead, Visa and Mastercard are card payment networks—often referred to in financial engineering as payment schemes or transaction switches. At their core, they operate high-capacity, fault-tolerant telecommunications and computing networks. Their job is to transmit financial data, authenticate credentials, and calculate settlement balances between financial institutions spread across hundreds of countries.

A useful mental model is the telecommunications industry. If you own an iPhone connected to an Airtel SIM card and you call a friend using a Samsung phone on Reliance Jio, Apple and Samsung do not manage the call connection. Airtel and Jio manage the customer relationships, but underlying telecom protocols route the data packets between the two distinct carriers.

In the financial ecosystem, your issuing bank is your telecom carrier, the merchant’s bank is the recipient’s carrier, and Visa or Mastercard operates the global optical fiber and switching infrastructure that links them together.

The Four-Party Payment Model: Anatomy of a Transaction

Every time a card payment occurs, an intricate coordination takes place behind the scenes. This structure is universally known as the Four-Party Model (though, including the network itself, there are technically five participants).

To see how these entities interact, imagine you are buying a laptop worth Rs. 60,000 from an electronics retailer using your ICICI Bank credit card, while the store uses an Axis Bank payment terminal:

1. The Cardholder (You): The customer who was issued the card and initiates the purchase.
2. The Issuer (Your Bank): The financial institution that issued your card—in this case, ICICI Bank. The issuer holds your credit account, evaluates your creditworthiness, and pays on your behalf during a transaction.
3. The Merchant: The business selling the goods or services (e.g., Croma, Amazon India, or your local supermarket).
4. The Acquirer (Merchant’s Bank or Aggregator): The financial institution or merchant acquirer—such as Axis Bank, often partnered with point-of-sale terminal providers like Pine Labs or Paytm—that provides the merchant with payment processing infrastructure and holds the merchant’s business account.
5. The Card Network (Visa or Mastercard): The neutral mediator, message router, and rule-setter connecting ICICI Bank and Axis Bank.

Without a centralized card network, every bank in the world would need to build direct, bilateral technological integrations with every other bank. If India alone has dozens of commercial banks and thousands of cooperative lenders, connecting them individually to millions of global financial institutions would create an unmanageable web of private connections.

Visa (via its proprietary network, VisaNet) and Mastercard (via Banknet) solve this problem through a hub-and-spoke architecture. Each bank only needs to connect once to the network hub to gain instant interoperability with tens of thousands of other financial institutions worldwide.

The Three Phases of a Card Transaction

When you make a payment, the process feels instantaneous. Yet, behind that two-second window lies a structured three-step lifecycle: Authorization, Clearing, and Settlement.

1. Authorization: The Split-Second Handshake

Authorization happens in real time while you stand at the checkout counter or wait on a website payment screen:

• When you tap your card, the terminal reads your encrypted card details (via the EMV chip or an NFC antenna) and packages them into an ISO 8583 or ISO 20022 financial transaction message.
• The terminal sends this data to the merchant’s acquirer (e.g., Axis Bank / Pine Labs).
• The acquirer does not know whether you have Rs. 60,000 available in your ICICI Bank account. It simply recognizes the card’s Bank Identification Number (the first 6 to 8 digits of your card) and forwards the encrypted authorization request to the appropriate network switch—Visa or Mastercard.
• The network inspects the message, runs real-time automated fraud detection algorithms, checks global sanction lists, and routes the request directly to the issuer (ICICI Bank).
• In India, under Reserve Bank of India (RBI) mandates, an Additional Factor of Authentication (AFA)—such as an EMV chip PIN for offline point-of-sale payments or an SMS OTP / 3D Secure biometric prompt for online payments—is validated.
• ICICI Bank verifies two things: Is the card authentic, and does the cardholder have sufficient credit or balance?
• If yes, ICICI Bank places a temporary hold on Rs. 60,000 and sends an “Approved” response code back through Visa/Mastercard to Axis Bank, which prints your payment receipt.

All of this commonly happens across thousands of kilometers of fiber-optic cables in under 1,500 milliseconds.

2. Clearing: Reconciling the Daily Ledger

Authorization does not move any money; it merely reserves funds and confirms legitimacy. The actual accounting happens during the clearing phase, typically at the end of the business day.

The merchant batches all approved transactions from the day and submits them to their acquirer. The acquirer forwards these records to Visa or Mastercard. The network validates the final amounts, adjusts for currency exchange rates if the purchase was international, calculates transaction fees, and delivers the finalized debit files to the issuing bank and credit files to the acquiring bank.

3. Settlement: Moving the Actual Capital

Settlement is the physical transfer of funds between institutions. Banks do not wire money individually for every coffee or grocery bill. Instead, card networks practice multilateral netting.

Over the course of a day, millions of customers use ICICI Bank cards at Axis Bank terminals, while millions of Axis Bank customers use their cards at ICICI Bank terminals. Visa and Mastercard calculate the net difference across all transactions.

If ICICI Bank cardholders spent Rs. 50 crore at Axis Bank merchants, and Axis Bank cardholders spent Rs. 42 crore at ICICI Bank merchants, ICICI Bank owes Axis Bank a net sum of Rs. 8 crore.

The network instructs settlement banks (often central banks like the RBI or major correspondent banks) to transfer these net funds across reserve accounts. Once the acquirer receives the net settlement, it deposits the net purchase amount into the merchant’s commercial bank account.

How Visa and Mastercard Make Money

A frequent question is how Visa and Mastercard generate billions of dollars in operating profit without charging cardholders directly or collecting loan interest.

When a merchant accepts a card payment, they do not receive 100% of the sale price. They pay a service fee known as the Merchant Discount Rate (MDR). If you spend Rs. 1,000 at a restaurant, the restaurant might only receive Rs. 982, with Rs. 18 (1.8%) deducted as MDR.

This fee is split among three players:

The Interchange Fee (The Lion’s Share)

The largest portion of the MDR (often 70% to 80% of the total fee) does not go to Visa or Mastercard; it goes to the Issuing Bank (the bank that gave you the card). This is called the interchange fee.

Interchange compensates the issuer for taking credit risk (the danger that you might default on your bill), funding interest-free grace periods, maintaining customer service, and funding cardholder reward programs like cashback and air miles. Card networks set the default interchange fee schedules, but they do not keep this money.

The Acquirer Markup

A smaller portion of the fee goes to the merchant’s acquiring bank and terminal provider to cover hardware installation, software maintenance, risk monitoring, and merchant onboarding.

The Network Assessment Fee (Visa and Mastercard’s Revenue)

Visa and Mastercard collect a small fraction of the transaction volume, known as the network assessment fee, along with small per-transaction switching fees. This fee is typically a fraction of a percent (often around 0.10% to 0.15% depending on volume, region, and transaction type).

While 0.10% on an individual Rs. 500 purchase sounds negligible—just 50 paise—card networks process hundreds of billions of transactions annually. Visa alone routinely handles upwards of 200 billion transactions in a single year across more than 200 countries. At that scale, tiny fractions of a percent generate immense revenues with very little incremental cost per transaction.

Beyond switching fees, modern card networks generate substantial revenue through value-added services:

• Cybersecurity and Fraud Management: Selling advanced risk-scoring suites (such as Visa Advanced Authorization and Mastercard Decision Intelligence) to banks.
• Tokenization Services: Charging token vault fees to safely convert sensitive 16-digit card numbers into randomized digital tokens for platforms like Amazon, Flipkart, Apple Pay, and Google Pay.
• Cross-Border Currency Conversion: Levying assessment fees when transactions cross international borders and require foreign exchange conversion.
• Data Analytics and Advisory: Providing aggregated, anonymized consumer spending insights to institutional investors, retailers, and governments.

Visa vs. Mastercard: Are There Real Differences?

For the vast majority of consumers, Visa and Mastercard are functional equivalents. Both enjoy near-universal global acceptance, both support robust cryptographic security protocols, and both operate with 99.999% network uptime.

However, technical and structural nuances exist under the surface:

When comparing card features—such as airport lounge access, reward multipliers, concierge desks, or golf privileges—the determining factor is rarely the logo itself. Instead, it depends on:

1. The Card Tier: A Visa Infinite or Mastercard World Elite card will offer far richer perks than a basic Visa Classic or standard Mastercard.
2. The Issuing Bank: Your bank decides whether your card gives you 5% cashback on dining or free movie tickets. The bank negotiates specific reward partnerships, sets the annual fee, and pays for cardholder perks.

The Indian Landscape: RuPay, RBI Directives, and UPI

India’s retail payment landscape is unique, governed by forward-looking regulations from the Reserve Bank of India and domestic payment systems operated by the National Payments Corporation of India (NPCI).

[Cardholder] ---> [POS Terminal / Gateway] ---> [Acquiring Bank]
                                                       |
                                            [Card Network Switch]
                                        (Visa / Mastercard / RuPay)
                                                       |
                                              [Issuing Bank]

1. The Rise of RuPay

In 2012, the NPCI launched RuPay, India’s homegrown card payment network. RuPay was created to reduce processing costs for domestic banks, ensure payment sovereignty, and serve underbanked populations through schemes like the Pradhan Mantri Jan Dhan Yojana.

Unlike Visa and Mastercard, which operate international servers, RuPay processes domestic transactions entirely within India, reducing clearing and settlement fees. In recent years, RuPay has challenged the global duopoly in India by pioneering Credit Cards on UPI, allowing consumers to link their RuPay credit cards directly to apps like BHIM, PhonePe, and Google Pay to make merchant payments via QR codes.

2. Data Localization Mandates

In 2018, the RBI issued a directive requiring all payment system providers to store end-to-end payment data exclusively on servers physically located within India.

Both Visa and Mastercard had to re-architect significant portions of their global infrastructure to comply, building domestic data storage and processing facilities. Entities that delayed compliance faced regulatory consequences—notably in 2021, when the RBI temporarily barred Mastercard from onboarding new domestic customers until audits confirmed total data localization compliance.

3. RBI’s Card Network Choice Mandate

Historically, when you opened a bank account or applied for a credit card in India, the bank decided your network. HDFC Bank might hand you a Visa card, while Axis Bank issued a Mastercard, without offering you an alternative.

To foster competition and prevent monopolistic lock-ins, the RBI issued guidelines in 2024 directing credit and debit card issuers to provide eligible customers the freedom to choose their preferred network (Visa, Mastercard, RuPay, etc.) at the time of issuance or renewal. This mandate puts choice directly into the hands of the Indian consumer.

4. Card Networks vs. UPI: Why Cards Still Matter

With the Unified Payments Interface (UPI) handling billions of low-value, zero-MDR transactions every month, some industry observers predicted the demise of card networks in India.

However, card networks continue to grow, particularly in the credit space:

• Unsecured Credit Lines: UPI is predominantly an account-to-account debit mechanism. Cards provide an interest-free credit line for 45 to 50 days, which debit rails cannot natively duplicate without underlying lending integrations.
• High-Ticket Purchases and EMI: Large purchases (e.g., consumer durables, smartphones, international flight tickets) rely heavily on merchant-funded zero-cost EMI programs integrated directly into card network clearing rails.
• Chargebacks and Buyer Protection: Card networks feature mature dispute mechanisms. If a merchant fails to deliver an item or a travel booking company goes bankrupt, card scheme rules allow issuing banks to initiate a chargeback to reclaim funds. Instant payment systems rarely offer equivalent buyer-protection mechanisms.
• Cross-Border Interoperability: While UPI is expanding to countries like Singapore, the UAE, and France, Visa and Mastercard remain accepted at more than 100 million merchant locations across nearly every currency on earth.

The Future: Tokenization, Passkeys, and Beyond

Card networks are not standing still. The traditional 16-digit primary account number (PAN) stamped on embossed plastic is gradually becoming obsolete.

Following the RBI’s Card-on-File Tokenization (CoFT) guidelines, merchants in India are no longer permitted to store actual card numbers, CVVs, or expiration dates on their servers. Instead, when you save a card on Swiggy, Zomato, or Flipkart, the merchant requests a unique cryptographic token from Visa, Mastercard, or RuPay.

This token represents your card exclusively for that specific merchant and device. Even if a merchant suffers a catastrophic data breach, the stolen tokens are useless anywhere else on the web.

Looking ahead, networks are deploying Click to Pay (based on the EMV Secure Remote Commerce standard) and biometric passkey authentication, replacing cumbersome SMS OTPs with device-native fingerprint or facial scans. Rather than acting as static plastic identifiers, Visa and Mastercard are positioning themselves as identity and security verification platforms for the digital era.

Conclusion

Visa and Mastercard are frequently misunderstood as lending institutions, but their real contribution lies in computing, telecommunications, and financial standards. They do not lend money or issue plastic cards; they build and run the high-speed data networks that make cashless commerce possible.

The next time you tap your card at a neighborhood store or complete a high-value purchase online, consider the journey your payment takes. Within the span of a single heartbeat, your card data traverses an intricate multi-party highway—navigating merchant terminals, acquirers, fraud engines, international switches, and central bank settlement accounts—to deliver an approved transaction.

As digital payments continue to evolve in India through UPI integration, tokenization, and regulatory choices, understanding the vital plumbing behind card networks helps you make smarter decisions about the cards you carry and how you manage your money.

• Tags:
• Visa
• Mastercard
• Card Networks
• Fintech
• Digital Payments
• Rupay