Quick disclaimer: this is not a professional industry guide. It’s simply my personal take from my time working at a payment company. I’m sharing it because I know how confusing payments can feel when you’re just getting started, and maybe my notes will help someone build a mental model of how it all works.
When you use your credit card, it might feel like a simple exchange. You pay, the merchant gets paid, and you earn a few points or cash back along the way. But behind that tap sits a complex network of banks, processors, and payment systems, and that “free” reward you get isn’t as free as it seems.
What Does It Mean When a Bank “Issues” a Card?
In the U.S., when banks issue consumer cards, they’re not doing everything on their own. Except for a few major banks who have their own in-house systems, most small, mid-sized, and even large banks actually rely on third-party providers like FIS or Fiserv. These companies provide the core banking and issuer processing systems that power a bank’s card business: account management, transaction processing, card management, billing, and more.
In other words, banks plug into these platforms to issue and manage cards without having to build the entire infrastructure themselves. But while the technology comes from these processors, risk and compliance responsibilities still fall on the banks. These processors are technology providers, not regulated financial entities. They must comply with certain security standards like PCI DSS, but they don’t handle customer due diligence or regulatory obligations — that’s bank’s job.
For banks using these third-party systems, connections to card networks like Visa or Mastercard are usually handled through the processor. So instead of each bank integrating directly with Visa or Mastercard, these third-party systems serve as intermediaries that already maintain those integrations.
The Special Cases: American Express and Discover
Visa and Mastercard follow what’s called the Four-Party Scheme: Cardholder, Merchant, Issuer, Acquirer, with the card network sitting in the middle to route information between issuers and acquirers.
But two card networks work differently — American Express (Amex) and Discover. They use a Third-Party Scheme, meaning they act as issuer, acquirer, and network all at once. Both Amex and Discover hold their own financial institution licenses and operate closed-loop networks. They issue cards directly and process the transactions themselves.
That’s why you’ll never see a bank issuing an Amex- or Discover-branded Visa or Mastercard, they’re entirely separate systems. Still, both Amex and Discover partner with large acquiring institutions to expand merchant acceptance, which is why most merchants today support all four major card brands: Visa, Mastercard, Amex, and Discover.
The Real Logic Behind Rewards
Banks often promote credit card rewards that offer cash back or points, giving the impression that rewards are a “free bonus.” But the reality is that those rewards come from merchant fees, specifically, the interchange fee.
Here’s what actually happens:
- When a cardholder makes a purchase, the acquirer sends the transaction request through the card network to the issuer.
- Once the issuer approves, the funds flow in the opposite direction, and the acquirer pays the issuer an interchange fee.
- That interchange is the issuer’s main source of income from card transactions.
- The issuer then shares part of that revenue back with the cardholder in the form of rewards, essentially trading profit margin for customer loyalty.
Meanwhile, the card network takes a smaller network fee for routing and settlement. When acquirers quote merchants their processing rates, they include three components: the interchange fee (paid to the issuer), the network fee (paid to the card network), and the markup. Together, these make up what’s known as the merchant rate or processing rate, the total cost merchants pay to accept cards.
For most merchants, the rate sits around 2-3.5%, but for integrated e-commerce platforms, it can reach 5-10% since payment processing is bundled with other services like fraud protection and site hosting.
Many merchants eventually pass these fees on to customers through higher prices or convenience fees. So while consumer enjoy their 1-2% cash back, those rewards are ultimately funded by the same system. In the end, consumers are still paying for their own rewards.
Credit, Debit, and ACH Payments
ACH (Automated Clearing House) payments, on the other hand, work completely differently. They move funds directly between banks, outside of card networks. ACH payments settle in batches (not instantly like cards), usually taking 1-3 business days, but they’re much cheaper.
Credit card interchange fees are generally higher than debit card fees, which is why some merchants charge extra for credit but not for debit or direct bank payments.
That’s why ACH is commonly used for rent, payroll, utilities, or large transfers where cost matters more than speed.
So, Who Really Pays?
The process of issuing and using a card is far from simple. Behind every tap is a complex ecosystem of banks, networks, processors, and technology providers, each taking a small cut along the way. Your rewards, your card, even your “free” perks, they all exist because somewhere in the chain, someone else is paying for it.
Waypoints 