Waypoints

Notes from My Journey Along the Way

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  • The Hidden Economics Behind Your Credit Card Rewards

    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.

  • A Peek Behind the Card Tap: How Payments Actually Work

    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.

    Let’s meet the four main players in every card transaction

    Every card transaction involves four main players:

    • Cardholder (you)
    • Issuer (your bank — think Chase, BoA, Citi)
    • Merchant (the store you’re buying from)
    • Acquirer (the bank that holds the merchant’s account — or, in the case of payment facilitators, the account is held via the PSP)

    The card network connects them all. This includes Visa, Mastercard, Amex, and Discover. While Amex and Discover are also financial institutions, for simplicity I’ll use Visa and Mastercard as the main examples below. The card network is basically the rails that move the transaction from point A to point B.

    Here’s how a payment actually flows in real time

    Let’s say you place an order online using your Chase Visa credit card:

    • The merchant submits the transaction to the payment processor.
    • The processor formats the transaction, performs fraud checks, and submits it through Visa’s network to Chase.
    • Chase approves, and you get your confirmation.

    If this were a debit card, you might be asked for your PIN. With credit cards, the authorization step is often “silent,” and your signature or click-to-confirm is considered enough.

    Information goes first, money comes later

    Everything above is just information flow — basically a yes/no message.

    The money flow happens later. When you pay $10 to the merchant, that $10 doesn’t land in their bank account right away (we’re talking about traditional card processing, not real-time payments).

    Here’s the gist:

    • The card network logs every single transaction throughout the day.
    • At the end of the day, they calculate a net settlement. This shows how much each bank owes or is owed by the other banks.
    • Instead of moving money one transaction at a time, banks just settle the net amount.

    This netting process is done through central clearing systems (like Fedwire or ACH in the U.S.). The card network doesn’t actually “move” money; it just produces the report of who owes what. The actual funds transfer happens between the banks themselves.

    That’s why most merchants get their payout on T+1 (next business day). Cross-border transactions often take T+2 because extra time is needed for FX conversion and international clearing.

    Seeing things from the merchant’s perspective

    If you’re a merchant and you want to accept card payments, you need an acquirer or a payment service provider (PSP).

    Most PSPs are “aggregators,” meaning you only need to integrate once and you can start accepting Visa, Mastercard, Amex, Discover, ACH, even digital wallets. That’s the convenience of a PSP. It handles the messy part of connecting to all those networks so you can focus on running your business.

    Why KYC can feel like a big hurdle

    Before you can go live, you’ll go through KYC (Know Your Customer). The acquirer will ask for:

    • Your legal entity details
    • UBO (Ultimate Beneficial Owner) information
    • Your business model and supported currencies
    • Historical transaction data (if you have any)
    • … and more

    Based on that, they assign you a risk profile. High-risk merchants may need to put down a reserve, have longer settlement cycles, or even get rejected.

    And even if you’re approved, they’ll keep monitoring your account. If your refund or dispute rates spike, they might increase your reserve, delay settlements, or suspend you.

    Here’s what PSPs really do behind the scenes

    First of all, PSPs aren’t banks. They’re technology companies that act as Payment Facilitators (PayFacs).

    They work with licensed acquiring banks behind the scenes, bundle all the complex payment rails into APIs, and make it easy for merchants to integrate payments in a few lines of code.

    This is why so many startups choose them as their first payment solution, not because they’re the only option, but because they let you get started quickly without negotiating directly with banks or card networks.

    Of course, there’s a trade-off. PSPs also carry risk:

    • If you’ve already been paid out and a customer disputes the charge, the PSP fronts that refund.
    • If your account balance is zero and you disappear, the PSP eats the loss, which is why they’re so careful with onboarding and risk monitoring.

    This is how money really moves at the end of the day

    One thing that used to puzzle me: who actually initiates the money movement during daily settlement?

    Here’s the answer I eventually found:

    • Card networks don’t move money. They just provide the net settlement report.
    • Banks move money. Each issuer and acquirer uses that report to push/pull funds through central clearing systems.

    So yes, Visa and Mastercard really do stay “hands off” when it comes to holding or transferring funds.

    When you step back, here’s what it all looks like

    Payments can sound complicated — issuers, acquirers, gateways, processors, PayFacs. But at its core, it’s not that different from other industries. Networks keep the ledger, banks move the money, and payment processors make it easy for merchants to plug in.

    It’s a layered system, kind of like a supply chain. Visa/Mastercard don’t connect with every single merchant directly. They connect with a few large acquirers, who then connect with PSPs, who then serve thousands of merchants.

    Honestly, this is a pattern you see in many industries. Take Google Cloud, for example — it’s essentially a “virtual landlord.” You’re renting space, servers, and infrastructure instead of owning them outright, just like a company renting office space. Many so-called “new” inventions are really digital versions of traditional services. Payments work the same way: the technology is new, but the underlying principles mirror what’s been done in banking and commerce for decades.

    I wrote this post for anyone who’s new to payments, or for merchants who’ve ever wondered why their payment processor asks for so much documentation or suddenly withholds funds.

    If you want to go deeper, there are amazing industry white papers and books out there. But if you just wanted a peek behind the curtain, this is my personal way of making sense of it all.