# What Is Mastercard? Understanding Its Role in Global Payments

> **Definition**
>
> Mastercard is a global payments network that partners with banks and other businesses to distribute Mastercard-branded payment cards that route transactions through its proprietary processing system.

## What Is Mastercard?

Mastercard is the second-largest payments network, ranked behind Visa, in the global payments industry. Mastercard partners with member financial institutions all over the world to offer Mastercard-branded credit, debit, and [prepaid cards](https://www.investopedia.com/ask/answers/042315/how-do-prepaid-debit-cards-work.asp).

Mastercard uses its proprietary global payments network, which it refers to as its core network, to facilitate payment transactions between banks, merchants, and consumers. These transactions generate revenue for Mastercard through the fees it charges.

### Key Takeaways

*   Mastercard is the second-largest payments network globally, following Visa.
*   Mastercard generates revenue primarily from fees based on gross dollar volume.
*   The company partners with financial institutions to offer open-loop credit, debit, and prepaid cards.
*   Mastercard does not issue cards or extend credit; its role is as a network processor.
*   Merchants must pay a merchant discount fee for accepting Mastercard payments.

## How Mastercard Operates in the Financial Sector

Mastercard itself is a financial services business that primarily generates [revenue](https://www.investopedia.com/terms/r/revenue.asp) from gross dollar volume fees. Mastercard cards are issued by member banks with the Mastercard logo and are characterized as [open loop](https://www.investopedia.com/terms/o/open-loop-card.asp). This means that the card can be used anywhere that the Mastercard brand is accepted.

Across the payments industry, there are four major payment card processors: Mastercard, Visa, [American Express](https://www.investopedia.com/terms/a/american-express-card.asp), and Discover. Each company operates a payments network and partners with a variety of institutions for card offerings.

All electronic payment cards have cardholder numbers that begin with an [issuer identification number](https://www.investopedia.com/terms/i/issuer-identification-number-iin.asp) (IIN) that distinguishes the network processor for electronic payments. The IIN can help to identify the card brand if a logo is not visible.

## Revenue Streams and Business Model of Mastercard 

In 2020, Mastercard reported $6.3 trillion worth of gross dollar volume, which shows the amount of money comprehensively transacted on all of its card offerings. The company partners with various institutions to offer different types of cards, including [credit](https://www.investopedia.com/hsbc-premier-world-mastercard-credit-card-review-4844145), debit, and prepaid. Most of Mastercard's business comes from working with financial institutions and co-brand partners to offer open-loop credit cards.

Mastercard does not have a banking division, as discussed in its 2020 Form 10-K filing:

> We do not issue cards, extend credit, determine or receive revenue from interest rates or other fees charged to account holders by issuers, or establish the rates charged by acquirers in connection with merchants’ acceptance of our products.

### Mastercard's Partnership Strategy With Financial Institutions

Mastercard teams up with financial institutions to issue its branded cards to consumers, students, and small businesses. These institutions often create [co-branded](https://www.investopedia.com/terms/co-branded-card.asp) reward cards with organizations like airlines, hotels, and retailers.

When Mastercard partners with a financial institution, the institution serves as the issuer. That institution determines the terms and benefits that a cardholder can receive on their card. A financial institution may choose to partner for the issuance of a [credit card, debit card](https://www.investopedia.com/articles/personal-finance/050214/credit-vs-debit-cards-which-better.asp), or prepaid card.

To attract different types of consumers, financial institutions offer numerous features on Mastercard-branded cards. Some popular credit card features may include no annual fee, issuer-branded or custom organization–branded rewards points, [cash back](https://www.investopedia.com/terms/c/cash-back.asp), and 0% introductory rates.

When credit, debit, and prepaid Mastercard cards are issued through partners, the financial institution is primarily responsible for all of the underwriting and issuance of the card.

## Understanding Mastercard's Network Fees and Processing 

Cards within the Mastercard network have different relationship maps depending on the type of card offered and the agreements in place. Regardless, Mastercard charges fees for usage of each Mastercard.

A transaction usually involves cardholders, merchants, [acquiring banks](https://www.investopedia.com/terms/a/acquirer.asp), issuers, and Mastercard, the network processor. Fees vary based on card and merchant agreements.

As a network processing service provider, Mastercard is responsible for the processing of a transaction. Mastercard may charge the issuer of a Mastercard a switching fee at the time of a card authorization, but generally, most fees involved with the transaction process are known as [interchange](https://www.investopedia.com/terms/i/interchange-rate.asp) fees and are negotiated between the issuer and the acquirer.

### How Merchants and Issuers Interact With Mastercard

To accept Mastercard electronic payments, a merchant must have their own (acquiring) bank that is capable of receiving electronic payments on the Mastercard network. When a cardholder uses a Mastercard, funds move from the cardholder's bank to the merchant's account. The merchant pays a fee to the issuer, called a [merchant discount](https://www.investopedia.com/terms/m/merchant-discount-rate.asp).

For Mastercard, the majority of the company’s revenue is generated from transaction fees charged to issuers and acquirers, which pay Mastercard based on gross dollar volume (GDV). The GDV fee is a percentage of the total GDV. Issuers also may be required to pay Mastercard a fee based on the co-branded card agreement. Each co-branded card agreement has different terms for fees, but in general, the GDV fee is a basic standard. Mastercard may also charge the issuer a switching fee for each card authorization, which can be a factor in determining the issuer’s interchange fee for the merchant.

> **Article Sources**
>
> 1.  U.S. Securities and Exchange Commission. “[Form 10-K Annual Report for the Fiscal Year Ended December 31, 2020, Mastercard Incorporated](https://www.sec.gov/ix?doc=/Archives/edgar/data/1141391/000114139121000018/ma-20201231.htm),” Page 6.