The Four-Party Model
Last Updated: 2025-12-18
Status: Complete
The Four-Party Model (also known as the Four-Corner Model) is the foundational structure of modern card payment networks. Understanding this model is essential for anyone building payment systems.
Overview
The Four-Party Model consists of four main participants in every card transaction:
| Party | Role | Example |
|---|---|---|
| Cardholder | Consumer who uses the card | You, buying coffee |
| Merchant | Business accepting the payment | Starbucks |
| Issuing Bank (Issuer) | Bank that issued the card | Chase (your credit card bank) |
| Acquiring Bank (Acquirer) | Bank that enables merchant to accept cards | Wells Fargo Merchant Services |
The Card Network (Visa, Mastercard) sits in the middle, facilitating communication between all parties.
Visual Representation
Basic Four-Party Structure
┌─────────────────────────────────────────────────────────────────────────┐
│ CARD NETWORK │
│ (Visa / Mastercard) │
│ │
│ Sets rules, routes transactions, manages disputes, collects fees │
└─────────────────────────────────────────────────────────────────────────┘
▲ ▲
│ │
│ │
┌────────┴────────┐ ┌────────┴────────┐
│ ISSUING BANK │ │ ACQUIRING BANK │
│ (Issuer) │ │ (Acquirer) │
│ │ │ │
│ - Issues cards │ │ - Enables card │
│ - Approves txns │ │ acceptance │
│ - Bears credit │ │ - Bears merchant│
│ risk │ │ risk │
└────────┬────────┘ └────────┬────────┘
│ │
│ │
▼ ▼
┌─────────────────┐ ┌─────────────────┐
│ CARDHOLDER │────────────▶│ MERCHANT │
│ │ purchases │ │
│ - Uses card │ goods or │ - Sells goods/ │
│ - Pays bill │ services │ services │
│ to issuer │ │ - Receives │
│ │ │ payment │
└─────────────────┘ └─────────────────┘
Four-Party vs Three-Party Model
Before diving deeper, it's important to understand that not all card networks use the Four-Party Model.
Three-Party Model (Closed-Loop)
American Express and Discover originally operated as Three-Party networks:
┌─────────────────────────────────────────────────────────────────────────┐
│ THREE-PARTY MODEL (Closed-Loop) │
├─────────────────────────────────────────────────────────────────────────┤
│ │
│ ┌─────────────────────┐ │
│ │ AMEX / DISCOVER │ │
│ │ │ │
│ │ Acts as BOTH: │ │
│ │ • Issuer │ │
│ │ • Acquirer │ │
│ │ • Network │ │
│ └──────────┬──────────┘ │
│ │ │
│ ┌────────────┴────────────┐ │
│ │ │ │
│ ▼ ▼ │
│ ┌─────────────────┐ ┌─────────────────┐ │
│ │ CARDHOLDER │──────▶│ MERCHANT │ │
│ └─────────────────┘ └─────────────────┘ │
│ │
└─────────────────────────────────────────────────────────────────────────┘
Key Differences:
| Aspect | Four-Party (Visa/MC) | Three-Party (AmEx/Discover) |
|---|---|---|
| Network role | Routes messages only | Issues cards + acquires merchants |
| Interchange | Paid issuer → acquirer | No interchange (internal) |
| Merchant fees | Lower (2.0-2.5%) | Higher (2.5-3.5%) |
| Control | Distributed | Centralized |
Modern Reality: Today, AmEx and Discover also license third-party issuers, making them quasi-four-party networks. But they still have proprietary acquiring arms.
Why it matters for PayFac:
- AmEx OptBlue program allows PayFacs to accept AmEx through their existing acquirer
- Different fee structures and chargeback rules apply for each network
Deep Dive: Each Party's Role
1. Cardholder
The cardholder is the consumer who:
- Has a contractual relationship with the issuing bank
- Uses the card to make purchases
- Is responsible for paying the monthly bill
- Can dispute transactions (initiating chargebacks)
Key Point: The cardholder has NO direct relationship with the merchant's bank or the card network.
2. Merchant
The merchant is the business that:
- Has a contractual relationship with the acquiring bank
- Accepts card payments for goods/services
- Pays fees (Merchant Discount Rate) to accept cards
- Bears responsibility for valid transactions and fraud prevention
Key Point: The merchant receives the transaction amount MINUS fees, typically 1.5% - 3.5% of the sale.
3. Issuing Bank (Issuer)
The issuer is a financial institution that:
- Issues credit/debit cards to consumers
- Sets credit limits and terms
- Bears the credit risk (if cardholder doesn't pay)
- Approves or declines transactions in real-time
- Receives interchange fees on every transaction
Examples: Chase, Bank of America, Capital One, Citi
Key Point: The issuer makes money from:
- Interest on unpaid balances
- Annual fees
- Interchange fees (paid by the acquirer)
4. Acquiring Bank (Acquirer)
The acquirer is a financial institution that:
- Enables merchants to accept card payments
- Bears the merchant risk (chargebacks, fraud, merchant bankruptcy)
- Pays interchange fees to the issuer
- Funds the merchant (after deducting fees)
- Manages merchant underwriting and compliance
Examples: Chase Paymentech, Wells Fargo Merchant Services, Worldpay, Fiserv (see Acquiring Banks and Payment Processors for detailed coverage)
Key Point: The acquirer takes on significant risk. If a merchant processes fraudulent transactions and disappears, the acquirer is liable for chargebacks.
5. Card Network (The "Fifth" Party)
Though called the "Four-Party Model," the network is essential:
- Routes messages between issuers and acquirers
- Sets rules all parties must follow
- Calculates net positions for settlement
- Collects assessment fees for network usage
- Manages disputes and arbitration
Key Clarification: Networks facilitate the exchange of funds and calculate net positions, but they don't hold merchant or cardholder funds. They instruct banks on how much to transfer.
Examples: Visa, Mastercard, Discover (network arm), UnionPay
The Durbin Amendment: Debit Interchange Caps
The Durbin Amendment (2010, part of Dodd-Frank) caps debit interchange for large banks. For comprehensive coverage of debit networks and routing, see Debit Networks & Routing.
Who It Affects:
- Banks with $10 billion+ in assets ("regulated issuers")
- Examples: Chase, Bank of America, Wells Fargo, Citi
The Cap:
Maximum: $0.22 + 0.05% of transaction amount
(+ $0.01 fraud adjustment if eligible)
Impact:
| Issuer Type | $100 Debit Transaction |
|---|---|
| Regulated (Chase) | ~$0.27 interchange |
| Unregulated (local credit union) | ~$1.00+ interchange |
Why It Matters:
- Large banks earn ~70% less on debit vs credit
- This is why big banks push credit cards over debit
- Small banks/credit unions have competitive advantage in debit rewards
- Merchants save significantly on regulated debit (but some processors don't pass savings through)
Honor All Cards Rule
A critical network rule that affects merchants:
The Rule: If a merchant accepts Visa, they must accept ALL Visa cards, including premium cards with higher interchange.
Implications:
- Merchants cannot selectively accept only low-interchange cards
- Cannot refuse premium rewards cards
- Creates cross-subsidy: cash/debit customers subsidize rewards cardholders
Durbin Amendment Exception:
- Merchants CAN set minimum transaction amounts up to $10
- Merchants CAN offer discounts for different payment types (cash vs card)
- Merchants CANNOT surcharge based on specific card type (in most states)
Key Terms Defined
| Term | Definition |
|---|---|
| Issuer / Issuing Bank | Financial institution that issues credit or debit cards to cardholders. Responsible for authorizing transactions and extending credit. |
| Acquirer / Acquiring Bank | Financial institution that enables merchants to accept card payments. Bears risk if merchant defaults on chargebacks. |
| Interchange Fee | Fee paid by acquiring bank to issuing bank on each transaction. Set by card networks. Ranges from 0.05% + $0.22 (regulated debit) to 3.3%+ (premium credit). |
| Assessment Fee | Fee charged by card networks (Visa, Mastercard) for using their infrastructure. Includes percentage and fixed components. Typically 0.13%-0.15% + per-transaction fees. |
| Merchant Discount Rate (MDR) | Total percentage fee charged to merchants. Includes interchange + assessment + acquirer markup. |
| BIN/IIN | Bank/Issuer Identification Number. First 6-8 digits of card number identifying the issuing institution. Industry transitioned to 8-digit IINs in 2022. |
| Authorization | Real-time approval from issuer to proceed with transaction. Places hold on funds. |
| Capture | Merchant's request to collect authorized funds. Can be same day or later. |
| Settlement | Actual movement of funds between banks. Typically T+1 to T+3. See Transaction Lifecycle. |
| Chargeback | Cardholder dispute that reverses a transaction. Merchant must prove transaction was valid. See Transaction Lifecycle - Chargebacks. |
Key Takeaways
-
Four parties, four relationships: Cardholder → Issuer, Merchant → Acquirer, both connected through the Network
-
Money flows opposite to goods: Customer gets product, merchant gets money (minus fees)
-
Risk is distributed: Issuer bears credit risk, Acquirer bears merchant risk
-
Interchange is king: It's the largest fee component (1.4%-3.3% for credit) and drives industry economics
-
Networks facilitate, not hold: Visa/Mastercard route messages and calculate positions but don't hold funds
-
Durbin caps debit: Large banks' debit interchange capped at $0.22 + 0.05%
-
Honor All Cards: Merchants accepting Visa must accept ALL Visa cards, including premium
Related Topics
Deep Dives:
- Transaction Flows - Authorization, capture, settlement, and response codes
- Fee Breakdown & Money Flow - Detailed interchange, assessment, and fee economics
- Interchange Optimization - Level 2/3 data, cross-border transactions
- PayFac Position in the Model - How Payment Facilitators fit into the four-party structure
- Self-Assessment Quiz - Test your understanding
Related Fundamentals:
- Card Network Role - Deep dive into network infrastructure, BIN routing, and network rules
- Transaction Lifecycle - Detailed authorization → capture → settlement flow
- Debit Networks & Routing - PIN vs signature debit, Durbin Amendment, least-cost routing
Industry Players:
- Payment Processors - The technical backbone connecting merchants to networks
- Payment Gateways - Secure transmission layer for payment data
- Acquiring Banks - Merchant enablement and risk management
- ISOs - Independent Sales Organizations and merchant acquisition
- ISVs - Software vendors with embedded payments
References
Official Interchange Rate Documentation
- Visa USA Interchange Reimbursement Fees - Official Visa interchange rate portal
- Mastercard Interchange Programs and Rates - Official Mastercard interchange schedules
- Visa Merchant Regulations & Fees - Visa merchant fee overview
Note: Interchange rates change periodically. Always verify current rates at official network portals.
Network Rules & Standards
- Visa Core Rules and Visa Product and Service Rules - Complete Visa rulebook
- Mastercard Rules - Mastercard network standards
Regulatory Resources
- Federal Reserve Regulation II - Debit interchange fee caps (Durbin Amendment)
- CFPB Credit Card Market Report - Consumer protection and market analysis
Industry Resources
- Electronic Transactions Association (ETA) - Payments industry association
- Nilson Report - Industry publication tracking payment card statistics
- U.S. Payments Forum - EMV and payments standards
Further Reading
Books
- "Payments Systems in the U.S." by Carol Coye Benson & Scott Loftesness - Comprehensive textbook on US payments
- "Electronic Value Exchange" by David Stearns - History of card networks and interchange
Online Guides
- Stripe: How Cards Work - Developer-friendly overview
- Merchant Cost Consulting: Interchange Rates - Detailed rate analysis
- Helcim: Visa USA Interchange Rates - Practical interchange breakdown
Continue reading: Transaction Flows