About card networks and interchange

Card networks (also called card brands or card schemes) operate the infrastructure that routes authorization requests and settlement funds between banks. They do not issue cards or hold accounts — they provide the rails that connect the financial institutions that do.

The major card networks are:

• Open-loop networks (Visa, Mastercard) set the rules and provide the infrastructure, but they rely on issuing banks to provide cards to people and acquiring banks to service merchants.
• Closed-loop networks (American Express) act as the network, issuer, and acquirer. This gives them more control over the person experience but limits their merchant acceptance compared to open-loop networks.

When a person taps, swipes, or enters their card details online, the card network routes the authorization request from the acquiring bank to the issuing bank.

The network determines the routing path based on the Bank Identification Number (BIN) — the first six to eight digits of the card number. This identifies the issuing bank and the card product (credit, debit, prepaid, commercial).

Interchange fees are transaction fees paid by the acquiring bank (and passed through to the merchant) to the issuing bank every time a card transaction is processed. The card network sets the interchange rate.

In a typical transaction, the merchant pays a merchant discount rate that covers three components:

Interchange rates vary based on several factors:

• Card type: Rewards cards and corporate cards carry higher interchange rates than standard debit cards.
• Transaction method: Card-present (in-person, chip/NFC) transactions have lower rates than card-not-present (online, keyed) transactions because of lower fraud risk.
• Merchant category: Some industries (grocery, utilities) have lower interchange rates negotiated at the network level.
• Transaction size: Some networks have fixed-fee components that disproportionately affect small transactions.

While interchange fees are a business concern rather than a technical one, they influence integration decisions:

• Address Verification Service (AVS) and CVV data: Providing complete address and CVV data in transactions can qualify for lower interchange rates. The Reefpay payment_method object includes address_line1, zip, and cvv fields for this purpose.
• Authorization vs. sale: Two-step transactions (authorize then capture) may qualify for different rates than single-step sales, depending on the card type and merchant category.
• Tokenized transactions: Recurring transactions using stored tokens may qualify for lower recurring interchange rates.

Settlement is the process of moving funds after authorization. It happens in batches, typically once per business day.

1. The merchant's gateway sends the batch of authorized transactions to the processor.
2. The processor submits the batch to the card network for clearing.
3. The card network calculates the net settlement amounts, deducting interchange fees.
4. The issuing bank debits the person's account and transfers funds (minus interchange) to the acquiring bank.
5. The acquiring bank deposits the net amount into the merchant's account.

Reefpay manages batches through the /v1/batches endpoint. For more information, see About batch settlement.

Automated Clearing House (ACH) transactions bypass card networks entirely. Instead, they move funds directly between bank accounts through the ACH network operated by Nacha (National Automated Clearing House Association).

Reefpay supports ACH through the Vericheck processor, making it possible to offer both card and bank account payment options through a single API.

• About the role of gateways
• About electronic payments
• Supported payment methods
• Supported processors