🧭 The four-party model

Four corners, five players

The four-party model, also known as the four-corner model, has been the standard architecture for card payments since the 1970s. The name comes from the diagram used to depict it. The four corners are the cardholder, the merchant, the issuing bank, which is the cardholder’s bank, and the acquiring bank, which handles card acceptance for the merchant. In the center of the diagram sits a fifth player, the scheme (or network), such as CB, Visa, or Mastercard. It connects the other four and sets common rules for them.

The authorization flow: a few hundred milliseconds

The authorization flow is the exchange of messages through which the issuer approves or declines a transaction before the funds are collected. It is the first of the two circuits a card payment sets in motion; the second is the money flow described in the next section. The round trip happens in real time, typically 300 ms to 2 s end to end, and the answer is simply yes or no. No money moves at this stage. Only messages travel between the terminal, the acquirer, the scheme, and the issuer.

0100                            MTI: authorization request
DE002  497010XXXXXX1234         PAN (card number, truncated here)
DE003  000000                   Processing code: purchase of goods/services
DE004  000000004250             Amount: EUR 42.50 (2 implied decimals)
DE007  0711093045               Transmission date/time (MMDDhhmmss)
DE018  5411                     MCC: grocery stores and supermarkets
DE022  051                      Entry mode: EMV chip + PIN
DE037  019200000042             RRN: unique transaction reference
DE041  TPE00042                 TID: terminal ID
DE042  000003560001             MID: merchant ID
DE055  9F26...                  EMV data, including the ARQC cryptogram

0110                            MTI: issuer response
DE038  A1B2C3                   Authorization code (keep it!)
DE039  00                       Response code: transaction approved
                                (05 = generic decline, 51 = insufficient
                                funds, 54 = expired card...)

Money flows: clearing and settlement

The money flow is the second circuit, the one through which funds actually move between banks. Authorization is immediate and handles one transaction at a time; the money flow is deferred and processed in bulk. At the end of the day, the merchant runs the end-of-day batch upload: the terminal sends the acquirer the day’s transactions as a single batch. The acquirer then submits those transactions for clearing, the stage where the scheme calculates multilateral net positions between banks. Settlement then takes place on the banks’ own accounts. In France, CB transactions clear through the CORE(FR) system run by STET, the French clearing house, and settle in central bank money through TARGET, the Eurosystem’s settlement system.

Who pays what: interchange and fees

The merchant service charge (MSC) is what a merchant pays its acquirer on every card transaction. It holds the economics of the four-party model together: the revenue that the acquirer, the issuer, and the scheme earn on each transaction all comes out of it. The MSC has three components. The first is the interchange fee, which the acquirer passes on to the issuer. The second consists of the scheme fees charged by the network. The third is the acquirer’s margin, which pays for its service and its risk.

• The cardholder pays an annual card fee and any other charges (withdrawals at other banks’ ATMs, currency conversion). In Europe, merchants may not surcharge consumer card payments at the point of sale (PSD2, Art. 62).
• The merchant pays the MSC, the terminal rental or purchase, and any e-commerce gateway fees.
• The issuer earns interchange plus cardholder fees. It pays for the card, fraud losses, authorization, and customer service.
• The acquirer earns its margin. It carries the merchant risk (unpaid transactions, merchant failure before delivery, chargebacks).
• The scheme charges membership and license fees, plus transaction fees on both sides (issuing and acquiring).

The three-party model: Amex, PayPal, and closed loops

In the three-party model (also called a closed loop), a single company acts as issuer, acquirer, and scheme at once. American Express is the classic example: Amex issues the cards, signs up merchants directly, and runs the network. PayPal applies the same logic to wallets, where both payer and payee hold PayPal accounts. A transaction there starts out as a set of internal book entries at PayPal.

Strengths and limits of the model

What the four-party model achieved

• Universality: one card, tens of millions of acceptance points worldwide.
• Competition at every corner: cardholders choose their issuer and merchants their acquirer, without breaking interoperability.
• Payment guarantee: a merchant that follows the acceptance rules gets paid, even if the cardholder is insolvent or the card was used fraudulently.
• Shared security: EMV, PCI DSS, 3-D Secure, and tokenization are rolled out across the entire network.

Its structural tensions

• Pricing complexity: merchants struggle to break down their MSC. Scheme fees are not capped and have risen significantly (the UK’s Payment Systems Regulator, the PSR, documented increases of more than 30% over the five years from 2017 to 2022).
• Reliance on international schemes: outside CB, Europe routes most of its payments through US networks. This sovereignty concern gave rise to the EPI/Wero project.
• Race for scale: with four intermediaries per transaction, the infrastructure only pays off at massive volumes. Hence the consolidation of European acquirers and processors.
• Friction from deferred settlement: the gap between real-time authorization and D+1 settlement creates risks (cancellations, disputes) that instant credit transfers avoid.