The Four Corner Model for Card Payments

The Four Corner Model, also called Four-party scheme, is fundamental in payments. It is the model under which the vast majority of payment systems in the world operate. The Four Corner Model for card payments shows the different actors presented in the introductory article and the links between them. For this article, it is important to say in the outset that it is assumed that the cardholder’s bank and the merchant’s bank are different. When the same bank serves the cardholder and merchant, the model is very simple and the interbank network does not need to be involved. Let’s continue with a general presentation of the Four Corner Model for card payments.

Image Four Corner Model for Card payments

Four Corner Model for Card payments

On the left side, we see the cardholder and his bank, the issuer of the card; and on the right side there are the merchant, who accepts the card, and his bank which plays the role of acquirer. The merchant’s and the cardholder’s banks exchange the payment related flows via the card networks which are also referred to as card schemes.

The issuer produces the card and makes it available to his client, the cardholder. A Point-Of-Sale (POS) Terminal is usually delivered by the Acquirer to his client, the merchant (also called the acceptor). Nevertheless, the merchant can buy it from another supplier. He must then ensure that the product corresponds to his needs and meets his bank’s requirements. The cardholder and the issuer are bound by an agreement entailing obligations on both side. The same applies for the relation between merchant and acquirer. They are also bound by an agreement.

The event that triggers the flow exchanges between the various actors is the payment of an amount by the cardholder for products or services provided by the merchant. The cardholder must have a payment card (and not just a withdrawal card for example). The POS Terminal of the merchant must be able to accept the payment card. In many countries, Visa and MasterCard are accepted by almost all merchants equipped with POS terminals, whether these cards have been issued in the country or not. This is possible thanks to standardization. 

When the time comes to pay, the merchant enters the amount to settle on the TPE and presents it to the customer. The cardholder introduces his card into the merchant’s POS terminal. After the first checks, the customer is invited 1) to authenticate himself as the true owner of the card and 2) to agree to have his account debited. These two actions are performed by entering the PIN code associated with the card. 
Note: The PIN code has the same legal value as a handwritten signature, so the customer indicates when entering the PIN code that he / she made the transaction and that the linked account can be debited.

When the PIN code is correct, a request for authorization flow is transmitted from the POS terminal, first to the acquirer, then to the issuer who returns a positive or negative response that goes back to the merchant and the cardholder. They can see the response message on the POS terminal screen. In case of a negative answer, the transaction will be stopped. In the case of a positive response, payment is considered to have already taken place, even if the cardholder’s account and the merchant’s account will only be debited and credited one or two days later. Authorization requests and associated responses are transmitted via the card networks like VISA and MasterCard. But they can also be transported over a national network like the e-RSB network in France.

The merchant will repeat the same operation with other cardholders. Each time, the transaction information is kept and stored in the POS Terminal. At the end of the day or the next day, the merchant will transmit all transactions details to his bank, the acquirer. But it’s not over yet. The acquirer must now collect the funds from cardholders’ accounts (to credit merchat’s account) by transmitting the corresponding payments flows to the issuing banks.

The last step in the process is the clearing and settlement. The merchant bank gets the money only after the interbank settlement of funds.  So it is a crucial step and it is important to understand what happens here. Clearing and Settlement have been analyzed in detail in previous articles. I recommend you to read them carefully. For the card payments, transactions can be initiated anywhere in the world, so in many different currencies. The card networks handle the currencies conversion and ensures that the banks and ultimately the merchants receive the funds in their local currency. This is one of the key services provided by the card networks and without it, the payment card market would certainly look completely different today.

3 Responses to The Four Corner Model for Card Payments

  1. Soren July 7, 2018 at 1:03 pm #

    A few preconditions. before my questions;

    1. A Cardholder can buy to a certain credit limit and get a credit of up to eg. min. 15 and max. 45 days depending on the time the goods are bought i.e. if he makes three purchases for USD10 each the 1st, 10th, 15th within the same month and the cutoff day of the month is 15th – then the amount invoiced on the 01st of the following month is USD 20,- and the last payment of USD10 actually do not come due until 45 days later (01st August)
    2. The Merchant has an agreement with the Acquirer/Merchant bank to get paid within 3 days – so between these parties we now have a mismatch in regards to credit to be handled by Issuer and Merchant bank, correct?
    3. The Issuer get their payment up til 45 days AFTER purchase but the Merchant get their money in less than 3 days after Purchase – so a credit of minum 12 and max. 42 days is needed and must be funded.

    So what is the actual flow of the money and who (Issuer?, other customers?) provides the credit

    1. I buy a service from a Merchant using my Creditcard
    2. The money is credited/capped from my credit line at my issuer
    3. The issuer submit funds to the Merchant bank – when?
    4. The issuer invoice me for all payments monthly (hence the credit)
    5. The acquirer/Merchant pays the Merchant max 3 days after the purchase (with what money?- did they already get paid?)

    If it is so basic that the Issuer is funding the credit then – I guess 🙂 – I get it – nut really like to understand the payment stream in above excample

  2. Soren July 7, 2018 at 1:21 pm #

    Not sure if I explained correctly

    1. I Pay using creditcard (up to 45 days credit)
    2. Merchant get paid within 3 days by Merchant Bank
    3. Merchant bank get Paid by Issuer
    4. Issuer get paid by me ?

    Or is it 1,3,2 and 4 ?

    • Jean Paul July 9, 2018 at 3:56 pm #

      Hi Soren, thank you for your comment and your interest.
      When you pay by credit card, the merchant receives the money in the next 3 to 5 business days.
      So the issuer of the credit card pays the merchant “immediately”. But the bank account of the cardhoolder is not debited.
      But the cardholder pays the issuer only 45 days later. So the issuer is the one bearing the credit risk, not the merchant.
      The loan is granted by the credit card company (the issuer) to the cardholder, not by the merchant.

      Coming to your process steps: is it 1,2,3 and 4 ? or 1,3,2 and 4 ?
      1,3,2 and 4 is more closed to the reality. But we need to make a difference between issuer and merchant Bank.
      At the end of the day, the merchant always receives money from his Bank which holds his account.
      So we can say, the issuer pays the merchant Bank and then the merchant Bank credits the merchant account.

      For a debit card, the cardholder account is debited immediately by the issuer. During the reservation, the payment is rejected in case there is no sufficient funds on the cardholder account. If the reservation is successful, funds are reserved so that the effective payment is guaranteed to the merchant bank.

      I hope this clarifies. Please let me know if you have additional questions.

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