Camel Toe Central
Closed systems, or three-party systems, such as Discover and American Express typically issue cards to consumers and acquire merchants to accept the card. They set fees to both sides, which largely consist of an annual fee, an interest rate (for credit cards) and a rewards program for consumers, and a fee for merchants (termed the merchant discount in the industry). A closed card platform can choose any structure of prices that it so desires between cardholders and merchants. In particular, if low cardholder fees and high merchant fees are what generate the most card transactions or profit, then the closed card system is free to set this structure of prices.
In contrast, many of the largest systems separate the clearing-house services from the task of obtaining consumers and merchants. This is true for Visa and MasterCard, as well as for debit networks such as NYCE and Pulse. Thus, the direct customers of these systems are banks. The systems are open in the sense that any bank or equivalent financial institution can join. In these systems, banks join and then seek to issue cards to consumers and acquire merchants to accept cards. When a consumer makes a purchase from a merchant, the payment is authorized and routed from the issuing bank through the payment system (i.e., Visa or NYCE) to the merchant’s account with the acquiring bank; subject to liability rules governing fraud, payments are generally guaranteed to the merchant, and the issuer is responsible for collecting funds from the consumer. Since many banks are typically associated with each system, there can be substantial competition among banks to offer access to the system. The competition takes place over the terms mentioned above, fees and rewards, and other features such as consumer protection and customer service. Open systems are often referred to as four-party systems, referring to the merchant, the consumer and the two banks, although the network owner is really a fifth party.
Typically, the owner of the open system collects a fee, often called the switch fee for the service. These are fairly small and, to date, have been largely uncontroversial. In addition to the switch fee, open systems set an interchange fee. The interchange fee is an amount that the merchant’s bank pays to the consumer’s bank as part of a typical purchase transaction.
