Understanding Payment Networks and Their Role In Payment Processing

Every time a customer swipes their card, a complex financial choreography begins behind the scenes. Payment networks make up an invisible infrastructure that handles billions of payments every year. The global economy brings in $113 trillion annually, much of it through payment processors. However, many business owners are unaware of how these detailed systems work. 

For businesses, payment processing networks can impact the fees you pay, processing times, and your overall customer experience. Because of this, you should be proactive about finding the right payment processor for your needs.

TL;DR

• Payment networks are the organizations and infrastructure that enable electronic money transfers between banks, businesses, and consumers.
• Major credit card processing networks include Visa, Mastercard, American Express, and Discover. Visa commands 52% of the credit card market share in the United States.
• The Automated Clearing House (ACH) network processes direct deposits, bill payments, and B2B transfers for over 31.5 billion transactions annually. These funds are not transferred in the same way as credit cards because the ACH network transfers funds from one bank account to another.
• By understanding how different payment networks operate, businesses can optimize processing costs and settlement times. For example, some payment processors offer next-day funding.
• Each network has unique fee structures, security protocols, and settlement timeframes that directly impact your bottom line.
• Businesses can strategically route transactions through different networks to minimize costs or accelerate funds availability.
• Working with payment processors like PayCompass gives businesses access to multiple networks through a single platform.

What Is a Payment Network?

A payment network organizes funds and transfers them electronically between financial entities. These networks connect cardholders, merchants, issuing banks, and acquiring banks. Thanks to this standardized system, payments can move securely from the buyer to the seller.

Payment networks set the rules, standards, and protocols that govern how transactions flow through the financial system. They manage risk, ensure funds are available, and authorize payments between financial institutions. Ultimately, the payment processing networks serve as the backbone of the global payments industry.

It’s hard to overstate the importance of payment networks in establishing trust between buyers and sellers. Before card processing and ACH transfers were an option, people used cash, wrote checks, or asked the merchant for credit. Merchants had to rely on the individual’s word that they would repay the credit. Bad checks were a notorious issue for merchants, resulting in lost revenue. Thanks to the modern payment processing industry, businesses can trust that the card payment, wire transfer, or direct deposit will actually arrive in their account. 

Types of Payment Networks

The financial world hosts several distinct types of payment networks, each serving different needs.

Card Networks

The most prominent payment network examples are credit card processing networks, such as Visa, Mastercard, American Express, and Discover. These networks facilitate credit and debit card transactions by connecting merchants with card-issuing banks. They establish interchange fees, security standards, and dispute resolution processes.

Card networks can be categorized as either open or closed:

• Open Networks (Visa and Mastercard): These networks allow multiple financial institutions to issue cards and acquire merchants under their brand. Then, the network processes payments.
• Closed Networks (American Express and Discover): Traditionally, these networks issue their own cards and serve as both the network and the issuer. One of the most extreme examples of a closed-loop network is a mobile app or wallet, such as the one offered by Starbucks. Once you add funds to the Starbucks-issued digital wallet, it can only be used at Starbucks.

Electronic Funds Transfer (EFT) Networks

Besides credit card processors, there are also other networks that can handle the transfer of funds. ETF networks enable account-to-account money movement:

• ACH Network: The ACH network processes direct deposits, bill payments, and business-to-business transfers. It has over 31.5 billion transactions a year. 
• Wire Transfer Networks: Fedwire, CHIPS, and similar systems facilitate wire transfers. While CHIPS handles high-value payments in the United States, Fedwire is responsible for transferring funds between the accounts that financial institutions have at Federal Reserve banks.
• Real-time Payment Networks: Newer systems, like the Federal Reserve’s FedNow Service and the Clearing House’s Real Time Payments (RTP) network, enable instant 24/7 account-to-account transfers.

Alternative Payment Networks

The payments landscape continues to evolve with the emergence of alternative networks.

• Mobile Wallet Networks: Apple Pay, Google Pay, and Samsung Pay create their own ecosystems that interact with traditional networks.
• P2P Payment Networks: Venmo, PayPal, Cash App, and Zelle facilitate person-to-person transfers through proprietary networks.
• Cryptocurrency Networks: Blockchain-based systems, such as Bitcoin and Ethereum, operate as decentralized payment networks

Major Payment Network Players and Market Share

The payment processing network landscape is dominated by a few major players who collectively handle trillions of dollars in transactions annually. Understanding their market positions helps businesses make strategic decisions about which networks to support.

Credit Card Networks

Four major credit card processing networks dominate the United States market.

Network	U.S. Market Share	Global Reach	Business Model	Cards in Circulation	U.S. Acceptance
Visa	52.2%	Accepted in 200+ countries	Open network	312.2 million cards	10.7 million merchants
Mastercard	24.9%	Accepted in 210+ countries	Open network	266.3 million cards	10.7 million merchants
American Express	19.5%	Accepted in 198+ countries	Closed network	48.4 million cards	10.6 million merchants
Discover	3.5%	Accepted in 200+ countries	Closed network	61 million cards	10.6 million merchants

Visa maintains its position as the dominant force in card payments, primarily due to the fact that it processes over 233.8 billion card transactions per year. However, Mastercard is a top competitor, with 204.51 billion card transactions annually and a growing market share in emerging markets. 

Meanwhile, American Express is known for providing cardholders more benefits in exchange for charging higher interchange fees. Interestingly, American Express cardholders are often more affluent, leading to higher value transactions.

Discover has the smallest market share and typically charges merchants less than American Express. Its claim to fame among cardholders is its high cash rewards and lack of a foreign transaction fee.

ACH Network

The ACH network is operated by Nacha. Originally, Nacha created the rules that made direct deposits and ACH bill payments possible. 

This network facilitates bank-to-bank transfers for various payment types.

• Direct deposits
• Bill payments
• Person-to-person payments
• Business-to-business payments
• Government disbursements

In 2024, the ACH network processed over 1.24 billion same-day ACH payments.. Altogether, ACH payments transferred added up to $86.2 trillion, reflecting the ACH network’s critical role in the U.S. financial system. 

Real-Time Payment Networks

Newer entrants in the payment network space focus on instant payments. 

• FedNow: The Federal Reserve’s instant payment service launched in July 2023
• RTP Network: Operated by The Clearing House, the RTP network handles a growing volume of instant transfers

New market entrants, like Zelle or Venmo, may promise instant consumer P2P payments, but these aren’t true interbank settlement systems. Unlike FedNow and the RTP network, Zelle and Venmo must use existing payment rails to process payments. By harnessing ACH and RTP, these digital payment networks can ensure near-instant transfers.

How Do Payment Networks Work?

So, how do payment processing networks work? Modern payment networks operate through a sophisticated process involving multiple parties and steps. While the specifics vary by network type, the general flow follows a similar pattern for card-based transactions.

Steps Involved in Payment Processing

When a customer makes a purchase, the payment undergoes a set process. The transaction must undergo authorization, clearing, and settlement before the payment process is complete. 

Authorization

During the authorization stage, the customer swipes or taps their card at the terminal when they make a purchase. The merchant’s terminal then sends this transaction to the payment processor. Then, this request is forwarded to the acquiring bank, which is also known as the merchant’s bank.

At this point, the acquiring bank sends the request through the payment processor, such as Visa or Discover, so that it reaches the customer’s bank. The customer’s bank is known as the issuing bank.

When it reaches the issuing bank, the bank can approve or decline the transaction based on fraud, available funds, or the account’s status. If the payment is authorized, the approval is sent in reverse through the acquiring bank until it reaches the merchant.

Clearing

Following the authorization stage, the funds have to actually move from the cardholder to the acquiring bank. Normally, the merchant batches all of their authorized transactions at the end of their typical business day. These transactions are submitted to the payment network, which then submits them to the acquiring bank. Interchange, processing, and network fees are calculated during this stage.

Settlement

Finally, the payment network calculates the exact amount owed to the acquiring bank from the issuing bank. After the money is transferred to the acquiring bank, the bank withholds any fees and deposits the remainder in the merchant’s account. In general, the settlement process takes between one and three days to complete.

Key Differences Between Networks

Different payment networks have distinct characteristics that affect how transactions are processed.

Card Networks Vs. ACH

When you compare ACH and card payment network examples, there are a few key differences in pricing, processing times, purpose, transaction methods, and consumer protections.

Feature	Card Networks	ACH Network
Processing Time	Authorization happens in seconds, but settlement can take one to two days.	While ACH settlement typically takes longer, there are some same-day options available.
Cost Structure	Percentage and fixed fees	Fixed fee (typically lower than card networks)
Transaction Method	Card-based transactions	Account and routing numbers
Main Use	Point-of-sale, e-commerce, recurring purchases	Direct deposit, bill pay, B2B
Consumer Protections	High. Consumers can dispute transactions and initiate chargebacks.	Limited protections.

ACH Vs. Wire Transfers

While both methods move money between bank accounts, ACH and wire transfers use different networks and have important distinctions. ACH transfers are batch-processed at a fairly low cost. They are slower and can take hours or days to complete. However, ACH transfers are reversible.

In comparison, wire transfers are irreversible. Once you send money to someone, those funds are gone. Wire transfers have a higher cost and must be individually processed. Often, this means that a transaction can be completed in as little as a few minutes or hours.

By understanding these differences, businesses can pick the most appropriate network for their transaction urgency, cost sensitivity, and other preferences.

The Technology Behind Payment Networks

Modern payment networks rely on sophisticated technology infrastructure to ensure security, reliability, and speed. These systems must handle millions of transactions per minute while maintaining near-perfect uptime.

Network Architecture and Security

Payment processing networks typically employ a hub-and-spoke model. Redundancies are designed to ensure reliability. These systems are set up with secure member connections between financial institutions, a central switch that routes transactions, geographically distributed data centers, and standardized communication protocols. 

Today, major networks maintain multiple processing centers. Those centers synchronize data in real-time. Even during power outages, they are able to operate continuously.

Payment networks deploy multiple layers of protection, such as end-to-end encryption and tokenization. They use the latest AI-powered fraud detection systems and advanced authentication methods. To protect consumers and merchants, networks invest billions of dollars into fraud prevention technologies to counter constantly evolving threats.

Data Standards and Messaging

Payment networks rely upon standardized formats for communicating data. Financial transaction card messages follow ISO 8583 and ISO 20022. Modern APIs provide interfaces for integrating with payment networks and effective communication.

How Payment Networks Impact Your Business

The payment network you select has a direct impact on your business operations, costs, and customer experience. When you consider the payment network your company adopts, keep the following factors in mind.

Processing Fees and Settlement Times

Each payment network contains its own fee structure. Typically, networks will have interchange fees that are set by the network and paid to issuing banks. Assessment fees are paid directly to the payment network. Meanwhile, processing fees are additional fees charged by your payment processor. 

Card network fees typically range from 1.5% to 3.5% of the transaction’s value. In contrast, ACH fees are usually fixed at $0.20 to $1.50 per transaction. However, some providers will also charge a percentage of the transaction amount on top of the ACH fees.

Funds are settled at varying speeds across different payment networks. While card networks usually take 1 to 2 business days, standard ACH transfers take 1 to 3 business days. Same-day ACH often takes just a few hours. However, real-time networks are the fastest option because they provide instant settlement. 

Chargeback and Dispute Processes

When considering a payment processing method, you should also review the expected cost of chargebacks and dispute resolution. Payment networks have set rules for transaction disputes. For example, chargebacks may have to be handled in a set time frame. 

Within the ACH network, chargebacks are known as reversals or returns. They must be processed within 60 days. Real-time payment networks typically offer limited to no dispute rights for customers.

Optimizing Your Payment Network Strategy

Armed with knowledge about payment networks, businesses can develop strategies to maximize benefits while minimizing costs.

Multi-Network Approach

Instead of relying on a single payment network, consider implementing a multi-network strategy.

• Offer card payments through major networks for convenience.
• Promote ACH for recurring payments to reduce costs.
• Consider real-time payments for time-sensitive transactions.

This approach gives customers more payment options. At the same time, it allows your business to route transactions through the most advantageous network.

Network Routing Optimization

With the right payment processor, businesses can intelligently route transactions. To do this, you’ll typically need a payment gateway or a payment orchestration platform that is capable of routing transactions through different networks.

• Send transactions through the lowest-cost network when timing isn’t critical.
• Use faster networks for high-value or time-sensitive purchases.
• Implement intelligent routing based on the transaction type, the amount, or the customer’s profile.

Advanced payment gateways can automatically optimize routing decisions to balance cost, speed, and approval rates. In the long run, this type of payment gateway can significantly reduce the time and money your company devotes to payment processing.

Future-Proofing Your Payment Infrastructure

The payment network landscape continues to evolve. Future-proof your company’s infrastructure through a few key steps.

• Investing in an intelligent payment gateway that can route transactions through the best network for your needs.
• Regularly audit your system’s security systems.
• Use an API-first design for better integration.
• Prepare for future standards by making sure you support ISO 20022 today.
• Support emerging payment methods, like cryptocurrencies, digital wallets, and buy now, pay later (BNPL) methods.
• Regularly reviewing your network mix against changing fee structures.

Businesses that adapt quickly to payment network changes can gain a competitive advantage in terms of their costs and the overall customer experience.

How PayCompass Helps Navigate Payment Networks

Managing multiple payment networks can be complex. PayCompass simplifies this process by providing access to major payment networks through a single integration. Our platform ensures optimized routing, consolidated reporting, and advanced security features. 

At PayCompass, our tools enable businesses to make well-educated decisions about payment network usage. We simplify payment processing’s technical complexity so that you can focus on growing your business. 

Final Thoughts

Payment networks are the fundamental building block of today’s economy. For a price, they connect businesses, consumers, and financial institutions from all corners of the world. By finding the best payment processing network for your business, you can improve your cash flow, achieve a better customer experience, and reduce your overall costs.

PayCompass specializes in helping businesses find the best payment processing solutions. We expertly navigate all of the major payment networks, so we can attain the most cost-effective payment solutions possible. Whether you want to reduce processing costs, speed up settlements, or expand payment options for customers, our team is here to help.

Ready to optimize your approach to payment networks? Contact us today to discuss how PayCompass can help streamline your payment processing.