The Four Corner Model, also called the 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 at 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.
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 the 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 sides. The same applies to the relationship 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 transaction details to his bank, the acquirer. But it’s not over yet. The acquirer must now collect the funds from cardholders’ accounts (to the credit merchant’s account) by transmitting the corresponding payment 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 card payments, transactions can be initiated anywhere in the world, so in many different currencies. The card networks handle the currency conversion and ensure 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.