Cards and payment rails

A bank’s customers judge it largely by how payments work. Cards must be accepted, transfers must arrive, and salaries must land on time. Behind each of these is a set of rails: schemes, clearing systems and settlement systems, each with its own membership rules.

This article explains the main rails a new bank connects to, using the EU as the most detailed regulatory example.

Card schemes

A card scheme is a set of rules and a network that lets cards issued by one institution be accepted by merchants served by another. The EU Interchange Fee Regulation distinguishes two models.

Model	How it works	Examples of the structure
Four-party scheme	Transactions flow from the payer’s account to the payee’s account through the scheme, an issuer on the payer’s side and an acquirer on the payee’s side	The large international debit and credit card networks
Three-party scheme	The scheme itself provides both issuing and acquiring	Networks that issue cards and sign merchants directly

Issuing and acquiring

The regulation defines both roles. An issuer is a payment service provider “contracting to provide a payer with a payment instrument to initiate and process the payer’s card-based payment transactions”. An acquirer is a provider “contracting with a payee to accept and process card-based payment transactions, which result in a transfer of funds to the payee”.

Role	Customer	Main activities	Main risks
Issuing	Cardholder	Card issuance, authorisation, credit or debit of the account, disputes, fraud monitoring	Credit risk on credit cards, fraud, chargebacks, scheme compliance
Acquiring	Merchant	Merchant onboarding, settlement to merchants, chargeback handling	Merchant fraud and insolvency, chargeback liability, AML risk in merchant portfolios

The two are different businesses with different risk profiles. A bank can do either or both. Issuing is the usual starting point for a retail bank; acquiring needs merchant risk expertise and more capital for chargeback exposure.

Interchange

Interchange is the fee paid between issuer and acquirer on each card transaction. In the EU, the Interchange Fee Regulation caps it at 0.2% of transaction value for consumer debit card transactions and 0.3% for consumer credit card transactions.

Commercial cards are outside the caps. Interchange caps reduce issuing revenue, which matters for business models that rely on card income.

Principal membership and BIN sponsorship

Schemes license institutions to issue or acquire under their brand. Membership rules are private contracts set by each scheme, not regulation, and they change. The broad structure is similar across the major networks.

Principal membership

A principal member has a direct contract with the scheme. It receives its own bank identification number (BIN) ranges, settles directly with the scheme, and is directly responsible for compliance with scheme rules.

Principal membership usually requires a licence, capital or collateral, operational capability and scheme approval. Settlement exposure to the scheme may need to be covered by collateral, especially for new members.

BIN sponsorship

A sponsored issuer issues cards under a principal member’s membership, usually on BIN ranges assigned through the sponsor. The sponsor remains responsible to the scheme, and in turn imposes controls, reporting and often collateral on the sponsored institution.

	Principal membership	BIN sponsorship
Contract with the scheme	Direct	Through the sponsor
Time to launch	Longer	Shorter
Control of product and data	Full, within scheme rules	Shared with the sponsor
Cost structure	Scheme fees and own operations	Scheme fees plus sponsor margin
Concentration risk	Lower	High dependence on one sponsor

Many new banks and payment firms start sponsored and migrate to principal membership once volumes and controls justify it. The migration should be planned from the start, because BIN ranges, card stock and contracts all change.

Issuer processing

Separately from membership, the issuer needs a processor to authorise transactions in real time, manage cards and connect to the scheme. Processing is usually outsourced and, for a bank, is typically a critical or important function under outsourcing and operational resilience rules.

SEPA

The Single Euro Payments Area harmonises euro payments. According to the ECB, the SEPA region consists of 41 European countries, including countries outside the euro area and the EU. The schemes are developed and administered by the European Payments Council, an association of payment service providers.

SEPA scheme	What it does
SEPA Credit Transfer (SCT)	Payer-initiated euro transfers
SEPA Instant Credit Transfer (SCT Inst)	Payer-initiated transfers that make funds available within ten seconds
SEPA Direct Debit (SDD)	Payee-initiated collections based on the payer’s mandate

The SEPA Regulation requires euro credit transfers and direct debits within its scope to use the ISO 20022 XML standard between payment service providers. A new bank offering euro accounts must join the schemes, directly or through a sponsoring participant, and reach every other reachable provider.

Instant payments in the EU

Regulation (EU) 2024/886 made instant euro credit transfers mandatory for providers that offer standard euro credit transfers.

Requirement	Euro area providers	Providers in non-euro Member States
Receive instant credit transfers in euro	By 9 January 2025	By 9 January 2027
Send instant credit transfers in euro	By 9 October 2025	By 9 July 2027
Verification of the payee	By 9 October 2025	By 9 July 2027

The payee’s provider must make funds available within 10 seconds of receipt of the payment order. If the payer’s provider receives no confirmation within that time, it must restore the payer’s account. Charges for instant transfers may not exceed charges for the equivalent standard credit transfers.

Verification of the payee requires the payer’s provider to check that the payee’s name matches the account identifier before the payment is authorised, and to tell the payer of any mismatch. This is a fraud control that the FATF’s revised payment transparency standard also points to.

The regulation also opened payment systems to non-banks. Because payment institutions and e-money institutions were not covered by the Settlement Finality Directive’s definition of institution, they were effectively prevented from participating in designated systems. The regulation amended that directive, with Member States required to apply the change by 9 April 2025.

ISO 20022

ISO 20022 is an international standard for financial messages. Compared with older formats, it carries more structured data about payers, payees, purposes and remittance information.

For banks, the practical effects are:

1. Better data for sanctions screening and transaction monitoring, because names and addresses are structured.
2. More automation in reconciliation, because remittance information travels with the payment.
3. Mapping and truncation risk where systems still convert between formats.
4. Investment in core and payment hub systems to generate and read the richer messages.

Real-time gross settlement

Large-value interbank payments settle in central bank money through real-time gross settlement (RTGS) systems. In an RTGS system, each payment settles individually and immediately, rather than being netted with others at the end of a cycle.

The Eurosystem’s RTGS system is T2, launched in March 2023 to replace TARGET2. The ECB describes it as processing payments one by one on a continuous basis with immediate finality, using ISO 20022 messaging, with central liquidity management functions. It states that every eight days T2 processes euro payments with a total value close to the euro area’s annual GDP.

Direct or indirect participation

Model	What it means	Typical for
Direct participant	Own account at the central bank, sends and receives payments directly	Larger banks, banks with high euro volumes
Indirect access	Payments made through a direct participant acting as correspondent	Smaller and newer banks

Direct participation requires eligibility, a central bank account, intraday liquidity management and technical connection. Indirect access is quicker but creates dependence on the settlement bank, as discussed in the correspondent banking article.

Planning a bank’s payment stack

1. Decide which rails are needed on day one. Domestic transfers, SEPA, instant payments, cards and foreign currency each need separate access.
2. Choose direct or sponsored access per rail, with a migration plan where sponsorship is temporary.
3. Size liquidity for settlement. Instant payments run around the clock, so liquidity must be available outside business hours.
4. Build fraud controls into the flow, including payee verification and real-time monitoring, because instant payments cannot be recalled.
5. Treat processors and sponsors as critical providers under outsourcing and resilience rules, with exit plans.

The final article in this series explains why the same activities are licensed differently from one jurisdiction to another.