What is collateral and why is it key to card operations?

In the world of cards, there are many elements operating in the background to ensure that a purchase, withdrawal, or payment processes securely and without delays. One of these elements is key to the system's stability: collateral.

Whether your business offers credit, debit, or prepaid cards, with brands like Visa or Mastercard, you need to have a fund called collateral, a backup that guarantees the fulfillment of your obligations throughout the transaction cycle. Learn below how it is calculated and why it is so important.

What is collateral?

Collateral is a financial guarantee required by international brands, such as Visa or Mastercard, from all card issuers. Its purpose is to protect the payments ecosystem against potential defaults by the issuer, ensuring that each part of the process can be completed without friction, even if there are unforeseen events.

In practice, it is a blocked fund that acts as a backup in case the issuer does not transfer the corresponding funds for completed transactions. If this occurs, the brand can use the available amount in the collateral to cover the payments that must be made to the acquirer or merchant, preventing interruptions or rejections in the chain.

In summary: collateral acts as a safety cushion that allows everything to keep running smoothly, even if something goes wrong. The established amount is safeguarded as a guarantee by the brands.

Why is it so important?

Because collateral is not only a technical requirement but also an essential element to maintain stable operations, comply with brand standards, and scale businesses without interruptions.

Furthermore, by understanding how this mechanism works and having visibility over its evolution, companies can make more informed decisions about their business: from releasing surpluses when not in use, anticipating adjustments according to their POS growth, to planning new expansions without hidden financial risks.

How does collateral intervene in the transaction cycle?

Every time a user uses their card, a process consisting of three stages is activated:

1. Authorization: the user makes a purchase or withdrawal.
2. Settlement: acquirers and merchants report the transaction.
3. Clearing: the brand informs the amounts, and the transfer of funds is made.

During this journey, the collateral remains active as a backup, ensuring that the brand can meet the payments to the acquirers, even if the issuer does not.

How is the required amount calculated?

The collateral amount is defined by the brand, such as Visa or Mastercard, and is based on the average daily TPV (Total Payment Volume) of the issuer over the last 90 days. Additionally, it is considered and multiplied by a factor that varies according to:

• The country.
• The brand.
• The type of card (credit, debit, or prepaid).

Let's look at two practical examples of collateral calculation:

• If the average daily TPV rises from $100 to $150 and the multiplier is 4x, the required collateral increases from $400 to $600. The collateral must be increased by the difference.
• If the average daily TPV decreases in volume, it could be a surplus. In that case, it is possible to request a refund of the surplus.

Learn about our Collateral management

If you have our BIN Sponsorship solution, where we provide you with the network's license to issue your cards, we assume regulatory and operational management, which includes:

• Reconciliation with the brand.
• Collateral fund management.
• Automatic reports and monitoring.

Moreover, from our Dashboard, businesses have real-time access to the available collateral amount, detailed information on its usage, and alerts on when part of the fund can be released or reused.

If you hired our Issuer Processing solution, where you already have the license to issue your cards, you manage the relationship with the brand and administer the collateral.

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The payments ecosystem demands increasing precision and resilience. Understanding how mechanisms like collateral work is an advantage for any card business looking to operate professionally, minimize risks, and respond swiftly to changes in volume or demand.