Credit Cards

Institutional Roles in Issuing and Processing

Processors

Examples:


  • Visa
  • Mastercard
  • Discover



Banks approach credit card networks such as Visa and ask to become a member. If the credit card networks agrees to allow the bank to become a member, that bank can now issue credit cards through that network to its customers. The customer now carries a balance that they must pay off, and pay interest on, through that bank to the credit card network they are a member of. Processors receive a very small amount of the discount rate collected from every transaction their credit card was used for.

Stores

In order for a store to accept a credit card sponsored through a certain credit card network, they must be a member of a bank that works with that network as well. For example, if you use your Visa card at the grocery store, the grocery store must have a relationship with Visa as well. Banks often go out and acquire businesses to add to their network by appealing to the fact that they will get more customers if they accept more types of credit cards instead of just accepting cash and Mastercard for example.

Authorization

  • The first process that a credit card goes through when used at a retailer
  • Checks whether or not your card is good for the money, what is your balance
  • Information goes from the store to the store's bank, then to the processor (Visa, Mastercard, etc), then to the person purchasing items' bank who then accepts or denies the usage of the card
  • The information then goes back through the network to the store and the transaction goes forward or is denied
  • For the money that you get for your groceries, you must pay a discount rate to the bank that you got your money from (this money is shared with the other members of the network with the bulk going to the bank providing credit)
  • The bank that issued the card sends the money paid using the card (minus their cut of the discount rate) to the processor, then the processor sends that money (minus their cut of the discount rate) to the acquiring bank (the bank that the store you purchased goods at is a member of), then that bank sends the money (minus their cut of the discount rate) to the retailer from whom you bought your groceries