Credit Card Industry Overview

History

Card systems for payments date back as far as 1914 when Western Union issued a card to their employees instead of a paycheck. This card could be used in the company stores to buy goods. Later in 1950 Diners introduced a travel and entertainment card for business travel. In 1958 Bank of America released their BankAmericard which was the first revolving credit card. Then in 1966 other banks trying to find a way to compete with the BankAmericard release the MasterCharge product. In the 1970's both of these card companies started using electronic payment methods instead of the paper based system. In 1976 BankAmericard changed it names to Visa, which is pronounced the same in almost every language and in 1979 MasterCharge changes its name to MasterCard.

How Credit Card Payments Work

The Players
Aquiring Bank (Merchant Bank) - This is a bank which provides credit card merchant accounts and processes the transactions for the merchant
Issuing Bank - This is a bank which issues the credit cards to the consumers on behalf of the credit card companies. So if you go to your local bank and get a credit card this is the issuing bank. The issuing bank puts money in the merchant account on behalf of the consumer and then charges the consumer for that payment
Card Associations - These are the organizations (Visa, Mastercard) which make the rules including the interchange fees.
Processors - There are two types of processors, front-end and back-end. Front end processors deal with authorization and settlement with the acquiring banks. Back-end processors actually handle the moving of the money from the issuing bank to the aquiring bank. Processors can be both the front-end and back-end, and also the acquiring banks can be their own processors.
Merchant - This is the place where the product is purchased, whether it be a local retail establishment or an online store.
Credit Card and Merchant Account Setup
An aquiring bank will provide a merchant account to a merchant to be able to accept credit card payments, and an issuing bank will provide a credit card account for a consumer to be able to use a credit card.


Credit Card Authorization
A credit card authorization requests goes as follows.
  1. The consumer swipes their credit card or is submitted online on a website.
  2. Merchant sends the credit card data and the sales amount to request authorization of this sale to their acquiring bank.
  3. The acquiring bank then sends the request to the card issuing bank. This information is known by the of credit card number.
  4. The issuing bank checks the amount of credit available on the account and issues a proper authorization response.
  5. The acquiring bank processes this information and sends the authorization code back to the merchant.
  6. If it is a brick and mortar establishment a receipt is printed and signed signifying the consumer will pay the debt.


Settlement
Later, usually at the end of the day the merchant reviews all of the sales and transmits request for settlement from the acquiring and issuing banks.
  1. The merchant sends the request for settlement to their acquiring bank.
  2. The acquiring bank sends the request through card associations interchange and issuing bank.
  3. The issuing bank then records the settlement on the consumers account and sends the funds minus some fees back to the acquiring bank.
  4. The acquiring bank then deposits the sale amount minus fees into the merchant account.
  5. Later the issuing bank sends a statement to the consumer to pay for the credit card purchase
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