Credit card industry

sapan Jain
Senior Lecturer,
Credit card deinition
credit card can be defined as the
mechanism whereby the issuing bank
provides the customer some services in the
form of payment services and also a pre
approved line of credit usually for a time
period, which is predetermined.
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ow credit card works
Suppose you buy a gift for your parents and
pay the retailer's bill by means of a credit
card. This means that you DO NOT pay cash
to the retailer and all that you do is accept a
charge to your credit card by way of signing
the charge slip. n this process, your credit
card account is charged with the amount that
you used to buy the gift.
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Cont.
ut how does the retailer get his money? The answer is
the charge that you incurred is "acquired by the
retailer's bank. This means that the retailer's bank, will
provide the retailer the amount of transaction made by
you, less the commission, once the retailer submits the
charges to his bank. This bank, called the "acquiring
bank, in turn will submit the charges to your bank (which
issued your credit card) called the "issuing bank through
the clearing mechanism maintained by the network
sponsors like Visa or Mastercard. n turn, your bank will
send you the bill (once a month) detailing all the
transactions made via credit card
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Cont.
The moment you pay the due amount to
your bank, the whole transaction cycle is
now complete. n a way, this represents a
reverse order of payment as detailed
above i.e. the retailer gets his amount from
the acquirer, who gets paid by the issuer
and you finally pay the issuer for the
transactions that you made.
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Retailer
Acquiring
bank
Clearing
network
Issuing bank
Customer
(card holder)
Goods purchased
Payment
received
Cont.
The acquiring bank initially makes the
payment, followed by the issuing bank and
only finally by the customer
The credit cycle works without the customer
not having to use cash to make a purchase.
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Cash transactions
There is a difference between the cash
transactions and the credit transactions
represented here in this diagram. n a cash
transaction scenario, there are only two parties
to the transaction. The customer makes a
purchase from the retailer and pays him
"directly using cash. The transaction ends as
both the legs of transaction viz purchase and
payments are completed. The time taken for the
whole completed transaction is very little (almost
immediate)
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Credit transaction
owever in a credit card scenario the number
of parties to the "complete cycle of
transaction is five in number. They are:
Customer (cardholder)
Retailer
cquiring bank
Clearing Network
ssuing bank
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Cont.
The increase in the number of parties also
means that there is an increase in time taken
to complete the whole cycle. This means that
some party has to be out of funds till such
time the cardholder makes the payment to
the issuing bank, leading us to the concept of
credit. Typically it is the issuing bank, which
has given credit to the customer for this
intervening period.
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Benefits to the cardholders
Convenience: Credit cards offer no-hassle shopping -
no cash, no checks, no additional identification. The
additional care needed to protect cash in case of
travelling etc is not required now as the credit card is not
the property of the finder as it happens in the case of
cash.
$ecurity: Lost cash can be used by anyone. f you lose
a credit card, report it to the bank that issued the card as
soon as possible and you may be protected from
unauthorized use of your card. owever, different banks
may have different liability policies
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Cont.
2ergency Protection: credit card will get
you through almost any emergency you can
think of. t's like a security blanket that will cover
you, in most situations.
&niversaI Acceptance: $o2e credit cards are
accepted at as many as over 20 million
merchant locations worldwide. Try that with a
personal check! f you need cash, you can get it
at TMs or banks around the world that accepts
your credit card.
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Cont.
$i2pIified Record-Keeping: Credit cards give you a record
of all your transactions for the month, so keeping track of
where your money goes is easier. Many credit card banks do
give the records of all the transactions made at the end of the
year consolidated for the whole year for tax purposes etc.
Consu2er Protection: hen you purchase goods or
services with a credit card, you have more clout if a product is
not satisfactory because your card issuer may intervene on
your behalf. This process takes the form of chargebacks etc.
Once you have already paid by cash or check for an item, the
merchant may not be too interested in making adjustments.
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Cont.
'aIue-Added Benefits: Many credit cards offer rebates,
cash refunds, contributions to your favourite charity, or
other special value-added benefits that you won't get
with paying by cash.
IexibiIity: ou're at the mall and see something you
really need that's on sale for a limited time. ou don't
have the cash to pay for it right now, but you hate to
miss out on the big savings. credit card allows you to
take advantage of sales and special offers, and then pay
for your purchases according to your personal spending
plan.
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Cont.
asier Budgeting: ith a credit card, you can plan to
finance a major purchase and pay it off on a schedule
that fits your budget.
ssentiaI for MaiI, Phone or Internet Purchases: A
credit is essential for renting a car or booking a hotel
room. herever you travel to around the world, a credit
card is the universal guarantee of your good financial
standing credit card also simplifies and speeds up mail
ordering and currently is the only way to make nternet
purchases
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Benefits to the Retailer
The retailer can now attract more number of
customers who have multiple options of
payment like credit cards. lso if the retailer
does not accept the payment via credit card,
but his competitors do, it amounts to a loss in
business. lso, the acceptance of credit
cards means that the payment is guaranteed
unlike a bank cheque, which may bounce.
ence credit cards can boost the sales of the
retailers.
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Benefits to the acquiring bank
The acquiring bank can earn a commission
fee by mediating between the retailer and the
issuing bank. nd this also gives the bank a
platform to broaden its banking relationship
with the retailers.
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Benefits to the issuing bank
s a part of the personal financial services
offered to the customers, this payment
services (in the form of a credit card) earns
not only an annual fee for the bank, but also
generates revenue for every transaction
made by the cardholder.
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Benefits to the network sponsor
Sponsors like Visa; Mastercard etc provide the
banks membership to the network of payment
services offered by them. This earns a
membership fee income, and also a percentage
of commission earned by the acquiring bank for
providing clearing services etc. (The fee charged
by the acquiring bank from the retailer is split
between the acquiring bank, issuing bank and
the network sponsor. Given the volume of the
credit card business, this represents a huge
amount to all the three parties concerned)
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'SA
Jointly owned by 21,000 member financial
institutions around the globe, Visa is a private,
for profit association dedicated to serving its
members, cardholders and merchants. Through
its member financial institutions, Visa offers the
world's most established and widely accepted
credit cards and other payment solutions for
both consumers and businesses Visa's history
traces back to 1958, when ank of merica
launched its blue, white and gold
ankmericard.
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Cont.
The name Visa was introduced in 1976 and since
then has grown into the premier payment brand.
Visa is headquartered in San Francisco, California
and has approximately 6,000 employees located in
more than 40 offices worldwide. Visa provides
member institutions with global payment platform
development, around-the-clock operation of the
world's largest and most sophisticated consumer
payment processing system, and protection and
management of the Visa brand.
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Cont.
Visa divides its membership into six regions:
sia Pacific
Canada
Central and Eastern Europe, Middle East and
frica
European Union
Latin merica and the Caribbean
United States of merica
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astercard
Mastercard was founded in the year 1966 as the
nterbank Card ssociation and Master Charge
was purchased by the California ank
ssociation in 1969, and was renamed
MasterCard in 1979.
There are approximately 25,000 MasterCard,
Cirrus and Maestro members worldwide, serving
consumers in 210 countries and territories.
Mastercard also provides one of the wide
reaching payment services across the globe.
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Cont.
MasterCard nternational is a global payments company
with one of the most recognized and respected brands in
the world. The two interlocking circles symbolize a
promise of quality, which has been incorporated into the
distinctive logos of each of our brands to communicate
the complementary relationships among them.
MasterCard manages a full range of payment programs
and services, including MasterCard credit and debit
cards, Maestro online debit cards, Cirrus TM cash
access, and related programs.
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2erican Lxpress
merican Express is a bit different in that this network is
not open to other members as is the case with the Visa
and Mastercard networks, but is proprietary in nature.
This means that merican Express issues the cards;
unlike in the other case where the member institutions
like the banks etc issue the cards.
nitially merican Express was issuing only debit cards
and only later did it start issuing credit cards also.
Considering the proprietary nature of the network, its
market share is not as high as the other two.
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ndian credit cards
The following are some of the important players in the
ndian Credit cards industry:
ndhra ank
ank of aroda
Canara ank
Citibank
DFC
SC
CC
S Cards and payments services
Standard Chartered bank
Vijaya ank
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