Commerce has become a technical issue. It is not only about making a financial transaction, it is about having a relationship with the consumer while they are exchanging currency for goods and services.
1914 - Western Union provided metal cards giving free, deferred-payment privileges to preferred customers. These cards came to be called "metal money.“
1924 - General Petroleum Corporation issued the first metal money for gasoline and automotive services first to employees and select customers and later to the general public.
Late 1930's - American Telephone and Telegraph (AT&T) introduced the "Bell System Credit Card." Soon, railroads and airlines introduced similar cards. Credit cards grew in popularity until the beginning of World War II when "Regulation W" restricted the use of such cards during the war and temporarily suppressed the growth of this new payment alternative.
1946 - A New York banker developed a credit system called Charge-It. When customers charged local retail purchases, the merchant deposited the charges at Biggins Bank and the bank reimbursed the merchant for the sale. The bank later collected payment from the customer.
1950 - Mr. McNamara created Diners Club charge card.
1951 - Customers of New York's Franklin National Bank submitted an application for a loan and were screened for credit. Approved customers were given a card they could use to make retail purchases. The merchant copied the customer information from the card onto a sales slip, called the bank for approval of transactions over a certain amount. The bank would credit the merchant account for the loan minus a fee to cover the costs of providing the loan.
1967 - Four California banks formed the Western States Bankcard Association and introduced the MasterCharge program to compete with the BankAmericard program.
1967 - Jürgen Dethloff invents the smart card computer.
1969 - As the bankcard industry grew, banks interested in issuing cards became members of either BankAmericard or MasterCharge. Their members shared card program costs, making the bankcard program available to even small financial institutions.
1970 - As credit card processing became more complicated, outside service companies began to sell processing services to VISA and MasterCard association members. This reduced the cost of programs for Issuing Banks and Acquirers and increased the size of the bankcard industry.
1970 / 1971 - MasterCharge and BankAmericard developed rules and standardized procedures for handling the bankcard paper flow in order to reduce fraud and misuse of cards. The two associations also created international processing systems to handle the exchange of money and information and established an arbitration procedure to settle disputes between members.
1976 - A pre-paid phone card was introduced by the Italian national phone company SIP. The introduction of the phone card was brought about by an extreme shortage of coins in the country which led to a rash of payphone thefts. The Italian phone card used a magnetic stripe, similar to those found on credit cards, and required the use of a payphone specially equipped with a magnetic card reader.
1979 - MasterCharge changed its name to MasterCard.
1982 - Japan's Nippon Telephone and Telegraph introduced the first Japanese pre-paid phone card to make calling more convenient for the tens of thousands of daily subway riders in Osaka and Tokyo. Like its European counterparts, the Japanese pre-paid cards relied on a magnetic strip and specially equipped telephones.
1993/1994 - Experimental card operating system at the University of Karlsruhe. It was mainly intended to implement and compare a family of public key crypto protocols worked on at the European Institute of System Security. Hence the name of the card was "ICEcard" (Ic card for Cryptographic Experiments).
1990 New York's RBOC, Nynex released the first pre-paid calling card that used PIN authorization instead of the magnetic stripe. Nynex's card permitted the cardholder to dial an 800 number and enter his PIN to make long distance phone calls.
1993 – First bank debit card/ checking card issued.
1994 - MAOSCO and Keycorp create programmable smart cards.
Card Associations: Both VISA and MasterCard are not for-profit organizations who both issue credit cards and set and maintain the rules for processing. They are both run by board members who are mostly high-level executives from their member banks.
Issuing and Acquiring Banks: An issuing bank is the original bank that issues the card, such as a First USA Visa card. The acquiring bank is the bank set up by the merchant to accept transaction processing for cards accepted.
Authorization Request and Response: An electronic request for authorization sent to an Issuer by a merchant or Acquirer. The response can approve, decline or route the transaction.
Authentication: A cryptographic process that validates the identity and integrity of data used in smart cards.
Smart Card/Chip Card: A plastic card embedded with an integrated circuit, or chip, that communicates information to a interface device. Chip cards offer increased functionality through the combination of significant computing power and data storage. Chip cards are capable of holding multiple applications and sometimes are referred to as Multi-Ap Cards.
Online Authorization: A method of requesting an authorization through a data communications network other than voice to an Issuer, an authorizing processor, or stand-in processing.
Offline Authorization: A method of processing a transaction between the card and terminal at the point of transaction without sending the transaction online to the Issuer for authorization. Transactions are sent in batch format to the processing systems.
Processor: A vendor acting as the agent to a bank that provides authorization, clearing, or settlement services for merchants and banks.
Host Systems: A computer system used by an Issuer, Acquirer, Merchant, Client or Vendor to perform in-house processing.
Interchange: The fees merchants pay to the card associations or companies on the transactions, usually a % of the sale price.
Card Industry Landscape The Why! The Players The Programs Specifics The How! Psychology of a card program Cardholder Corporate Sponsor Merchant / POI Access Device (Card, Transponder, Terminals ….) Rewards (Points, coupons…) Program (Loyalty supplier, database, rules) Collateral (setup, statements, printed materials) Technology (Systems, processing, hardware, firmware, Issuing) Banks Issuing and Acquiring Processor
Transaction Breakdown * Represents e-coins/e payment services, direct deposit 0% 70% 30% 0% Catalog/ Phone 5% 95% 0% 0% Web 0% 30% 10% 60% In Store eCurrencies* Card Check Cash
2000 - MasterCard's 20,000 member institutions had issued over 437 million branded cards world wide, 15.4 percent more than the previous year. The number of cards issued in the US reached 235.1 million in 2000, 16 percent above the 1999 level.
MasterCard association generated $857 billion in gross dollar volume (GDV), which includes both purchase activity and cash transactions, representing a 21.5 percent increase on 1999. In the fourth quarter of 2000, GDV rose 19 percent to $231 billion. In the US, full year GDV registered its highest growth rate in six years having risen 20.2 percent to $423 billion.
MasterCard has 21 million acceptance locations worldwide, a 12.7 percent increase on 2000.
1998 - Visa had issued 655 million cards, generating sales volume of $ 1,4 trillion and was accessible at 488,585 ATMs.
MBNA Corp. The Wilmington, Delaware-based issuer issues cards for 4,000 groups, ranging from virtually every college and university in the US to the International Bridge Club. The company's 2000 annual report says its average account balance was USD $3,519, compared with the industry average of USD $2,311. The average transaction value for MBNA customers was USD $129, compared with the industry's USD $99.
First USA has more than 2,000 partnership programs, including relationships with America Online Inc., Microsoft Corp., and Yahoo! Inc.
According to association estimates, about 40 to 50 percent of cards issued worldwide are multibranded (either a co- branded, affinity, or loyalty card), a level that some say is the saturation point for the market.
Monthly payment is required otherwise draw down on deposit and high penalty
Requires high maintenance and yearly fees
Operates on an open platform with some level of authorizations
Credit/Debit Online Transaction Processing Legacy Hosts Visa or MC systems Processor -Merchant accepts card -Validates card by signature check or PIN -Processes transaction -Consumer’s bank approves transaction, sends back to merchant -Settlement will post to statement. -Merchant’s bank initiates transaction -Routes to locations determined by card ids for approval and processing -Collects card ID/number, Merchant ID, Amount. Request Auth Settlement Request Auth Settlement
Allows for filtering/selective use via SIC codes (i.e. hotels, fuel, etc.)
Spending limits (daily, weekly, monthly, by category)
Intense reporting & tracking
Main target B2B & corporate travel
Operate on an open platform, with some level of tabling/filtering
Purchase/Procurement Card Transaction Processing SIC Filtering Visa or MC systems Processor -Merchant accepts card -Validates card by signature check or PIN -Processes transaction -Merchant;s bank initiates transaction -Processes against SIC filter -Routes to appropriate locations -Processes transaction -Approves or Declines transaction -Posts to statements on settlement Request Auth Settlement Request Auth Settlement
Access to a bank/ checking account (continual deposits)
No credit line (instead an overdraft line)
Concern by retailers on fees
Runs on bank transaction networks (Interlink and Maestro)
Networks originally designed for banks to share information
Operates on an open and/or closed platform with security
Filtered (selective use) and open available
Debit Offline Transaction Processing Legacy Hosts Visa or MC systems Processor Batch Request Auth and Settlement Settlement Request Settlement -Merchant accepts card -Validates card with PIN -Processes transaction -Collects batch data and formats clearing transaction -Approves or Declines transaction -Routes to appropriate locations -Processes transaction -Posts to statements Auth and Settlement
Open and Filtered (selective use) from one store, to a chain, to a mall
Funds are pre-loaded on the card – most once spent are disposable
Most are anonymous
Most operate on a closed platform
Stored Value Transaction Processing -Cards are preloaded with points. -Merchant requests transaction -Verifies Card Legacy Hosts/filters Visa or MC systems Processor Request Auth Settlement Request Auth Settlement -Transaction processes like Debit -Card is validated against stored value hosts or filtering -Processes transaction -Posts to statements
Membership Card Transaction Processing -Card is accepted -Checked against internal database -Can be routed to third-party database through processor. Internal Database Processor 3 rd party Database Example: Blockbuster Example: Dining Ala Carte
Can have multiple currencies (i.e. cash, points, etc.)
Smart Card Transaction Processing -Card and Terminals authenticated with cryptograms -Obtain PIN, if needed -Verifies static data on chip -Processes static programs offline -Sends transaction online -Routes to any internal legacies -Verifies risk parameters on card Legacy Hosts Visa or MC systems Processor Online Request Auth Settlement Online Request Auth Settlement -Validates card and transaction data -Routes to hosts systems -Processes settlement -Posts to statements -Formats the crypto authentication request -Routes and initiate online transactions.
Smart Card Overview Electronic Ticketing & Automated Air Travel Processes Special Offers and Loyalty Programs Automated Car Rental Processes E-Purse Enhanced Customer Information Corporate Security Automated Lodging Processes POS / Merchant's Logical & Physical Access Voucher Replacement Target Marketing and Expandable to other Locations Mobile Commerce
Magnetic stripe technology remains in wide use in the U.S. However, the data on the stripe can easily be read, written, deleted or changed with off-the-shelf equipment.
To protect the consumer, businesses in the U.S. have invested in extensive online mainframe-based computer networks for verification and processing.
The microprocessor on the smart card is there for security. The host computer and card reader actually "talk" to the microprocessor. The microprocessor enforces access to the data on the card.
"We didn't want an FFP. But it came to my attention that FFPs were siphoning business travel away from us. We did it defensively, and I think if we had not done that we would have been terribly disadvantaged."
- Herb Kelleher, President, Southwest Airlines
First 20 Years Of FFP 9.77 Trillion Miles Accumulated
- Source: InsideFlyer Magazine 2001
1985 - Banks Team Up With Airlines
Co-branded Cards Wildly Successful
Average spend up to 10x higher
Active account rate up to 80 percent or higher
Attrition and acquisition costs decline
150,000 members in 1981 to 200,000,000 members in 2001
71% of consumers if FFP said they wouldn’t trade their frequent flyer benefits for lower airfares.
Source: Frequent Flier Magazine
The proven addition of miles can drive repeat purchases and maximize customer lifetime value.
Source: Hambrecht & Quist
Consumers charge about $3,200 a year on a typical credit card – add miles and they spend more than $18,000 a year.
Source: Bank Rate Monitor
Universal Mile + Network + Card The Network as a Catalyst for Increased Spend and Activation Miles Earned Through Partners: 2,125 Miles from Card: 1,325 + Total Earning that Month: 3,450 + $ XYZ BANK $1,325 300 Miles 800 Miles 250 Miles 100 Miles 375 Miles 300 Miles $ 300 $ 300 $250 $ 100 $ 75 $ 300 Gas & Oil Grocery Electronics Trip TeleCom Retail (online & offline) + + + + + PLUS all other card purchases outside the partner network Purchases on card at partner retail locations
Universal Mile + Network + Card Increase in Monthly Charge Volume (in $Millions) * Revenue figure based on 2.9% of gross charge volume in interchange and miscellaneous fees, plus 60% revolving balances at 13.9% annual interest. Average Monthly Spend Incremental monthly revenue volume increases 400%+ & revenues increase $100 Million + a year. EXAMPLE* Incremental monthly charge volume goes from $72M to $314.2M—an increase of 430% Sample Card Issuer with 200,000 cards Increased Spend Increased Activation Increased Acquisition TOTAL $ 4.0 M $ 2.7 M $ 1.9 M $ 8.6M $ 48.0 M $ 32.8 M $22.3 M $ 103.1M Monthly Revenue Increase Annual Revenue Increase
Attainability Of The Program Member: Limited Earnings Capability = Short-Term Loyalty & Interest
Single Partner, Stand Alone Programs: Even Top Customers Can’t Make For A Successful Program – It Requires A Network
Just Because They Carry Your Card Doesn’t Mean You’ve Captured Their Heart: "The research shows clearly that the existence of a loyalty card scheme is not associated with a degree of loyalty in shopping habits." -Source: Customer Loyalty Today
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