Credit Card Issuers


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This presentation covers the credit card business and highlights the many different types of credit cards available, how credit cards are processed and the major credit card issuers.

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Credit Card Issuers

  1. 1. Financial Services Industry Training Credit Card Issuers An Overview of the Credit Card Business Saunders Learning Group, LLC Saunders Learning Group, LLC, Andover, KS
  2. 2. Training from Saunders Learning Group Saunders Learning Group provides a variety of training programs, workshops and seminars targeted to the financial services industry. Programs are available in a wide range of topics, and we are specialists in developing custom programs that are targeted to your needs. Contact the founder, Floyd Saunders at 316-680-6482 or at for more information. Saunders Learning Group, LLC, Andover, KS1
  3. 3. Topics1. Role and Function of Credit Card Issuers2. Meaning and Definition3. Types of Credit Cards4. How a Credit Card Company Makes Money5. Credit Card Transaction Processing Steps6. Market Share of Major Credit Card Companies Saunders Learning Group, LLC, Andover, KS Slide 2
  4. 4. Module 1 Role and Function of Credit Card IssuersSaunders Learning Group, LLCSaunders Learning Group, LLC, Andover, KS
  5. 5. Credit Card Issuers & Associations Function Provides day-to-day financial advice, products and services focused on small to mid-size businesses often headquartered in the local community.  Issuing bank (such as Chase) funds the transactions. Issuing banks are the financial institutions that issue credit cards. Issuing banks can be large, national institutions or smaller, local banks, or even credit unions.  They lend us the money charged on a card, until repayment occurs  Card association (like Visa) processes them.  If we default on our credit card bill, the issuing bank must suffer the loss (though we as Example consumers will suffer a lower credit rating). Card issuers also set the terms of our credit card agreements, like the APR and other activities fees..  Card associations process the credit card transactions. They are responsible for setting the transaction terms and fees for merchants and the card-issuers.  Visa and MasterCard are the two major examples of card associations.  Card associations are actually cooperatives comprised of thousands of issuing banks. For example, Citigroup owns 9.5% of MasterCard, Chase owns 8.5%, and HSBC and Bank of America each own 5.1%.  Familiar Card association brands include Visa, MasterCard, American Express, Discover, and Diners Club.Credit Card  Visa, MasterCard and American Express issuers co-brand with their card association. Brands  90% of credit card accounts in the U.S. are issued by five banks: JPMorgan Chase, Citigroup, Bank of America, Capital One, and HSBC Saunders Learning Group, LLC, Andover, KS Slide 4
  6. 6. Module 2 Credit Card Issuers Meanings and Definitions Saunders Learning Group, LLC Saunders Learning Group, LLC, Andover, KSSlide 5
  7. 7. Meaning and Definition Credit Card  A credit card is a card issued by a financial company giving the holder an option to borrow funds, usually at point of sale.  Credit cards charge interest and are primarily used for short-term financing. Interest usually begins one month after a purchase is made and borrowing limits are pre-set according to the individuals credit rating.  A credit card is a small plastic card issued to users as a system of payment.  It allows its holder to buy goods and services based on the holders promise to pay for these goods and services.  The issuer of the card creates a revolving account and grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user.  Holders of a valid credit card have the authorization to purchase goods and services up to a predetermined amount, called a credit limit.  The vendor receives essential credit card information from the cardholder, the bank issuing the card actually reimburses the vendor, and eventually the cardholder repays the bank through regular monthly payments.  If the entire balance is not paid in full, the credit card issuer can legally charge interest fees on the unpaid portion. Saunders Learning Group, LLC, Andover, KS Slide 3
  8. 8. Meaning and Definition Credit Card Issuer  A credit card issuer is a bank or credit union that offers credit cards.  The credit card issuer makes the credit limit available to cardholders and is responsible for sending payments to merchants for purchases made with credit cards from that bank.  Also called member banks. Chase and Citi are examples of credit card issuers.  Credit card issuers cant issue credit cards all by themselves, they need the help of payment processing networks like Visa and MasterCard (a credit card association).  However, American Express and Discover act as both the credit card issuers and the payment processing network. Saunders Learning Group, LLC, Andover, KS Slide 4
  9. 9. Meaning and Definition Credit Card Agreement  A Credit Card Agreement is a contract between a credit card issuer and the cardholder. The credit card agreement spells out the terms, conditions, pricing, and penalties of the credit card.  How to Find Your Credit Card Agreement. Federal law requires all credit card issuers with more than 10,000 credit card accounts to list a copy of their credit card agreements online. Your credit card issuer should also provide you with a copy of your credit card agreement when you request it. Finally, the Federal Reserve maintains a database that includes credit card agreements from more than 300 credit card issuers. Saunders Learning Group, LLC, Andover, KS Slide 5
  10. 10. Meaning and DefinitionThe credit card agreement will list:  The annual percentage rate for each type of balance that can be carried – purchases, balance transfers, and cash advances.  Finance charge information including the minimum finance charge and the finance charge calculation method.  Grace Period.  Credit Card Fees.  Credit Limit and information about how your credit card issuer can change it .  Details about using your credit card in another country.  Options for paying your credit card balance.  How your credit card is reported to the credit bureaus.  How your information is shared or kept private.  Changes the credit card issuer can make to your account.  What constitutes default and what happens if you default.  How to handle a lost credit card.  How to close your account.  How to handle disputes with the credit card issuer .  The legal body who enforces the credit card agreement. Saunders Learning Group, LLC, Andover, KS Slide 6
  11. 11. Module 3 Types of Credit CardSaunders Learning Group, LLCSaunders Learning Group, LLC, Andover, KS
  12. 12. Types of Credit CardsSince each persons financial needs are different, it makes sense that there aredifferent types of credit cards. Before you apply for a credit card, become familiarwith the various kinds of credit cards to make sure youre choosing the best creditcard for you.Standard Credit Cards The most common type of credit card allows you to have a revolving balance up to a certain credit limit. Credit is used up when you make a purchase and made available again once youve made a payment. A finance charge is applied to outstanding balances at the end of each month. Credit cards have a minimum payment that must be paid by a certain due date to avoid late- payment penalties. Standard credit cards are also called "plain-vanilla" credit cards because they offer no frills or rewards. Theyre also uncomplicated and relatively easy to understand. Saunders Learning Group, LLC, Andover, KS Slide 7
  13. 13. Types of Credit Cards Premium Credit Cards • These cards offer incentives and benefits beyond that of a regular credit card. Examples of premium credit cards are Gold and Platinum cards that offer cash back, reward points, travel upgrades, and other rewards to cardholders. Premium cards can have higher fees and usually have minimum income and credit score requirements. Charge Cards • Charge cards do not have a preset spending limit and balances must be paid in full at the end of each month. Charge cards typically do not have a finance charge or minimum payment since the balance is to be paid in full. Late payments are subject to a fee, charge restrictions, or card cancellation depending on your card agreement. Limited Purpose Card • Limited purpose credit cards can only be used at specific locations. Limited purpose cards are used like credit cards with a minimum payment and finance charge. Store credit cards and gas credit cards are examples of limited purpose credit cards. Saunders Learning Group, LLC, Andover, KS Slide 8
  14. 14. Types of Credit Cards Secured Credit Cards • Secured credit cards are an option for those without a credit history or those with blemished credit. Secured cards require a security deposit to be placed on the card. The credit limit on a secured credit card is equal typically at least the deposit made on the card, but it could be more in some cases. Youre still expected to make monthly payments on your secured credit card balance. Prepaid Cards • Prepaid cards require the cardholder to load money onto the card before the card can be used. Purchases are withdrawn from the cards balance. The spending limit does not renew until more money is loaded onto the card. Prepaid cards do not have finance charges or minimum payments since the balance is withdrawn from the deposit. These cards are not actually credit cards and they dont directly help you rebuild your credit score. Prepaid cards are similar to debit cards, but are not tied to a checking account. Saunders Learning Group, LLC, Andover, KS Slide 9
  15. 15. Types of Credit Cards Business Credit Cards • Business credit cards are designed specifically for business use. They provide business owners with an easy method of keeping business and personal transactions separate. There are standard business credit and charge cards available. Rewards Credit Card • Rewards credit cards give you a bonus based on your card usage. Choosing the right rewards credit card means picking one that gives rewards you can use. With a good rewards card, you can out earn any costs, e.g. annual fee, without too much hassle. Balance Transfer Credit Cards • Balance transfer credit cards are good for combining several credit card balances or for taking advantage of a lower interest rate. Not only should you consider the introductory balance transfer interest rate, but also how long the rate lasts and the rate that applies once the promotional rate expires. Saunders Learning Group, LLC, Andover, KS Slide 10
  16. 16. Types of Credit Cards Student Credit Cards Travel and Entertainment Zero Percent Interest Credit •Student credit cards are designed Credit Cards Cards for college-aged consumers who are •A credit card that can be used to •As the name indicates, zero percent just starting out with credit. These cover travelling expenses and for credit cards do not require the cards typically give credit to college your enjoyment/entertainment. An credit card owner to make any kind students who lack a credit history. example of a T&E card is "Diners of interest on their shopping. You Not every credit card with "student" Club." It can only be used at certain could utilize your credit card and in the title is actually good for restraunts which would constitute also purchase anything you desire students. So, if youre on the "entertainment.“ and pay only the monthly minimum market for one of these cards, make requirement. sure you pay attention to the credit card terms. Saunders Learning Group, LLC, Andover, KS Slide 11
  17. 17. Module 4 How Credit Card Companies Make MoneySaunders Learning Group, LLCSaunders Learning Group, LLC, Andover, KS
  18. 18. How a Credit Card Issuers Makes Money Credit card issuers (most often a bank or credit union) receive revenue from fees paid by stores that accept their cards and by consumers that use the cards, and from interest charged consumers on unpaid balances. Credit Card Companies make money in a number of ways like :  Fees (annual fee, over limit, past due, etc)  Interest on the revolving loan if a credit card balance is not paid in full each month.  The card Issuer [the bank that issued the card and/or the issuer network ie: Visa, MS, American Express, JCB etc] makes a percentage of each item you purchase from the merchant who accepts your credit card. These rates range from 1% to 4% of each purchase.  Last, the cardholder can make additional money through other means, such as selling your name to a mailing list or sending advertisements in your monthly bill. (Due to regulation, this is becoming less frequent) Saunders Learning Group, LLC, Andover, KS Slide 16
  19. 19. Module 5 Credit Card Processing StepsSaunders Learning Group, LLCSaunders Learning Group, LLC, Andover, KS
  20. 20. Credit Card Authorization Process Flow Saunders Learning Group, LLC, Andover, KS Slide 19
  21. 21. Credit Card Transaction Processing Steps Step 1Authorization• After a merchant swipes the card, the data is submitted to merchant’s bank, called an acquirer, to request authorization for the sale.• The acquirer then routes the request to the card-issuing bank, where it is authorized or denied, and the merchant is allowed to process the sale. Saunders Learning Group, LLC, Andover, KS Slide 19
  22. 22. Credit Card Transaction Processing Steps Step2Batching• At the end of a day, the merchant reviews all the day’s sales to ensure they were authorized and signed by the cardholder.• It then transmits all the sales at once, called a batch, to the acquirer to receive payment. Saunders Learning Group, LLC, Andover, KS Slide 20
  23. 23. Credit Card Transaction Processing Steps Step3Clearing• After the acquirer receives the batch, it sends it through the card network• Each sale is routed to the appropriate issuing bank.• The issuing bank then subtracts its interchange fees, which are shared with the card network• And transfers the remaining amount through the network back to the acquirer. Saunders Learning Group, LLC, Andover, KS Slide 21
  24. 24. Credit Card Transaction Processing StepsStep4Funding• After receiving payment from the issuer, minus interchange fees, the acquirer subtracts its discount fee• Sends the remainder to the merchant.• The merchant is now paid for the transaction, and the cardholder is billed. Saunders Learning Group, LLC, Andover, KS Slide 22
  25. 25. Credit Card Transaction Processing Steps Glossary  Acquirer: A bank that processes and settles a merchants credit card transactions with the help of a card issuer.  Cardholder: The owner of a card that is used to make credit card purchases.  Card network: Visa, MasterCard or other networks that act as an intermediary between an acquirer and an issuer to authorize credit card transactions.  Discount fee: A processing fee paid by merchants to acquirers to cover the cost of processing credit cards.  Interchange fee: A charge paid by merchants to a credit card issuer and a card network as a fee for accepting credit cards. They generally range from 1 to 3 percent.  Issuer: An financial institution, bank, credit union or company that issues or helps issue cards to cardholders. Saunders Learning Group, LLC, Andover, KS
  26. 26. Credit Card Transaction Processing Steps1. Merchant calculates the amount of purchase and asks buyer for payment .2. Buyer presents merchant with a credit card.3. Merchant runs credit card through the point of sale unit.  The amount of the sale is either hand-entered or transmitted by the cash register.4. Merchant transmits the credit card data and sales amount with a request for authorization of the sale to their acquiring bank.5. The acquiring bank that processes the transaction, routes the authorization request to the card-issuing bank.  The credit card number identifies type of card, issuing bank, and the cardholders account.6. If the cardholder has enough credit in their account to cover the sale, the issuing bank authorizes the transaction and generates an authorization code.  This code is sent back to the acquiring bank.  The issuing bank puts a hold on the cardholders account for the amount of the sale. Note that the cardholders account has not been actually charged yet. Saunders Learning Group, LLC, Andover, KS
  27. 27. Credit Card Transaction Processing Steps7. The acquiring bank processing the transaction, and then sends the approval or denial code to the merchants point of sale unit. • Each point of sale device has a separate terminal ID for credit card processors to be able to route data back to that particular unit.8. A sale draft, or slip, is printed out by the point of sale unit or cash register. • The merchant asks the buyer to sign the sale draft, which obligates them to reimburse the card-issuing bank for the amount of the sale.9. At a later time, probably that night when the store is closing up, the merchant reviews all the authorizations stored in the point of sale unit against the signed sales drafts. • When all the credit card authorizations have been verified to match the actual sales drafts, the merchant will capture, or transmit, the data on each authorized credit card transaction to the acquiring bank for deposit.10. The acquiring bank performs what is called an interchange for each sales draft, with the appropriate card-issuing bank. • The card-issuing bank transfers the amount of the sales draft, minus an interchange fee to the acquiring bank11. The acquiring bank then deposits the amount of the all the sales drafts submitted by the merchant, less a discount fee, into the merchants bank account. Saunders Learning Group, LLC, Andover, KS Slide 25
  28. 28. Module 6Major Credit Card Companies Market ShareSaunders Learning Group, LLCSaunders Learning Group, LLC, Andover, KS
  29. 29. Visa  Provides credit and debt card processing services toFunction member banks, merchants and businesses.  Credit Card Processing - Visa operates VisaNet,  the world’s largest retail electronic payments processing network, handling 150 million transactions every day.Example  more than $5.9 trillion in global consumer spend is transacted annually.  includes: core transaction processing, debt card transactions, riskproduct management and information-based services. and  Services tailored to individual countries or regions and serve the needs ofServices financial institutions, governments, businesses, merchants and consumers around the globe.  Every day, VisaNet connects up to 1.93 billion cards, millions of acceptance locations, 1.9 million ATMs and 15,200 financial institutions.  Risk Management Services  sophisticated risk management services that protect issuers, acquirers, and merchants from losses due to fraud, theft or unauthorized use.  include transaction risk scoring, innovative data encryption techniques and transaction alerts and notifications Share ofthe Market Visa’s share of worldwide purchase transactions on both credit and debit cards as of May 2012 was 64.67 percent, down 1.1 % from 2011. Saunders Learning Group, LLC, Andover, KS Slide 28
  30. 30. MasterCard Function  Provides credit, debit, prepaid, commercial credits for consumers via member banks and payment processing to merchants.  Payment products include credit cards, debit card programs, e-commerce solutions, prepaid cards, loyalty and reward solutions and comprehensive cardholder benefits and services.  MasterCard card products are provided to financial institutions, merchants, and businesses. Example  CARD PAYMENT SOLUTIONS  Manages and monitor travel and entertainment expenses product  MASTERCARD® SMART DATA and  Smart data suite delivers tools to leverage financial data, customize transaction Information and establish spending controls. Services  MASTERCARD PURCHASE CONTROL™  Purchase Controls are a simple, secure, and effective way to manage business xpenses. Share of  MasterCard’s market share expanded by almost half of a percentagethe Market point to 25.57 percent in 2011. Saunders Learning Group, LLC, Andover, KS Slide 29
  31. 31. Discover  Provides consumers with credit cards Function and a range of banking products. Unlike MasterCard and Visa is not an association, and does it own payment processing.  Offers Cashback, miles, business and student cards with a 5% cashback bonus Example applied to charges. Products  Offers savings and retirement plan accounts including Money Market, Online and Savings, Certificates of Deposit, and IRA CD. Services  Provides student loans and personal loans via online application process  Also provides gift cards, identify theft protection and a credit score tracker.  Discover currently has about 9% of the market share for credit cards and 54.4 million Share of customers.the Market Saunders Learning Group, LLC, Andover, KS Slide 30
  32. 32. American Express  Provides both credit and charge cards for Function individuals and corporations. In addition, it’s financial services division offers Private Banking services to high net- worth clients and a range of international cask management, payment and trade services to banks. Unlike MasterCard and Visa is not an association, and does it own payment processing.  American Express is multinational financial services corporation best known for credit cards, charge cards and traveler’s cheque businesses. Example  Offers a range of charge cards with different levels of services, including Products  Green Card and  Gold Card Services  Platinum Card  The “Blue” card  Centurion (or “Black) Card  Offers co-branded credit cards with Airlines, hotels and retailers.  American Express currently has about 8% of the market share for credit cards and 50 Share of million customers.the Market Saunders Learning Group, LLC, Andover, KS Slide 31
  33. 33. Thank You !Saunders Learning Group, LLCSaunders Learning Group, LLC, Andover, KS
  34. 34. Questions Saunders Learning Group, LLC, Andover, KS
  35. 35. Summary of Book Figuring Out Wall Street Consumer’s Guide To Financial Markets By Floyd Saunders Publisher: Saunders Learning Group ISBN: 978-0-9824019-0-3 available from Amazon, B&N, and http://www.figuringout or Author Contact email: Blog: www/money/ Twitter @floydsaunders Facebook: Figuring Out Wall Street Sideshare: Book summary: From bank failures to home foreclosures and panic around the world, Figuring Out Wall Street, is the concise guide to help everyone understand how this latest crisis happened, who was responsible and what to do now to restore our financial systems. Written in an easy to understand manner, even the most complex financial concepts are easy to digest. This book provides help to monitor investments with a review of investment products, financial regulators and economic indicators. Learn how the stock market exchanges work and the world of investment banking, hedge funds, venture capital and private equity. Every chapter includes action plans for investing. Saunders Learning Group, LLC, Andover, KS
  36. 36. About the Author  Floyd Saunders has worked on Wall Street with both Bank of America and JPMorgan, where is was a vice president in global financial systems. He has worked across the industry in retail, commercial, and investment banking.  He has taught courses in Money and Banking and extensively for the American Institute of Banking and various colleges.  As a consultant, he developed and taught a wide range of banking and investing courses.  He authored three programs for the American Bankers Association: Banking on Mutual Funds and Annuities, Introduction to Securities Markets and Investing in Securities. Saunders Learning Group, LLC, Andover, KS