Credit card industry

Pooja Jain
Senior Lecturer, JUIT
Waknaghat
Credit card definition

 A 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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How 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. In this process, your credit
card account is charged with the amount that
you used to buy the gift.

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Cont…
 But 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. In 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. In 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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 Acquiring Clearing Issuing bank
bank network

Payment
received

Retailer Customer
(card holder)
Goods purchased

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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. In 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

 However in a credit card scenario the number

of parties to the “complete cycle of
transaction” is five in number. They are:
 Customer (cardholder)
 Retailer
 Acquiring bank
 Clearing Network
 Issuing 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.
 Security: Lost cash can be used by anyone. If 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. However, different banks
may have different liability policies

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Cont…

 Emergency Protection: A credit card will get

you through almost any emergency you can
think of. It's like a security blanket that will cover
you, in most situations.
 Universal Acceptance: Some credit cards are
accepted at as many as over 20 million
merchant locations worldwide. Try that with a
personal check! If you need cash, you can get it
at ATMs or banks around the world that accepts
your credit card.
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Cont…
 Simplified 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.
 Consumer Protection: When 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…
 Value-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.
 Flexibility: You're at the mall and see something you
really need that's on sale for a limited time. You don't
have the cash to pay for it right now, but you hate to
miss out on the big savings. A 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…
 Easier Budgeting: With a credit card, you can plan to
finance a major purchase and pay it off on a schedule
that fits your budget.
 Essential for Mail, Phone or Internet Purchases: A
credit is essential for renting a car or booking a hotel
room. Wherever you travel to around the world, a credit
card is the universal guarantee of your good financial
standing A credit card also simplifies and speeds up mail
ordering and currently is the only way to make Internet
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. Also if the retailer
does not accept the payment via credit card,
but his competitors do, it amounts to a loss in
business. Also, the acceptance of credit cards
means that the payment is guaranteed unlike a
bank cheque, which may bounce. Hence 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. And this also gives the bank a
platform to broaden its banking relationship
with the retailers.

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Benefits to the issuing bank

 As 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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VISA

 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 Bank of America launched its
blue, white and gold BankAmericard.

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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:

 Asia Pacific
 Canada
 Central and Eastern Europe, Middle East and
Africa
 European Union
 Latin America and the Caribbean
 United States of America

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Mastercard

 Mastercard was founded in the year 1966 as the

Interbank Card Association and Master Charge
was purchased by the California Bank
Association 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 International 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 ATM cash
access, and related programs.

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American Express
 American 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 American Express issues the cards;
unlike in the other case where the member institutions
like the banks etc issue the cards.
 Initially American 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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Indian credit cards
 The following are some of the important players in the
Indian Credit cards industry:
 Andhra Bank
 Bank of Baroda
 Canara Bank
 Citibank
 HDFC
 HSBC
 ICICI
 SBI Cards and payments services
 Standard Chartered bank
 Vijaya Bank

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