While we tend to think that a credit card is a credit card, there are actually three different kinds of cards available today. They are a card offered by a bank, a travel and entertainment card, and a “house card.”
You’ve probably noticed that thousands of banks offer credit cards. And all of those credit cards carry the Visa or MasterCard logo, along with the bank’s name. Visa and MasterCard do not offer credit cards directly to consumers.
Visa is a privately held membership association. It’s owned by 21,000 member financial institutions around the world, and virtually all of those members offer Visa credit cards. Likewise, MasterCard has approximately 25,000 MasterCard, Cirrus and Maestro members worldwide.
These types of credit cards are “revolving” credit accounts. You can pay all or part of your balance each month, pay off the card, run up the balance again and so on. However, your account will come with a preset credit limit, which can be as low as $100, as high as $40,000 — or even higher.
Travel and entertainment cards are different. They are not offered by banks. Instead, they are offered directly by American Express and Diners Club. No matter where you apply for an AmEx or Diners Club card, you will get the same terms and conditions. What’s more, both American Express and Diners Club cards come with no preset spending limit.
In most cases, you will have to pay your balance in full each month on an American Express card. Diners Club is similar, but it gives you two months to pay without incurring penalties (which is designed to appeal to travelers who take long trips).
Both travel card providers also offer many of their customers year-end summaries of their charges, which can be useful at tax time, when tallying travel and entertainment expenses.
Unlike bank cards and travel and entertainment cards, which can be used in a variety of businesses and locations, house cards can be used only at a specific chain of stores. Major issuers of house cards include:
- department stores (Sears is the biggest issuer of house cards, overall),
- oil and gasoline companies, and
- telephone companies.
And then there are specialty cards, like the one you can get at your local tire center.
Like travel and entertainment cards, most house cards come with the same terms and conditions, regardless of where you apply. Like bank cards, most house cards are revolving accounts, so you do not have to pay your bill in full each month.
Now, how money flows to a company when you use your bank or travel/entertainment credit card to purchase a product or service?
First, the company that sells you the product or service has to have a merchant card services account. This account enables the company to accept credit cards.
This is how a basic, retail credit card transaction works: After you or the cashier swipes your credit card through a reader, software at the point-of-sale (POS) terminal dials a telephone number (using a modem or Internet connection) to call an acquirer or processing company.
The acquirer is an organization that collects credit authentication requests from merchants and provides the merchants with a payment guarantee. When the acquirer gets the credit card authentication request, it checks the transaction for validity and the record on the magnetic strip for:
- merchant ID,
- valid card number,
- expiration date,
- credit-card limit, and
- card usage.
Once these items have confirmed, the processing company approves the charge. It is then responsible for making sure the proper bank accounts are debited and credited. And it takes responsibility for resolving errors or fraudulent charges. The processing company doesn’t do this for free. It makes money on every single credit card transaction.
In most cases, the processing company gets both a per-transaction fee and a percentage of each sale (also known as the discount rate). So, to fill in some numbers, when you spent $100 at the flower shop, the processor may have received $0.25 as a transaction fee, plus a small portion of the sale — in this example, $0.022. Of the $100 you paid, the credit card processor got $0.272.
After the transaction has been processed and the money has been allocated to the processor, the $99.728 due to the florist is deposited into the company’s bank account. Some processors also enjoy a “float” period — often one, two or three days during which they hang onto the merchant’s money before depositing it into the bank account.
Some merchants get more favorable terms than others when it comes to accepting credit cards, but the above numbers are fairly common. And for large purchases, the discount rate can take a pretty good bite out of the merchant’s revenue. The reduced income from accepting credit cards does explain why some companies will encourage you to pay them in cash or with a check.
Plus, whenever you use a credit card, there is a risk that you will “charge back” the amount of your purchase — i.e., dispute it with the credit card issuer. The issuer then will go back to the merchant to get a refund, along with a penalty fee (often in the neighborhood of $25).
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