In the mid- to late 1940’s a simple idea by a bank to offer their customers a card which they could use at local retail stores, and then have the merchant deposit the receipts which they would reimburse took off. This was called the “Charg-It” system and it leads the way in developing the first bank credit card in 1951.
With the credit card being formally invented, the process to issue more cards and acquire these transactions was needed, not only locally, but across the globe and over the years, banks licensed other banks and formed associations to established a wider issuing and acquiring footprint. In the last 65 years, credit card issuing and acquiring has evolved as technology has evolved, however, the process has effectively remained the same. Whether you are new to issuing and acquiring or a veteran, here are some of the basics and not so basics you need to know.
There are four parties involved in any credit card transaction. These are:
- The Issuing Bank (A Bank or financial services provider that issues the credit card)
- The cardholder
- The merchant
- The Acquiring Bank (A Bank or financial services provider that has sponsored the merchant)
It all seems so simple, however like a graceful duck floating along a stream, underneath there is a lot more happening.
The not so basics
Behind the scenes of a simple credit card transaction there is a myriad of information, processes, procedures and fees (yes I used the four letter F word). Some of these are:
- BIN Numbers
- Interchange Fees
- Merchant Service Fees
- Scheme fees, and
- Settlement processing
Each card issued by a Bank or Financial Services institution will have a BIN number. These are the first six digits of any credit card and they advise of the bank/institution that issued the card, the type of card (low rate, gold, platinum etc) and the scheme (VISA, MasterCard, AMEX, Diners, JCB and China UnionPay just to name a few) that the card is connected to. The BIN number of a card dictates the interchange fee that the acquiring bank needs to pay to the issuing bank.
This is a fee for allowing the acquirer to accept payment from an issuing bank when the two may or may not be the same. Depending on the type of card that is used, some of this interchange fee may be used to reward the cardholder with things such as “points” or other offers they may provide, hence why acquiring banks charge a “merchant service fee”. A Merchant Service Fee is a fee charged by the acquirer to their sponsored merchant for the acceptance of a card payment. This fee is there to cover the costs of interchange and scheme fees as well as other services.
Card schemes are a payment network which banks or financial institutions become members of to either issue or acquire cards that operate in the network of that card scheme. Schemes provide its members with rules and regulations to abide by and allow its members to offer and accept cards or payment services all over the world. As an example, if an acquiring bank is not a member of VISA, then they are not able to process VISA cards to accept a payment. With so many banks offering their own cards, and so many businesses wanting to accept them, there needs to be a large network in place to capture the card details, obtain verification and provide a response to the merchant.
To do this requires a “Switch”. A switch will capture card data when a transaction is processed at a merchant, send a request to the issuing bank for verification and then provide the merchant with an “Approved” or in some cases a “Declined” response as well as some others. With tens of thousands of banks across the globe that are scheme members, a switch plays an integral part in the processing of every payment. After all is said and done and merchants across the world have processed or accepted the tap/insertion of a little plastic card as payment for the goods or services they have offered, they want to see the fruits of their labour in their bank account.
As card payments are not processed in real time and are stored throughout the day, acquiring banks send a settlement request every evening from their merchants to the schemes and the schemes issue them a credit and in turn charges a “Scheme fee” for this process. The schemes then send requests to their issuing members to debit their cardholders accounts, and then the process from a cardholder making a purchase to a merchant receiving their funds starts all over again. You now should understand the basics and some of the not so basics about issuing and acquiring, but with the payment space continuously evolving, changes are expected to be seen in the coming future.
Meet the Author
George Solomos is a passionate cards and payments specialist. His experience throughout his career has seen him manage and structure the in-house treasury and payments processes for some of the largest companies in Australia and globally.Currently working as a private consultant, George assists start-ups and existing businesses with services ranging from establishing and streamlining payments processes, though to the most complex requirements of centralised treasury and cash management procedures.