Financial Services Industry Training

Credit Card Issuers

An Overview of the Credit Card Business

Saunders
Saunders Learning
Learning Group,
Group, LLC, LLC
Andover, KS
 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
floyd@floydsaunders.com for more
information.

Saunders Learning Group, LLC, Andover, KS

1
 Topics
1. Role and Function of Credit Card Issuers
2. Meaning and Definition
3. Types of Credit Cards
4. How a Credit Card Company Makes Money
5. Credit Card Transaction Processing Steps
6. Market Share of Major Credit Card Companies

Saunders Learning Group, LLC, Andover, KS Slide 2

 Module 1
Role and Function of Credit
Card Issuers

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Saunders Learning
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Andover, KS
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 Diner's 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

 Module 2
Credit Card Issuers Meanings
and Definitions

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Saunders Learning
Learning Group,
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Andover, KS
Slide 5
 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
individual's 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 holder's 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
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 can't 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
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

Meaning and Definition
The 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

 Module 3
Types of Credit Card

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Types of Credit Cards
Since each person's financial needs are different, it makes sense that there are
different types of credit cards. Before you apply for a credit card, become familiar
with the various kinds of credit cards to make sure you're choosing the best credit
card 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 you've 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. They're also uncomplicated and relatively easy to
understand.

Saunders Learning Group, LLC, Andover, KS Slide 7

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
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. You're 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 card's 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 don't 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
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

Types of Credit Cards
Student Credit Cards
•Student credit cards are designed
for college-aged consumers who are
just starting out with credit. These
cards typically give credit to college
students who lack a credit history.
Not every credit card with "student"
in the title is actually good for
students. So, if you're on the
market for one of these cards, make
sure you pay attention to the credit
card terms.
Saunders Learning Group, LLC, Andover, KS
Travel and Entertainment
Credit Cards
•A credit card that can be used to
cover travelling expenses and for
your enjoyment/entertainment. An
example of a T&E card is "Diners
Club." It can only be used at certain
restraunts which would constitute
"entertainment.“
Zero Percent Interest Credit
Cards
•As the name indicates, zero percent
credit cards do not require the
credit card owner to make any kind
of interest on their shopping. You
could utilize your credit card and
also purchase anything you desire
and pay only the monthly minimum
requirement.
Slide 11
 Module 4
How Credit Card Companies
Make Money

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Saunders Learning
Learning Group,
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Andover, KS
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

 Module 5
Credit Card Processing Steps

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Credit Card Authorization Process Flow

Saunders Learning Group, LLC, Andover, KS Slide 19

Credit Card Transaction Processing Steps

Step 1
Authorization
• 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
Credit Card Transaction Processing Steps

Step2
Batching
• 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
 Credit Card Transaction Processing Steps

Step3
Clearing
• 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
Credit Card Transaction Processing Steps

Step4
Funding
• 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
Credit Card Transaction Processing Steps
 Glossary

 Acquirer: A bank that processes and settles a merchant's 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

 Credit Card Transaction Processing Steps
1. 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
cardholder's 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 cardholder's account for the amount of
the sale. Note that the cardholder's account has not been actually charged
yet.
Saunders Learning Group, LLC, Andover, KS
Credit Card Transaction Processing Steps
7. The acquiring bank processing the transaction, and then sends the approval or
denial code to the merchant's 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 bank
11. The acquiring bank then deposits the amount of the all the sales drafts submitted
by the merchant, less a discount fee, into the merchant's bank account.

Saunders Learning Group, LLC, Andover, KS Slide 25

 Module 6
Major Credit Card Companies
Market Share

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Visa
 Provides credit and debt card processing services to
Function 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, risk
product management and information-based services.
and  Services tailored to individual countries or regions and serve the needs of
Services 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.
http://corporate.visa.com/about-visa/technology-index.shtml
 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 of
the 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

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 percentage

the Market point to 25.57 percent in 2011.

Saunders Learning Group, LLC, Andover, KS Slide 29

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

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

 Thank You !

Saunders
Saunders Learning
Learning Group,
Group, LLC, LLC
Andover, KS
Questions

Saunders Learning Group, LLC, Andover, KS

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 wallstreet.com
or www.floydsaunders.com
Author Contact
email: floyd@floydsaunders.com
Blog: www/money/floydsaunders.com
Twitter @floydsaunders
Facebook: Figuring Out Wall Street
Sideshare: http://www.slideshare.net/FloydSaunders

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

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