Card Industry

Note: I am not going to get into the complexities of various transactions or topics which I am going to discuss, but  the intentions is to give some basic understanding to various topics which I am going to write, comments / criticisms are most welcome J

Credit Cards

We all use credit cards for making various purchases and enjoy the benefits but make  payments to bank later.

Now, let’s think of how this simple transaction occurs through multiple parties getting involved.

Transaction cycle

1. “A” goes to Big Bazaar to purchase some household items and he has a Visa card issued by Citibank with a limit of INR 20,000
2. At the time of making payment, he presents his credit card to the cashier
3. In this case, Big Bazaar being the merchant has a merchant account with ICICI being the acquiring bank
4. Once the card is swiped the following sequence of authorization happens:
1. Acquiring bank sends the approval request to Visa
2. Visa sends the approval request to Citibank
3. Citibank checks the customer outstanding either approves /disapproves the transaction and sends the information to Visa
4. Visa in turns sends the approval information to Acquiring bank
5. Transaction get approved
5. In terms of the financial entries, the following entries are passed:
1. Since the card is issued by Ciibank in collaboration with Visa, Visa acts as the clearing and settlement intermediary between acquiring bank and issuing bank
2. When the merchant submits its claim with the acquiring bank, acquiring bank sends the same to Visa, Visa debits the Issuing bank for the value of approved transaction and credits the acquiring bank net of any charges which is a revenue shared by both issuing bank and Visa
3. Acquiring bank debits its own account and transfers the funds to the respective merchant account
4. Issuing bank debits the customer account and credits the visa settlement account

Some obvious questions? (will write about this in my follow up blog on the same topic)

1. What is the role of Visa?
2. Is the MasterCard different from Visa Card?
3. Is there any difference between cards issued by Visa/MasterCard and cards issued by American Express which does not have any of these logos?
4. Is the transaction cycle different for Debit Cards?
5. What are the revenue drivers for a card issuing company?
6. What are the risks in a card issuing company?