Lies, Damn Lies and Credit Card Banks

A Credit Article Contributed by Mark Mcclelland

What Kind of Credit Cards Do Banks Offer?

Although there are actually only two basic types of cards available consumers, credit cards and charge cards, it used to be that only banks offered consumers credit cards. The difference between the two types of cards is that credit cards provide a revolving line of credit, whereas charge cards must be paid off in full every month. By far, the most common credit card is a Visa, with about 60% of the credit card market, and MasterCard with about 40% of the market. And American Express, of course, accounts for the lion's share of the charge card market.

Credit Card Issuing Banks and Credit Card Associations

Banks and other financial institutions that provide lines of credit actually issue credit cards. That's why your credit card is, perhaps, an MBNA Visa card, or a Bank One MasterCard. While the banks issue cards, Visa and MasterCard themselves are actually only associations of those banks that issue the cards.

The idea here is that a bunch of banks get together and decide that they're all going to issue "thenextbest" credit card with bunches of fabulous incentives (to entice you to get and use one of these new cards).

Now, in order to process the massive numbers of transactions these banks expect their customers to generate by using this new card, and not having the technical infrastructure themselves to do it (nor wanting to expend the funds to set one up), the banks form an association that will process all those transactions for all the member banks. In this way all the banks in the association share the transaction-processing burden (costs).

And while the association is set up on a for-profit basis, it is actually run on a break-even basis. And this kind of makes sense; the banks don't necessarily want the association to make any money off the deal, since that means less money for the banks themselves - they simply want it to process their transactions, and since it's their association they can (upon agreement) run it the way they want.

So, it's not MasterCard or Visa making the money, it's the member banks of the MasterCard and Visa associations. But if that's the case, how, exactly, do the association's cover their transaction processing costs? Well, they charge processing fees to the member banks, and understand that there're thousands of banks in each association, and millions of consumers using credit cards issued by those member banks... so the tiny fees charged the banks on a per-transaction basis can really add up fast; but regardless, it all goes to cover the association's cost of operations.

Banks and the Credit Cards They Issue

And, as you know, any bank can be a member of both the Visa and MasterCard associations. But any bank that joined either one or both associations and issued either Visa credit cards and/or MasterCard credit cards was not allowed - by association rules - to issue any other association's cards, like American Express or Discover. However, recent Supreme Court action let stand a lower court's ruling that said that this "exclusionary rule" was anti-competitive. So now, association member banks are free to issue other types of cards as well.