How Credit card transaction works?

Have you thought about what was involved in making a credit card
purchase. Most of us use credit cards frequently. We charge our meals
when dining out, pay for our gas at the pump, and purchase large, and
sometimes small, retail ticket items with our credit cards. But we never
think, or even care, about the process running in the background that lets
us make these purchases. What actually happens when the merchant runs
our credit card through their Point of Sale terminal? Who is actually
authorizing the charge payment? What did the merchant need to do to be
able to handle credit card transactions?

Steps involved in a normal credit card transaction:

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. Point of sale units are usually set to request authorization at the
time of sale, and then actually capture the sales draft at a later
time.
6. 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.
7. 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.
8. 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.
9. 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.
10. 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.
11. 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. This is in
lieu of depositing the actual signed paper drafts the with the bank.
12. 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.
13. 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.
Acquiring Bank: A bank that has a business relationship with a merchant
and receives all credit card transactions from that merchant. The name of
the bank on the swipe machine (Point of Sale Terminal).

Issuing Bank: The bank issuing the Credit Card.

Check out also this for better understanding:

How Visa works?
How MasterCard works?

Other related links:

Credit Card Tips (Credit Card Tips: Use your CC wisely.)
How to lodge a complaint regarding Credit Card Issues (The banking
ombudsman scheme 2006)
__________________
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Home › topic › Finance

The History of Credit Cards – It All Started In The 18th Century

Thu, 09/11/2008 - 04:43 — Gareth Marples

Have you ever stopped to think about the evolution of your credit card? Where did it come from?

How was this system of paying for your purchases developed? Would you believe that the history

of credit cards actually started way back in the 18th century?

In 1730, Christopher Thompson, a furniture merchant, created the first advertisement for credit by

offering furniture that could be paid off weekly. This introduced the idea that people who couldn’t
afford to buy “big-ticket” items could make regular payments until the full cost of the items were

paid.

That idea was picked up and used, from the 18th century until the early part of the 20th century,

by tallymen. Tallymen sold clothes that the purchasers could pay for in small weekly payments.

They kept a tally (thus the name tallymen) of what people had bought on a wooden stick. One side

of the stick was marked with notches to represent the amount of debt and the other side was a

record of payments.

During the rise of the British middle class, bankers introduced the idea ofoverdraft protection.

This was one of the first forms of consumer credit because it was really a type of loan that kicked

in automatically if an account didn’t have enough money in it to cover the checks written against

it.

Industries recognized the need for credit

The system of credit took a real turn in 1914, when Western Union, in the interest of good

customer service, gave some of their more prominent customers a metal card to be used in

deferring payments – interest free – on services used. This system became known as “Metal

Money”.

Then another company realized the value of making goodwill gestures to their customers. In 1924,

General Petroleum Corporation issued the first metal money specifically for gasoline and

automotive services. They offered this first to their employees, then to select customers and then,

because the system seemed to work so well, to the general public.

The Ford Motor Company played a large part in creating the consumer credit business. Just like

Christopher Thompson back in 1730, Ford recognized that not all Americans had enough savings

to buy a Model T. Even those who did have enough might not want to put their whole life-savings

into just a car. So Small Loan Companies, or Finance Companies, began making their first car

loans.

In the late 1930’s, American Telephone and Telegraph (AT&T) introduced the “Bell System Credit

Card.” Other industries followed suit – railroads and airlines introduced similar cards. The system

of credit was fast growing in popularity.

But then World War II came along and, with it, came the prohibition of all use of credit and charge

cards. However, as soon as the War was over, business starting booming. Travel became more

popular. People were also beginning to acquire more costly modern conveniences for their homes,

like kitchen appliances and washing machines. These demands on the budget made the concept of
credit more popular because people could buy things with credit cards that they couldn’t afford to

buy with cash. So the demand for credit cards increased in ratio to the improvement in lifestyles.

People wanted more – and they wanted it now!

Charge cards evolved as lifestyles improved

After seeing these trends of increased travel and spending among those who held charge cards,

banks became interested in credit cards and online banking.

Since they were in the business of lending money, they saw the potential of gaining income by

charging interest on credit cards.

1950 marked the real beginning of the credit card most of us are familiar with today. Diner’s Club,

Inc. introduced the first credit card that could be used at avariety of stores and businesses. This

card was established primarily for businessmen to use for travel and entertainment expenses. The

Diner’s Club gave its cardholders up to 60 days to make payment in full. Merchants were eager to

accept the card because they found that credit card customers usually spent more if they were

able to “charge it”.

The first bank to implement this system was the Franklin National Bank in New York. In 1951,

after screening applicants, they issued the Charge-It card to those approved for credit. This card

could be used by consumers at local retail establishments. It worked much like the credit card

systems of today – the consumer made a purchase using the card; the retailer obtained

authorization from Biggins Bank, and closed the sale. The Bank reimbursed the retailer and

collected the debt from the consumer at a later date.

What a great idea for everybody involved! Other banks saw the same potential. In 1958, the

“Don’t leave home without it” card was introduced by American Express. But the first revolving-

credit card was issued in the State of California by the Bank of America. The BankAmericard,

marketed all across the state, was the first card to offer its cardholders payment options, where

they could pay the debt in full or they could make monthly payments while the banks charged

interest on the remaining balances.

In 1965, Bank of America saw more potential for income and control so they issued licensing

agreements to banks of all sizes across the nation. These agreements allowed the other banks to

issue BankAmericards and to interchange transactions through issuing banks. Now everybody was

getting in on the act!

All these credit card systems – they needed some regulation

 The credit card industry was booming! But some kind of regulation became necessary. Charge card

issuing and processing became too large of a task for the banking industry to handle. In 1966,

fourteen US banks had formedInterlink, an association with the ability to exchange information

on credit card transactions. In 1967, four California banks had formed the Western States Bancard

Association and introduced the MasterCharge program to compete with the BankAmericard

Program. By 1969, most independent bank charge cards had been converted over to either

BankAmericard or Master Charge cards.

As the bankcard industry grew, banks interested in issuing cards became members of either

BankAmericard or MasterCharge. Their members shared card program costs, making the bankcard

program available to even small financial institutions.

By the mid 1970s, the credit card industry started exploring international waters. But the name

“America” caused some problems. So, in 1977, BankAmericard became VISA. Then in 1979,

MasterCharge followed suit and changed its name to MasterCard.

In 1979, with the improvement of electronic processing, electronic dial-up terminals and magnetic

stripes on the back of credit cards allowed retailers to swipe the customer’s credit card through the

dial-up terminal, which accessed issuing bank cardholder information. The advantage of this

system, besides saving paper, was the increased speed of processing authorizations – one to two

minutes. It also decreased credit card fraud.

Credit cards today – an abounding industry

There are five leaders in the credit card industry today:

• Visa International

• MasterCard

• American Express

• Discover

• Diner’s Club

There are other check processing companies trying to penetrate the market, like Euro Card, JCB

and ATM companies, but credit cards still account for over 90% of all e-commerce transactions.

Visa has been a leader in credit card innovation. This has brought them the recognition as the

world’s leading credit card association, with over one billioncards being issued, and carrying over

50% of all credit card transactions conducted worldwide.

 So there you have your history of credit cards. An interesting journey – one that gives you

knowledge. And knowledge used brings wisdom. So you’re now qualified to make a wise decision

and get on board the credit card industry train. Enjoy the trip!

About The Author

Gareth Marples is a freelance writer providing valuable tips and information on the history of credit

cards. His numerous articles offer moneysaving tips and valuable insight on typically confusing

topics.

• Finance

• Gareth Marples's blog

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