Credit Card Vendors
A credit card vendor is a lending institution or a third-party payment processor that handles credit card processing.
It is important to mention that in this overly complex industry there are mainly four big companies: Visa, Mastercard, American Express and Discover which are labeled by many as credit card networks or more simply, payment processors. Put simply, what these networks do is partner with banks such as: Bank of America, Citi, Chase, TD Bank or Wells Fargo to facilitate both merchant payments and settlements in conjunction with the issuers of these Credit Cards. It is also important to note that not every network issues Credit Cards: Mastercard and Visa do not, they just act as a partner for issuing banks so that they can release their credit cards to the public. However, Discover and American Express do issue credit cards directly to the public.
Another key part of the credit card industry are the credit card issuers, which are institutions that have made a partnership with one or more of the major credit card vendors (Visa, Mastercard, American Express and Discover) to issue credit cards to the public. Normally, bigger banks partner with more than one vendor (For example: Chase has both Visa and Mastercard cards) while smaller banks usually limit themselves to no more than one. The credit card issuers are tasked with underwriting the credit risk involved with lending to consumers through credit cards and setting the interest rates. Additionally, they are also responsible for: Customer billing, managing reward programs and reporting account behavior to credit bureaus.
Practically, how this system works is very simple:
- First, merchants send batches of authorized transactions to their payment processor (Visa, Mastercard, American Express or Discover, mainly).
- The payment processor passes the transaction details to the card associations so that they can communicate the appropriate debits to the issuing banks in their networks.
- The issuing bank debits the cardholder’s account for the amount that was used in the transactions.
- The issuing bank proceeds to transfer the appropriate funds for transactions to the merchant bank, taking interchange fees into account.
- Lastly, the merchant bank deposits funds into the merchant account (minus fees).
Payment processors have been on the spotlight of the media and other companies recently, for example: Amazon was considering to stop accepting Visa as a payment processor on their website altogether. However, a good upside of payment processors is that because of technological advances in the sector, merchants can receive money almost instantly, which was impossible before.