Institutional roles in issuing and processing credit cards발음듣기
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Institutional roles in issuing and processing credit cards
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[Voiceover] What I want to do in this video is try to give a reasonable understanding of the different players involved that issue and process your credit cards.발음듣기
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Sometimes you could say that the network, or the processors are the people that maintain the credit card networks.발음듣기
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What they do is they, essentially, maintain networks of IT and policies that connect a bunch of banks together.발음듣기
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Right now the networks are just circles, but you'll see that they're networks as I build out this explanation.발음듣기
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I decide that, you know what, it would be good for my business for me to issue a credit card.발음듣기
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I could extend credit to my customers, they'll pay me interest, maybe I'll make some fees off of that, and it'll be good business for my bank.발음듣기
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Visa has some policies and if you're a legitimate bank and you agree to all those policies, you'll become a member of that network.발음듣기
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'"That'll be convenient, I don't like carrying cash in my pocket, so give me a credit card."발음듣기
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The credit card, I think we've all seen credit cards, It'll say Bank A really big up at the top.발음듣기
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Bank A, I'll have a credit card number that's unique to me, my credit card number, my name will be there, some type of expiration date, and then here in the bottom right corner, they're going to say what network I'm a part of.발음듣기
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A credit card issued over here would say MasterCard or if it was American Express, they'd put American Express here, or maybe there's some type of a hologram.발음듣기
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I could use it and then I'll build a balance and then in the future I could pay off that balance to this bank or I could carry a balance and they'll charge me interest, which is usually reasonably high interest, so I want to pay it off fairly quickly, but how does this actually work in the context of a network?발음듣기
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The grocery store, if they accept credit cards, they need to have some relationship with another bank someplace on this Visa network, in order for them to accept a Visa card.발음듣기
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This would be the merchant bank, or we could say the retailer's bank, or it's often in credit card lingo called the acquiring bank or the acquirer.발음듣기
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It's called the acquirer because this is the player that goes out and goes to each of the merchants and says, "Hey, right now you only accept cash or you only accept American Express.발음듣기
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'"That way you'll have more appeal to more customers and it'll be more convenient for your customers and every time a transaction happens, we'll just take a little bit of a cut of that transaction."발음듣기
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This was the grocer, maybe bank B goes off and acquires the shoemaker, maybe he goes and he gets the tailor on the network.발음듣기
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These are all different retailers who will now, all of a sudden, accept Visa, because their merchant bank is a member of the Visa network.발음듣기
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That's literally to check whether I'm good for the money, whether this card is valid to buy $100 worth of groceries.발음듣기
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When I swipe the card or when the grocer swipes the card, it's going to send a message from that little unit, from the point of sale unit, to the acquiring bank.발음듣기
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Then Visa will say, "Oh, that's bank A's card," and they'll give a number to bank A on their own proprietary network.발음듣기
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Then bank A will look into their database and say, "Oh yeah, Sal's got $1,000 of credit, he hasn't used any of it, he is good for it.발음듣기
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Then the transaction goes forward and eventually, as you could imagine, you can't just authorize a transaction and then I walk away with the groceries.발음듣기
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That $100 is going to come from bank A, but he's not going to get a complete $100, because obviously, each of these players, they're providing a service.발음듣기
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The network operator or the processor is offering their network and there's other services they might provide, different security mechanisms.발음듣기
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They say, "Sal lives in Chicago, but all of a sudden, he's buying $100 worth of groceries in Salzburg "or someplace that seems unlikely."발음듣기
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Then it might send some type of a warning trigger, so people might have their own security mechanisms.발음듣기
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This guy is going out there, he might be providing the actual point of sale terminals, the actual network, so they're all going to get a little bit of a cut of things.발음듣기
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There'll be a 2%, and it's not always 2%, that's a round number, but it also is a ballpark, not completely outlandish, relative to what tends to be the case.발음듣기
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'"They get 2% of all of these guys' transactions," but of course they're going to have to share it with these other people up here.발음듣기
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Of this $2, and I'm doing it in roundabout numbers, bank A, now we're going to split up the $2, bank A is going to get, let's just say, $1.70.발음듣기
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These aren't that far off from what the real numbers might be and they change and they depend on the banks and the network and all of that.발음듣기
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The issuing bank, besides now that I have a credit balance, it'll be able to charge interest on it.발음듣기
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They just say, "Our standard interchange fee is X% of transactions plus $0.10," and that's what bank B is going to pay to bank A.발음듣기
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It's essentially bank A's cut of the discount rate, of the $2 this guy is charging that guy.발음듣기
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Then, the network, they make their money in several ways, but in general, they make money off of every transaction, as well.발음듣기
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In this example, $0.10 of this discount rate that this guy charged would go to the processor or the network.발음듣기
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When the whole transaction gets settled, which essentially means everyone gets the money they need to get, this bank is going to send Visa's settlement bank $100 minus the $1.70 that it gets to keep as part of its interchange fee.발음듣기
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Visa will keep $0.10 of it, send it to the acquirer, so the acquirer is going to get $98.20.발음듣기
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In order for this retailer to be able to use all of this infrastructure out there, he essentially had to pay 2% of the actual transaction.발음듣기
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The more retailers he signs on, or the more retailers he acquires, the more cuts of transactions he's going to make.발음듣기
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Then bank A is going to make that interchange fee, which was the bulk of that discount rate, that retailer discount rate, not related at all to the federal funds discount rate.발음듣기
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They might be able to charge me 15-20% annualized percentage rate interest on that money until I pay it off.발음듣기
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