Major Parties Involved In Credit Card Transaction Finance Essay - Free Essay Example

Sample details Pages: 3 Words: 955 Downloads: 3 Date added: 2017/06/26 Category Finance Essay Type Research paper Did you like this example? Selling goods or services on credit, relying on the credibility of the consumer has been a custom of merchants since past. This practice has been mutually beneficial for both, the merchant and the consumer. Introduction of credit cards has been an extension of this idea, with better defined terms and conditions defined, and involving regulatory bodies for vigilance. Don’t waste time! Our writers will create an original "Major Parties Involved In Credit Card Transaction Finance Essay" essay for you Create order Credit Card is a card issued by a financial company  giving  the holder  an option to borrow funds. Credit cards charge  interest and are primarily used  for short-term  financing9. They are issued by banks or credit unions, and have shape and size according the specification of ISO/IEC 7810 standards as ID-1 (defined as 85.60 * 53.98 mm in size)10. Credit cards are usually used at point of sale. This plastic card entitles its holder to buy goods and services based on holders promise to pay for these goods and services availed now, in near future. It is also known as Plastic Money. Institutions issuing these credit cards need to use due diligence while processing the applications of consumers. The critical step in the process is -credit history check. This mainly includes validating the consumers ability to repay debts based on the responsibility and sincerity demonstrated in repaying previous debts. Though this check is not a guarantee that similar response would be repeated in future transactions too, but it provides a primary check, when carried meticulously. The consumers credit report thus prepared contains information like number and types  of credit accounts, duration for which each account has been open, amount of available credit used and whether bills are paid on time.   Information regarding whether  the consumer has any bankruptcies, liens or judgments are also a part of the report that supplements the decision whether to extend credit to that consumer and also the credit limit to be granted. Major Parties Involved in Credit Card Transaction: Cardholder: Owner of credit card , who uses it to make a purchase of goods or services Merchant: The individual or business who accepts credit cards for payment of the product or services sold to the consumer or cardholder. Issuer Bank11: The responsibilities of issuer bank are majorly administrative. The functions it handles covers various aspects of cardholder relationship, including card marketing, credit processing of applications, card issuance, cardholder billing, payment collection from cardholder, fraud control, collection from defaulters, and so forth. Acquirer Bank: Receiving side of the transaction, i.e. Merchant is managed by acquirer bank. It is the financial institution accepting payment on behalf of the merchant. Operations of processing and reconciling all the credit transactions made at merchants end are also acquirer banks responsibility. They perform sales and marketing functions too, by soliciting and signing up new merchants. Merchants application proc essing and authorization is done by acquirer bank. Institutions like J P Morgan Chase, Bank of America, HSBC etc are the bigger players in this role, accompanied by many more. Credit card Association: Association of issuer banks like MasterCard, Visa, American Express et al. is made to monitor, control, and manage transaction terms for all parties involved in transaction (merchants, issuer banks, acquiring banks). Transaction Network: It is the technology part of the transaction that enables the electronic transaction. Working of Credit Cards: Fig 3: Credit Card transaction processing diagram12 The credit card transactions can be majorly divided into two parts: Authorization: It is the process that happens immediately after each purchase transaction. Once the card is swiped at register for payment, issuer bank authorizes the transaction by validating the card and its outstanding limit. Clearing and settlement: This is the second part of transaction cycle, wherein merchant is paid for the sales. Issuer bank gets interchange fee  [1]  , and acquirer bank earns discount fee as their share of profit in the transaction. A typical credit card transaction involves the following steps: Consumer swipes his card at POS for payment of the purchases made. An intermediary, Authorize.Net, supports the intricate routing of data forward for authorization and processing. The secured transaction network passes the information via defined connection and finally submits the transaction information to the credit card network (like Visa or MasterCard), which further relays the transaction to the issuer bank that issued the credit card to the consumer. The issuing bank either authorizes or declines the transaction based on the customers available credit limit and passes the results back to the credit card network, which is finally routed to Authorize.Net. Authorize.Net sends the results of authorization to the merchant and consumer (at website, in case of online transaction). After this authorization, merchant delivers the goods or services to the consumer. The issuer bank sends the calculated funds for the transaction to the credit card network, which passes the funds to the merchants bank (acquirer bank). The bank then deposits these funds into the merchants bank account. This is process is called settlement. Respective interchange fee and discount fee are also deducted by issuer bank and acquirer bank. Consumer pays outstanding credit card consolidated bills at defined interval, defined in the terms of contract. Charges and Profits in Credit card transaction: Issuer Bank: They issue cards to and represent consumers during transaction. They bear the risk of default that cardholder or consumer might commit. In return they charge, and therefore are benefit in case of no defaults by; interchange fees (generally 1-2% of the total transaction value14) to merchants with every transaction. Acquirer Bank: They are the intermediary between Issuer bank and Merchant. They receive all credit card transactions from issuers, and present all payments in a time period to the merchant in lump sum. In exchange, the acquirer bank charges merchants a fixed amount for its services, as well as a variable sum dependent on the volume of the merchants sales15.