Co-Branded/Affinity Credit Cards

Some merchants and organizations form marketing arrangements with financial institutions to issue general-purpose credit cards with the merchant or organization name on the front of the card.  These cards are termed co-branded or affinity cards and the card accounts may be part of the bankcard company networks.

Co-branded cards typically offer consumers a rewards program.  Organizations such as sports teams, schools, or service organizations issue affinity cards jointly with a financial institution that offers compensation in return for marketing to the merchant's customers or the organization's members.  The institution might base its compensation on the number of account applications, the number of accounts activated, account volume and income, or other defined benchmarks.

Private Label (Store) Credit Cards

In some cases, financial institutions might issue a card jointly with a merchant.  These cards are known as private label or store cards.  Consumers can use them only at the merchant whose name appears on the front of the card.  These cards do not carry a bankcard company logo, and the merchant typically plays a limited role in the issuance of the card or managing the credit relationship. Some private label (store) credit card retailers actively manage card issuance and credit relationships through affiliated financial institutions.

Bankcard Companies

The two major bankcard companies, Visa and MasterCard, account for the majority of credit and debit cards in use.  Both organizations began as bank service companies, owned by principal-member financial institutions.  They provide separate, but similar operating policies, procedures, and controls for bankcard issuance, acquiring, and settlement activities.  The companies own the credit card trademark, granting membership to financially sound financial institutions that apply.  Only members are allowed to issue cards bearing the company logo, and they pay transaction and membership fees for use of the bankcard association logo and services.

Each company has three primary types of membership:  Visa has principal, associate, and participant memberships; MasterCard has principal, affiliate, and agent memberships.  Each membership type conveys different privileges.  Principal membership allows members to solicit cardholders and issue cards, solicit and sign merchants, and sponsor other financial institutions for membership in the company.  Associate/affiliate and participant/agent members can perform all of the principal membership functions except sponsor other members.

Card issuers are financial institutions that have permission to issue bankcard company credit cards.  Acquiring financial institutions and sponsored third parties have contracts with merchants that accept a bankcard company's products.  Acquiring financial institutions accept and process transactions from those merchants through the company's network interchange payment system.  The cost of technology infrastructure and the level of transaction volume are high for bankcard-acquiring institutions.  Most rely on third-party service providers.  Non-financial institution processors must be sponsored by financial institutions to process merchant transactions. Under the bankcard company's bylaws, acquiring financial institutions are responsible for the actions of all contracted third-party service providers; therefore, they are expected to monitor carefully the providers' compliance with the companies' operating rules.

The bankcard companies set interchange fees, which are paid by the merchant acquirer to the issuing financial institution.  The merchant acquirer typically passes this fee along with a discount or acquirer fee for processing services to its merchants.  Bankcard issuing institutions generate their revenue from the interest charged on revolving balances, and from the interchange, late, over-limit, cash advance, and card fees.  Merchant-acquiring institutions, which assist in clearing and settling credit card transactions, generate most of their revenue from the acquiring and other processing fees (e.g., charge-back processing and account maintenance) they charge to the merchant.


Figure 5 - Credit Card Clearing

Legend: Solid lines represent the flow of information and dashed lines represent the flow of funds.

Figure 5: Credit Card Clearing and Settlement

Figure 5 illustrates the payment and information flows for a typical credit card transaction.  In this example, the consumer pays a merchant with a credit card (step 1).  The merchant electronically transmits the data, at the POS and through the bankcard company's electronic network, to the card issuer for authorization (steps 2 and 3).  If approved, the merchant receives the authorization to capture funds, and the cardholder accepts liability by signing the credit voucher (steps 4, 5, and 6).  In cases involving purchases under $25, the cardholder does not have to sign.  The merchant receives payment, net of fees, by submitting captured credit card transactions to its financial institution in batches or at the end of the day (steps 7 and 8).  The merchant acquirer forwards the sales draft data to the bankcard company, who forwards the data to the card issuer (steps 9 and 10).  The bankcard company determines each financial institution's net debit position.  The bankcard company's settlement financial institution coordinates issuing and acquiring settlement positions.  Members with net debit positions (generally issuers) send owed funds to the company's settlement financial institution, which transmits owed funds to the merchant acquirers.  The settlement process takes place using a separate payment network such as Fedwire® (step 11).  Each business day, the association's settlement financial institution receives information from the association about issuer and acquirer positions, sending Fedwire® 1031 draw-down messages to all of its issuers with instructions to fund their settlement accounts for those amounts.  The association's settlement financial institution debits issuer accounts for those amounts and credits the appropriate acquiring financial institution accounts.  If an issuer does not fund its account on time, the association will intercede, cover the short position, and assess a penalty fee on the issuer. The card issuer will then present the transaction on the cardholder's next monthly statement (step 12).  The cardholder makes a payment for the charges incurred in accordance with the cardholder agreement.


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General Purpose Credit Cards
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Debit and ATM Cards