Data Sheet: The Credit Card Industry
Data Sheet: The Credit Card Industry
DATA SHEET
The Credit Card Industry is a global, multi-lingual, multi-currency based financial services business. This business is dominated by a few key players like Visa, MasterCard who provide the infrastructure for credit card transactions and card issuers like MBNA, Citibank and American Express who provide the credit card and credit to the customer. They may also play the role of an acquirer for enabling credit card transactions with merchants and banks. The Business Model has fixed ongoing infrastructure costs that are a part of running the business. The Credit Card Vendors are looking for a better ROI on these fixed costs as competition increases, brand loyalty decreases, margins decline and customers and merchants are increasingly savvy about their credit card benefits. A new threat in the form of debit cards has also impacted this mature Industry.
Participants
Merchant: A vendor of goods or services who accepts a credit card as a form of payment.
Acquirer: An acquiring financial institution (or "acquirer") contracts with the bank, card issuers and merchants to enable credit card transactions. The acquirer deposits the daily credit card totals and debits the end-of-month processing fees from the merchants accounts. Customer: Network: transactions. Card Issuer: holder. An individual or a business that uses a credit card to procure goods and services. A company that is authorized by the acquirer to capture, authorize and process merchant An organization that issues cards to card holder and is responsible for billing the card
Association/Private Label: An organization like Visa, Master Card or American Express, Diners or Discover which provides the brand names under which credit cards are issued. The associations market their brands along with the card issuers and share in the marketing costs. Visa and MasterCard are industry standard and sponsored by a consortium of banks to ensure fairness in the credit card business. The Transaction: A merchant is a company accepting credit cards for retail, mail order, or Internet transactions. The merchant has a deposit account with a merchant bank. The merchant has a contractual relationship with an acquirer who assigns them a merchant ID, purchases the merchant's credit card transactions at a discount, and deposits funds into the merchant's bank. The merchant must choose an authorization network supported by, and paid by, the acquirer. The issuing bank makes the credit decision to issue the card to the merchant's customer, sets their credit limit, and maintains all the details related to the card transactions. The cardholder applied for the card and is responsible for paying the bill from the issuing bank. Only an authorization network has direct access to issuing banks' computers to process credit card authorization requests. To authorize a customer's card, the merchant creates an authorization request. This transaction contains the card number, expiration date, amount, address verification service (AVS) data, the CVV2 number from the signature area of the card, and other fields. The merchant sends the transaction using a device or software certified by the authorization network. The system dials the authorization network and sends the transaction to the authorization network host computer. The network then inquires of the issuing bank, which authorizes or declines the transaction. For the merchant to be paid for the transaction, settlement must occur. The settlement is done the same day on the Point of Sale or when fulfillment occurs.
Key Credit Card Metrics (US 2001) Top 10 Credit Card Vendors Citibank MBNA Bank One Discover Chase Capital One American Express Bank of America Providian Fleet Securitization: Citigroup: $204 Billion. MBNA: $73 Billion. JPM/Chase: $75 Billion. Fraud/Revenue Loss (Annual) Stolen Cards $ 1 Billion Bankruptcy $ 3 Billion Credit Card Fraud $ 10 Billion Some Big Numbers Total Available Credit $ 1.8 trillion Total Credit Card Debt - $660 billion Sales Volume of o VISA $2.1 trillion o MC - $986 billion o AMEX - $298 billion Credit Card Spending 1.3 trillion Sub Prime Accounts 70 million Credit Card Consumers 185 million
Credit Card Business Model Highlights Securitization Credit card receivables owed by customers to card issuers are treated as assets and securities are issued against those assets. The securities are traded as bonds and hence the term securitizing. Investors such as money market funds and pension plans buy these securities. That provides finance for lenders who recycle that into more credit card debt for customers by issuing more cards or higher credit limits. Sub Prime Cards Individuals with less than stellar credit histories are targeted with credit card offerings. These credit card offerings are accompanied by high interest rates and excessive fees. Providian pioneered this approach and did well until the economy slowed down which made it for difficult for these individuals to pay off their credit card bills. The securitization of these credit card receivables and the securities issued against them are analogous to junk bonds in the credit market. Sub Prime Lending has come under the scrutiny of
$1.80
$1.75
$1.50
Source: Fortune Magazine Technology as a Key Business Process Enabler in the Credit Card Industry
Citibank in India has pioneered the use of Wireless Technology to authenticate credit card transactions. The Indian Telephone and Communications Network is very cumbersome and expensive to use in big cities because the lines may be busy or the merchant may not be able to procure a telephone or network
Executive Summary
The credit card industry is consolidating with a few major players dominating the landscape. These players are trying innovative financial instruments to leverage their portfolios. Securitization of credit card receivables is one such example. This has come under increasing scrutiny from federal regulators because of their accounting treatment. Technology could be used as a significant differentiator in this mature industry for the major participants to take market share from the other players. Citibank is a pioneer in this area as shown in the section above. The internet, wireless, messaging and smart cards could be a major factor in the next generation of credit cards.