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Archive for the ‘Associations’ Category

The two full-service credit card companies in our review, American Express and Discover, issue their own brands of cards directly to customers and authorize merchants to accept those cards. Discover, an affiliate of Morgan Stanley, provides primarily credit card services. American Express, a publicly held company, also provides travel, financial, and network services. Each company owns a U.S. bank. American Express and Discover assume primary responsibility for providing credit card services directly to both customers and merchants.

They perform all major aspects of issuing cards, including approving applications from customers, mailing cards to customers, authorizing transactions, and sending out bills. They also perform all major aspects of acquiring merchants to accept their cards, including signing up merchants, distributing credit card terminals, and settling merchant accounts. By acting as both issuer and acquirer, the two companies represent what the industry refers to as a “closed loop” system. Both companies own and operate the electronic networks that handle all information on transactions for cardholders and merchants.

American Express and Discover market their credit card business to consumers and potential merchants in the United States. Both companies issue cards to individuals, and American Express also issues cards to businesses. In addition, American Express has arrangements in some overseas markets to license foreign banks to issue its cards and acquire merchants.

While the associations do not provide credit card services directly to cardholders or businesses, they establish the operating standards that define the policies, roles, and responsibilities of their member institutions and provide the data processing and telecommunications systems that transfer transaction data between members. The member institutions issue the credit cards to customers, acquire (sign up) merchants to accept credit cards, or both, along with providing other services directly to the cardholders and merchants. Member institutions generally fall into two categories:

Issuing banks that solicit potential customers, approve applications, and issue credit cards. These banks extend credit to cardholders, establish the terms of cardholders’ accounts (for example, credit limits and treatment of delinquent accounts), collect debts, and maintain accounts and cardholder records.

Acquiring banks that solicit potential merchants and approve and license merchants to accept credit cards. These banks, also known as merchant banks, enter into agreements authorizing merchants to accept the association’s credit cards, submit their merchants’ transactions into the association’s system for payment from issuing banks, and maintain accounts and related records on their merchant clients.

Third-party processors are also part of the industry. They contract with acquiring and issuing banks to provide transaction processing and other services. As part of the services they provide for their banking clients—members of the credit card associations—processors block Internet gambling transactions and ensure that Internet gambling sites do not become approved merchants.