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Archive for the ‘Credit Card’ Category

Two types of credit card organizations handle the four major U.S. credit cards: (1) credit card associations such as VISA International (VISA) and MasterCard International Inc. (MasterCard) and (2) full-service credit card companies such as American Express Company (American Express) and Discover Financial Services, Inc. (Discover). Credit card associations and full-service credit card companies vary dramatically in size, market reach, and organizational structure. As of December 31, 2001, for example, the two major credit card associations had dramatically higher numbers of issued credit cards than the major credit card companies.

Each of the two major associations in our review is owned by its member financial institutions. Around 21,500 member financial institutions own VISA, and about two-thirds of them are located in the United States. About 20,000 financial institutions participate in MasterCard worldwide. As described in a prior GAO report, MasterCard has a two-tier membership structure composed of principals and affiliates.17 Principal members have a direct membership relationship with the association and serve as sponsors to affiliates. For example, a U.S. or foreign bank can apply to become an affiliate member if a principal member agrees to sponsor the bank and the bank satisfies the association’s membership criteria and clears the approval process.

Many major credit card industry participants have attempted to restrict the use of credit cards for Internet gambling but have faced challenges in their efforts to do so. Full-service credit card companies that issue their own cards and license merchants to accept cards have implemented policies prohibiting customers from using their cards to pay for Internet gambling transactions and will not license Internet gambling sites. Credit card associations have instituted a different approach a transaction coding system that enables association members, at their discretion, to deny authorization of properly coded Internet gambling transactions.

Many major U.S. issuing banks that are members of these associations have chosen to block such transactions because of concerns over Internet gambling’s unclear legal status and the high level of credit risk associated with the industry. These efforts are hampered, however, by Internet gambling sites that attempt to disguise their transactions to keep from being blocked by the issuing banks. In addition, some association members—primarily those in foreign jurisdictions where Internet gambling may be legal—continue to acquire Internet gambling sites as merchants. Further, efforts to restrict the use of credit cards for Internet gambling can be circumvented by cardholders’ use of on-line payment providers to pay for gambling activities. With such intermediaries, issuing banks cannot necessarily determine the nature of the activity being charged.

In spite of these challenges, the credit card industry’s efforts to restrict the use of credit cards for Internet gambling could, according to research conducted by gaming analysts, reduce the projected growth of the Internet gaming industry in 2003 from 43 to 20 percent, reducing industrywide revenues from a projected $5.0 billion to approximately $4.2 billion. However, as banks increasingly choose to restrict the use of credit cards for Internet gaming, Internet gambling sites are expected to emphasize newer forms of payment, such as e-cash, that could eventually replace credit cards.