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HOW CREDIT CARDS WORK

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How Credit How Credit CardsCards Work Work

What the numbers on the card What the numbers on the card mean?mean?

How the transactions work?How the transactions work? Main entities involvedMain entities involved How each entity makes How each entity makes

money?money?

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What the numbers on the card What the numbers on the card mean?mean?

Here are what some of the numbers stand for: Here are what some of the numbers stand for: The first digit in your credit-card number signifiesThe first digit in your credit-card number signifiesThe type of the card (Amex- 3, Visa - 4, MasterCard 5 , The type of the card (Amex- 3, Visa - 4, MasterCard 5 ,

Discover 6)Discover 6) American ExpressAmerican Express - Digits three and four are type and - Digits three and four are type and

currency, digits five through 11 are the account number, currency, digits five through 11 are the account number, digits 12 through 14 are the card number within the digits 12 through 14 are the card number within the account and digit 15 is a check digit. account and digit 15 is a check digit.

VisaVisa - Digits two through six are the bank number, digits - Digits two through six are the bank number, digits seven through 12 or seven through 15 are the account seven through 12 or seven through 15 are the account number and digit 13 or 16 is a check digit. number and digit 13 or 16 is a check digit.

MasterCardMasterCard - Digits two and three, two through four, - Digits two and three, two through four, two through five or two through six are the bank number two through five or two through six are the bank number (depending on whether digit two is a 1, 2, 3 or other). (depending on whether digit two is a 1, 2, 3 or other). The digits after the bank number up through digit 15 are The digits after the bank number up through digit 15 are the account number, and digit 16 is a check digit. the account number, and digit 16 is a check digit.

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What the numbers on the card What the numbers on the card mean?mean?

SystemSystem

NumberNumber

BankBank

NumberNumber

AccountAccount

NumberNumber

CheckCheck

DigitDigit

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What the magnetic-stripe What the magnetic-stripe containscontains

Account Number, Account Holder Account Number, Account Holder Name, Pin, Country Code and Name, Pin, Country Code and Currency etc.Currency etc.

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How the transactions workHow the transactions work

Payment Payment

ProcessorProcessor

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Issuing Bank: A bank that issues the Issuing Bank: A bank that issues the credit to the customer.credit to the customer.

Acquirer Bank : A bank that has a Acquirer Bank : A bank that has a business relationship with a merchant business relationship with a merchant and receives all credit card and receives all credit card transactions from that merchant.transactions from that merchant.

Visa/MasterCard: Co-operative Visa/MasterCard: Co-operative Ventures owned by the issuing banks, Ventures owned by the issuing banks, which own networks that facilitate the which own networks that facilitate the exchange of money between banksexchange of money between banks

Main entities involved.Main entities involved.

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How each entity makes money?How each entity makes money?

The Visa and MasterCard organizations are funded by membership dues and fees paid by the banks that make up the organizations.

The banks themselves have two main The banks themselves have two main sources of revenue from credit-card sources of revenue from credit-card transactions.transactions.

1)1) Interchange FeeInterchange Fee2)2) Interest on purchases and cash Interest on purchases and cash

transactions/Membership fee charged to transactions/Membership fee charged to the customerthe customer

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How each entity makes money?How each entity makes money?

Interchange Fee: Interchange fees are charged by the merchant's /acquirer bank to a card-accepting merchant as component of the so-called merchant discount fee. The merchant pays a merchant discount fee that is typically 2 to 3 percent . The majority of this fee, The majority of this fee, goes to the issuing bank, but parts of it goes to the issuing bank, but parts of it go to the processing network, the card go to the processing network, the card brand (American Express, Visa, brand (American Express, Visa, MasterCard, etc.), and the merchant's MasterCard, etc.), and the merchant's acquirer.acquirer.

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Term - Payment GatewayTerm - Payment Gateway

Wikipedia defines the term 'Wikipedia defines the term 'Payment Gateway' as ...' as ...

A Payment Gateway is an e-commerce service that A Payment Gateway is an e-commerce service that authorizes payments for e-businesses and online authorizes payments for e-businesses and online retailers. retailers.

It is the equivalent of a physical POS (Point-of-sale) It is the equivalent of a physical POS (Point-of-sale) terminal located in most retail outlets. terminal located in most retail outlets.

Payment gateways encrypt sensitive information, such Payment gateways encrypt sensitive information, such as credit card numbers, to ensure that information as credit card numbers, to ensure that information passes securely between the customer and the passes securely between the customer and the merchant.merchant.

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Payment Gateways - Workflow DiagramPayment Gateways - Workflow Diagram

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Payment Gateways - Workflow Example Payment Gateways - Workflow Example Interaction DiagramInteraction Diagram