News released by credit card industry expert said that credit card transaction volume has exceeded more than $2 trillion and raked in more than $100 billion in revenues in U.S. alone.
The huge credit card transaction volume required massive operational and manpower supports. In order of a credit card transaction to take place, there must be four parties involved. The first party is a card company that issued the credit card and it is called the Issuer. The second party is a card company that acquired the credit transaction from the merchant and it is called the Acquirer. The next two parties are the cardholder and the merchant.
Because the credit card transaction volume is so huge, the credit card industry experts smartly segregated the credit card business into two categories, the Card Issuing Business and Card Acquiring Business. This system makes managing credit card business easier.
Card Issuing Business
Issuer can make money just by concentrating on the card issuing activity. Issuer makes money from the cardholders. The Issuer make money by charging cardholders membership fees. When cardholders use their credit cards at other Acquirers’ Merchants, the Issuer earned a share of the merchant discount fee called Interchange Fees. If cardholders perform cash advancing from their credit cards, the Issuer earn cash advance fees.
The major income of card issuing business is not these two. It is the interest revenue earned when cardholders revolved their card balances. The following is a summary of the revenues earned in card issuing business :
1. Card membership fees.
2. Interest on revolving card balances.
3. Interchange fees (a shared income from Acquirers)
4. Cash Advance Fees
5. Late payment penalty fees.
6. Other service fees such as returned cheque handling fees, exceed limit fees, sales slip retrieval fees, etc.
While earning the incomes, the Issuer incurs expenses in the process such as manpower cost, system cost, plastic card cost, card embossing cost, etc. The following is a summary of common cost incurs by the Issuer :
1. Cost of Funds.
2. Card Acquisition Cost – Expenses spent in acquiring new credit card customers such as direct card sales commission, welcome package cost and related expenses.
3. Plastic card and embossing cost.
4. Card marketing and promotion cost – Advertisement and card promotional programs.
5. Operational cost which include staff salaries and expenses incurred by various departments such as New Accounts, Card Marketing, Card Sales, Card Embossing, Authorization, Customer Service, Collection, Fraud Control, Systems, Human Resource, Administration and Finance.
6. Capital Investments – Major costs involve Mainframe Computers, Networking, Credit Card Software, Card Embossing Machines, Personal Computers for staff, Furniture & Fittings, Office Renovation and Telephone System.
Card Acquiring Business
If a card company does not wants to go through the complexity of setting up the Card Issuing Business, it can kick off the Card Acquiring Business which is less complicated. An Acquirer, by offering the Merchants, a facility to acceptance credit cards, the Acquirer charges the Merchants a discount fees.
The cost incurred by the Acquirer is much less complex than the Issuer. The following is a summary of the cost:
1. Merchant Sign Up cost – Cost includes printing of Merchant Agreements, Display Decals, Standees.
2. Interchange Fees – Sharing of Merchant Discount Revenue with the Issuers whose cardholders patronized the Acquirer’s Merchants.
2. Operational cost which include staff salaries and expenses incurred by various departments such as Merchant Sales, Merchant Services, Authorization, Fraud Control, Systems, Human Resource, Administration and Finance.
3. Capital Investments – Major costs involve POS Terminals, Mainframe Computers, Networking, Credit Card Software, Personal Computers for staff, Furniture & Fittings, Office Renovation and Telephone System.
In general the Card Issuing Business is more lucrative than the Card Acquiring Business. Because the credit card business is very complex and specialized, it makes experienced credit card professionals or experts highly demanded.
If a company does not have the experience and expertise in managing credit card business, it is best to employ experienced professionals or stay away from it. I have seen card companies loosing millions of dollars during the initial phase of doing credit card business due to operational incompetency and attacks by fraud syndicates. I noticed that fraud syndicates like to target new credit credit companies.
Article Source
