This paper describes teh characteristics and business model of the credit card industry.

1. Credit Card Industry Fact Sheet
DATA SHEET The Credit Card Industry
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 merchant’s accounts.
Customer: An individual or a business that uses a credit card to procure goods and services.
Network: A company that is authorized by the acquirer to capture, authorize and process merchant
transactions.
Card Issuer: An organization that issues cards to card holder and is responsible for billing the card
holder.
Association/Private Label: An organization like Visa, Master Card or American Express, Diner’s 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.

2. Credit Card Industry Fact Sheet
Credit Card Industry Status Quo:
This industry has matured in the US with a few big players like Citibank, MBNA, JPMC and Bank One
dominating the landscape. American Express and Discover Card are also major players with their own
private labels and not under the Visa and MasterCard Umbrella. Growth is limited in the US although
global opportunities abound. Credit Card Usage has burgeoned in the US and stiff competition has
limited margins. The customer has benefited with lower interest rates and other perks. The credit card
business is still subject to the vagaries of the economy.
In a competitive industry segment, the acquirers, issuers, associations and the networks play one or all of
the roles. American Express for Instance plays all the above mentioned roles to maximize participation in
the credit card transaction process.
Key Credit Card Metrics (US 2001)
Top 10 Credit Card Vendors Fraud/Revenue Loss (Annual)
• Citibank • Stolen Cards – $ 1 Billion
• MBNA • Bankruptcy – $ 3 Billion
• Bank One • Credit Card Fraud – $ 10 Billion
• Discover
• Chase Some Big Numbers…
• Capital One
• American Express • Total Available Credit – $ 1.8 trillion
• Bank of America • Total Credit Card Debt - $660 billion
• Providian • Sales Volume of
• Fleet o VISA – $2.1 trillion
o MC - $986 billion
Securitization: o AMEX - $298 billion
• Credit Card Spending – 1.3 trillion
Citigroup: $204 Billion. MBNA: $73 Billion. JPM/ • Sub Prime Accounts – 70 million
Chase: $75 Billion.
• Credit Card Consumers – 185 million
Credit Card Business Model Highlights
Securitization
Credit card receivables owed by customer’s 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

3. Credit Card Industry Fact Sheet
are analogous to junk bonds in the credit market. Sub Prime Lending has come under the scrutiny of
federal regulators because of the lenders predatory lending practices. Also, banks are required to keep
sub-prime lending under limits by federal laws.
Affinity and Co-Branded Cards
MBNA pioneered this approach by marketing credit cards to professional and other communities which
are relatively affluent. The members of these communities have better credit histories which improves the
quality of the credit card receivables and its securitization. These cards are called affinity cards because
they affiliate with a group of people. Co-Branded cards are cards which are issued on behalf of another
brand to leverage the potential of both the card issuing vendor and the partner. Citibank for instance has
partnered with American Airlines to offer a credit card to its frequent flyers. Citibank lets users collect one
American Airline Mile for every dollar spent which influences the customer to spend on this co-branded
card hence enhancing the profitability of the card.
Credit Card Industry Top 5 IT Initiatives
Fraud Detection
Visa and MasterCard have reduced credit card fraud to 6 cents for every 100 dollars of credit card
transaction. Though this might seem small, the numbers are staggering as credit card usage soars to 5
trillion dollars or more globally. Credit card companies and credit card infrastructure providers invest
significant ongoing resources in identifying credit card fraud. The internet has contributed to a rise in
credit card fraud and investment in this area continues as a cost of running the business.
Call Center Productivity/Customer Experience
Credit card companies have significant call centers cists which operate 7/24/365. Automating the
customer experience and reducing the talk time is a high priority for credit card companies. The internet
has provided a framework for reducing call center costs as customers are lured to use the web for the
customer experience. IT investment in this area has increased lately due to efficiencies in customer
using the web instead of the call center and opting for web statements instead of paper statements.
Up Selling and Cross Selling
Customers have different vendors for different financial services. Credit Card companies have become a
play as being acquirers or acquires for the customer bases to up sell other financial services like
brokerage, insurance, mortgage and investment advice. Citibank and American Express are setting the
trend by up-selling to their customer. Cross selling has become another profitable source of revenue for
credit card companies as they leverage their customer base information by selling products for other
vendors and charging a portion of sales and charging a fee.
Mining the (un)Profitable Customer
A profitable customer for a credit card company is somebody who charges a lot to the credit card and
faithfully pays his credit card dues over a long period of time. Students, people who have just graduated
and people with several other profiles fit this description. An intelligent scan of the customer base will
yield targeted lists which can be leveraged and incentives like lower interest rates can be given to these
customers as teasers and enticing them to spend and pay. Customers who have a potential for going
bankrupt should also be able to be identified so they can be incented with lower rates to pay off their
credit card balances or they can be denied further credit.

4. Credit Card Industry Fact Sheet
Smart Cards – A Wild Card
Smart Card which is popular in Europe has yet to catch up in the US due to several reasons, cultural and
technological. Several Vendors, Financial Service Providers, Merchants, IT Providers, regulatory
authorities have to come to terms with a common definition of a smart card and its capabilities. The battle
for a common definition of a smart card continues....This is a big opportunity for vendors to play a key role
in defining the capabilities of such a card as we have the infrastructure to do so across the enterprise.
Debit Card Threat
Debit cards have become increasingly popular with customers these days instead of paying with checks.
This has posed a threat to the credit card industry from a revenue perspective. Since the debit card
directly debits the customer’s bank account, the risk is reduced in the transaction and hence a debit card
transaction is cheaper than a credit card transaction. Fortune magazine documented this in a recent
article and the diagram below explains it all. Although one can have a Visa debit card which is “Accepted
Anywhere Visa Is Accepted”, a visa debit card is more expensive for the merchant than a regular debit
card. Battle Lines have been drawn between Visa and the merchants in this case.
As can be seen clearly, everybody benefits from a debit card transaction. The credit card has its place for
certain transaction types.
Retailer Acquirer Retailer’s Issuing
Keep Keeps Bank Keeps Bank Keeps
$98.20 $1.80 $0.05 $1.75 $0.23 $1.50 $1.48
$0.02
$0.02
Ski Lift Visa/MC
Package Keep
$100.00 $0.04
Retailer Processing Issuing PIN Network
Keep Agent Bank Keeps Keeps
$99.80 Keeps $0.13 $0.02
$0.20
$0.05 $0.15 $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

5. Credit Card Industry Fact Sheet
line because of the delays and the reliability of the government owned network. Hence using an EDC
terminal is not a feasible option for a lot of merchants. These merchants had to use a manual process
which increased the potential for fraud until now. Wireless technology is however private and readily
available and state of the art. The Merchant has a cell phone with a high capacity SIM Card. The phone
has special software which can accept card numbers and other card information. This information is
transmitted to the Bank as an SMS message. The bank reads the message and check whether this card
can be accepted or not and send another SMS message back to the merchant indicating acceptance or
denial of the charge. If the card is accepted, the merchant continues the transaction and the regular
transaction process of the credit card follows.
Technologically, the convergence of mobile phone and SMS technologies with card payment
systems was a significant challenge. It meant developing the application on the SIM Card while
ensuring data security and converting the SMS standard into the appropriate format recognizable
by the Cards Switch for an authorization.
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.