How do Credit Cards Work?
by Shane Jacobeen
There are more than half a billion credit cards in the US today. While you’re probably familiar with how to use credit cards, do you know what happens behind the scenes when you swipe your card or click ‘Pay Now’? While it’s not necessary to understand how credit cards really work to use them effectively, you may find it helpful to know more about the various organizations involved in the process. So if you’re interested in learning the basics of the credit card industry, this article is for you.
Let’s start with the big players. In the world of credit cards, there are two main roles:
In the U.S., there are four credit card networks: American Express, Discover, Mastercard, and Visa. These networks are the backbone of every credit card transaction that takes place; when you swipe your card (literally or digitally), the record of that transaction is processed on whichever of the four networks your card operates.
But wait, you may say, what about my Chase card? Or my Wells Fargo card? Great question, as it leads to the second of the primary roles in the credit card world:
The financial institutions that manage the credit accounts that we hold as individuals or business are called issuers. They maintain our lines of credit, collect payments from cardholders, and transfer payments to merchants. While the networks themselves are also financial institutions that can issue cards directly to consumers, non-network issuers can also issue cards on the Mastercard and Visa networks (American Express and Discover do not partner with external issuers – every card on these networks is also issued by the network company itself). Chase, for example, issues its credit cards on the Visa network, while Bank of America issues credit cards on both the Mastercard and Visa networks.
Great, but what about my Amazon Prime card?
A co-branded card is a partnership between a retailer and an issuer in which the retailer (typically) offers some incentive for the cardholder related to the goods and/or services they offer and/or the industry in which they operate. Many major airlines and hotel chains have co-branded cards, as do large retailers such as Amazon, Walmart, and Target. While the advertising and branding of the card (including the design of the physical card itself) is often entirely performed by the retailer, the credit account is maintained by the issuer.
Payment processors are responsible for transferring the information from your credit card to the network in order to process a transaction. Generally, this information includes your account information, some information about the retailer, and the purchase amount. The network then processes the transaction, and sends a confirmation message back to the payment processor, which in turn communicates to you the status of your transaction. Examples of payment processors include PayPal, Stripe, Square, and Amazon/Apple/Google Pay.
Of course, there are a lot of specific details about how each networks, issuers, co-branded cards and payment processors work that is beyond the scope of this overview. If you’re still curious, I encourage you to dive deeper into each of these topics. And for more on credit cards and rewards, see the ‘Related Topics’ below.