Credit and Debit Card Issuers
SIC 6099, 6153
NAICS 522320, 522220
Industry firms grant credit and debit accounts to businesses and individuals. Certain banks in this industry are also engaged in other aspects of commercial banking; for more information on these activities, see Banking and Insurance.
In the mid-2000s, Visa, MasterCard and American Express were the world's largest players in the financial card market, offering credit and debit cards to consumers around the world. Visa controlled 52 percent of the U.S. market, whereas MasterCard held about 28 percent, American Express held 14 percent, and Discover held 6 percent. Worldwide, purchases made with Visa and MasterCard credit cards ballooned to nearly US$2 trillion in the early part of the century.
The top three credit card issuers—Citigroup, MBNA, and Bank One (now part of JP Morgan Chase)—controlled about 43 percent of the U.S. general purpose card market by 2003. Of these issuers, Bank One had been dominating the market for co-branded and affinity cards, having made deals with Walt Disney, Yahoo! British Airways, Sony and Borders.
The use of debit cards by consumers continued to increase, with the leading five PIN-based network organizations reporting 592.2 million transactions in the U.S. in 2003, up almost 27 percent over 2002 levels.
Smart card technology continued to make inroads in most areas around the globe, with the one major hold out being the U.S. Most European countries have sought to conform to the international Europay/Visa/MasterCard (EVM) standard for chipped cards so that cards can be read internationally. Contactless cards that transmit radio signals are the latest technology being promoted in the smart card arena.
The credit card industry consists of credit card associations, such as Visa and MasterCard, which provide an international brand name that are owned by their member issuers, as well as credit card issuers, such as Citicorp and MBNA Corp. Some credit card companies, notably American Express, also issue their own cards. The industry includes four major kinds of issuers: banks, oil companies, retailers, and travel and entertainment companies. In terms of revenues, bankcards have led the industry since their introduction. Banks and other financial operations issue universal cards, which are valid at any participating business or institution. Retail and oil cards (sometimes referred to as charge cards), nevertheless, remained popular throughout the last half of the twentieth century. Retailers and oil companies traditionally provided cards that were only valid at affiliated stores or gas stations, but many of these cards were joint ventures with major credit card companies, namely Visa and MasterCard, and might be used anywhere. Like retail and oil cards, travel and entertainment cards were traditionally valid only at a limited number of places relating to travel and entertainment. Cards such as American Express, Diners Club, and Carte Blanche provide this kind of credit card.
The credit card business became an industry in its own right in the 1960s by offering common services and sharing features. At this point, governments began to pass legislation to cover the credit card industry as issues of privacy and equal access to credit cards arose. A major legal event in the United States stemmed from the practice of credit card companies sending people unsolicited credit cards in an effort to increase their number of cardholders. The Federal Trade Commission placed a moratorium on these mailings in 1970 and President Nixon decided to prohibit the practice altogether. The problems resulted from the interception of credit cards by criminals who would run up large bills, which the intended recipients would receive. Although existing laws protected consumers from incurring these charges, consumers would have to go to court and attempt to prove their innocence, a process that entailed considerable time and money.
Some governments established a series of laws and regulations to protect consumers against possible card credit-related problems. The United States passed the Fair Credit Billing Act of 1972, which required credit card issuers to allow a 60-day period for consumers to make written complaints about their bills, a 15-day period for credit card issuers to acknowledge these complaints, and a 60-day period for credit card issuers to investigate, correct, and explain their bills after receiving complaints. Congress revised this act in 1975 and added that cardholders must receive their bills 14 days prior to the end of the billing period. Further legislation and rulings addressed other consumer complaints involving privacy. At issue were credit card companies' sharing of personal information with state and federal agencies, as well as the sale of cardholder mailing lists to other companies.
The largest and most persistent problem the industry faces, however, has been fraud. Early kinds of credit card fraud resulted from stolen or lost credit cards. Later, some criminals developed methods for actually producing fraudulent credit cards, while others obtained credit card numbers through mail fraud and used them to place telephone orders. Furthermore, some merchants perpetuated credit card fraud by charging consumers for merchandise that they did not purchase. In 1996, credit fraud bore a US$436 million price tag in the United States alone. Credit card companies, along with state and federal government, collaborated to prevent and contain the proliferation of credit card fraud. As a result, U.S. federal law imposes a ten-year prison sentence and US$10,000 fine for credit card fraud from US$1,000 to US$5,000. Japan, on the other hand, still had not passed comprehensive credit card legislation by mid-1998. In cases of credit card fraud in Japan, the cardholder is mainly responsible for covering the damages, according to Asahi Evening News. In late 2001, fraud prevention legislation known as the Identity Theft Prevention Act was drafted in the United States. The bill would mandate that U.S. credit card companies must eliminate a portion of each customer's account numbers on receipts.
Another legislative action related to the U.S. credit card industry took place in 2001. In the mid-1990s, the U.S. Department of Justice launched an investigation of some allegedly anti-competitive activities of MasterCard and Visa. The main issue—the practice of restricting banks that issued MasterCard or Visa from issuing rival cards such as American Express or Discover—eventually resulted in a formal lawsuit, filed by the Justice Department in 1998. More than three years later, in October of 2001, a U.S. district judge ruled that MasterCard and Visa could no longer prevent member banks from issuing other cards. Analysts speculated that such a ruling, which could produce major changes in the way banks and other credit card issuers conducted business with credit card associations, could allow firms like American Express and Discover to increase their market share. Both MasterCard and Visa planned to file an appeal by February of 2002.
Unlike retail and gas credit cards, which earn the issuer money through both finance charges and increased sales, universal cards issued by banks and other financial operations strive to make a profit mainly by enticing cardholders to use their credit lines. Consequently, credit card issuers implemented a number of measures to increase their profits, including raising the fee they charged merchants (typically issuers receive 2 to 3 percent of a transaction). Issuers also marketed such products as insurance, sold their cardholder lists, sold advertising space on their payment envelopes, and modified their methods of calculating interest.
Because many state laws placed caps on interest rates under usury laws, credit card issuers could not increase their basic finance charges. Instead, they decided to change the way interest applied to the account. At first credit card issuers charged interest on a cardholder's balance minus any payment made, but later many banks adopted an average daily balance method, where they charged interest on a daily basis from the point a charge was made, unless the cardholder paid the balance in full by the due date.
Credit card issuers also started marketing other financial products along with their credit cards, including insurance and loans. In addition, they began offering cardholders cash advances on their credit cards through a participating bank or an automatic teller machine (ATM). For cash advances many credit card issuers automatically charge interest on a daily balance basis, whether paid in full by the due date or not. Since banks and other financial institutions provide only a limited number of services, they also market a host of wares from other companies such as tape recorders, watches, pens, cameras, radios, and collectibles, among other things. The credit card issuer then receives 15 percent commission on these sales. Credit card issuers use their remittance envelopes and statements to advertise these products.
Some credit card companies also charge annual fees to increase their revenues, especially from cardholders who do not use their revolving credit, although the industry has grown much more competitive...
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