Every day, there are over 108 million credit card transactions in the United States.
That’s a lot of swipes, card inserts and taps.
Debit and credit cards, obviously, are safer to carry than cash for several reasons. If you lose your cash, or your wallet is stolen, you’re out of luck. Payment cards and debit cards, in particular, can be swiftly canceled and new cards issued.
Phyllis Gurgevich
The card system is designed to make being paid as easy as possible. It can eliminate the need for cash and provide confidence, safety and security for all the parties involved in financial transactions. In fact, surveys show that 80% of consumers prefer spending with a card over cash.
Long before a card is swiped, financial institutions have invested in creating and supporting the system. This includes things like technology, integration, account maintenance, security, building and paying consumer rewards programs, fraud prevention, fraud reimbursement, customer service, and many other actions essential to ensuring that the merchant’s customer has a safe and seamless payment experience.
The anatomy of the transaction starts when a consumer pays a merchant for things like food, services or goods using a card. The financial institution then transfers its own funds to the seller or merchant, and the consumer becomes responsible for repaying a loan.
Many times, outstanding balances will be repaid in full during the statement cycle and therefore will not accrue interest. Sometimes the balance is not paid in full by the due date and an interest charge is applied.
Other times, the loans will not be repaid (historically, 3-4% of loans are not repaid). While this potentially damages a consumer’s credit score and creates a loss for the bank, it does not affect the merchant, who has already been paid in full.
In the case of both debit and credit card transactions, the card system facilitates removal of funds from a customer’s financial institution and its transfer to another person or business.
While everyone participating in a card transaction benefits from it, it is the merchant, or receiver of the funds, that always ends up with more funds and without further obligations. For the security and convenience of allowing consumers to use a card for their purchase, they contribute to the system in the form of a fee at the moment of a transaction.
Next comes authorization. When the consumer uses a card to make a purchase from the merchant, the purchase information is sent electronically to the merchant’s bank via the payment system. The merchant’s bank requests authorization from the credit card company and/or bank to proceed with the transaction.
Prior to granting authorization, the credit card company checks with the issuing bank to make sure the account in question is in good standing. When authorization is given, the purchase is authorized and can be made.
Finally, financial institutions continue to incur costs of technology, integration, account maintenance, security, consumer rewards, fraud prevention, fraud reimbursement, customer service, and other actions long after the merchant is fully paid and the customer leaves with their purchase.
As a customer, you can avoid paying unwanted fees as a part of your credit card usage. In short, it benefits consumers to do their homework.
First, shop around for a credit card that fulfills specific circumstances and needs. For example, apply for a rewards card if you are fairly certain you will be able to pay off your monthly debt each month.
Apply for a credit card with a low introductory annual percentage rate if you’re about to make a substantial, one-time purchase that may take a few months to pay off. Ask the credit card company about miscellaneous fees, including cash advance fees, annual fees, excess limit fees and card replacement fees.
Also, be prepared to pay your bill on time to avoid late fees. Happy, and safe, shopping.
Phyllis Gurgevich is president and CEO of the Nevada Bankers Association.
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