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CREDIT CARD HELP: The basic fundamentals of credit cards

Picking the right card

Visa, AmEx, MasterCard, Discover -- What's the difference?

By James Peter Rubin

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Credit card companies are like watches. As long as they work, you don't worry much how.

That said, their inner mechanisms may differ markedly.

You can group the four most familiar credit card companies in pairs with Visa and MasterCard using one system of transaction and American Express and Discover another.  There are other differences between them, too. Below you'll find a summary of how each pair of cards operates, their histories and other distinctive points:

Visa, MasterCard 
Visa and MasterCard do not issue cards. Rather, they function as intermediary organizations creating networks between financial companies, including major banks and credit unions that issue cards bearing the Visa or MasterCard name, and merchants providing goods and services. The issuer, a term describing the banks, and merchants pay fees to participate in the Visa or MasterCard networks. Visa and MasterCard set and maintain rules governing use of their branded cards.

When a cardholder requests a purchase via either Visa or MasterCard, it triggers a multistep processes. The merchant submits the charge to his or her bank, which requests authorization from the issuer of the card. If there are enough funds available in the cardholder's account, the issuer, and subsequently the merchant's bank, can authorize the transaction.

At the end of a business day, a merchant sends a batch of sales receipts to its bank, which distributes them to the appropriate issuing organizations. For example, the merchant's bank will send separate batches to Chase, Bank of America or Barclays.

Each issuer subtracts a fee from the amount charged. The issuer shares this fee with Visa or MasterCard. The card network sends the remaining amount to the merchant's bank, which subtracts its own fee before advancing a final total to the merchant.

Visa and MasterCard birthed the first general service credit cards in 1966. First, Bank of America created a division franchising a card that later became Visa. At about the same time, a group of banks created a member-owned association, the InterBank Card Association, which is now MasterCard Worldwide.  Both organizations developed an open-loop system that enabled banks to cooperate seamlessly on fund transfers. For much of the groups' histories, financial institutions that wished to issue a card had to select one of the two.  But rules changes now allow them issue Visa and MasterCard in both networks.

The end result has been an extensive worldwide presence. Both cards may be used at more than 25 million locations in 170 countries.

American Express, Discover
Whereas the Visa and MasterCard systems engage many organizations, American Express and Discover are akin to one-stop shops. That is, they issue their own cards, authorize purchases and settle both with consumers and merchants.

American Express's roots date to the mid-19th century when the company was a competitor to the U.S. Postal Service. It invented travelers checks in 1891 but didn't enter the credit card business until the late 1950s when it introduced a charge card for travel and entertainment expenses. AmEx was first to market with a plastic card, although it didn't allow revolving payments until 1987; prior to then, it required customers to pay their balance in full at the end of each month.

American Express generally charges merchants a higher fee. That may account for its lesser reach than Visa and MasterCard. American Express says its cards are accepted in more than 130 countries.

Discover was introduced in 1985 by retailing giant Sears in its expansion into the financial services industry. It was sold to Dean Witter, which was later acquired by Morgan Stanley. In 2007, Discover became its own company, Discover Financial Services. Last year, the company purchased Diner's Club. It is accepted at 4 million locations, which is fewer than Visa, MasterCard or American Express. 

CREDIT CARD HELP: The basic fundamentals of credit cards


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