When making a purchase using a credit card, consumers aren’t simply buying merchandise or paying for services from a merchant; instead, they are involving several third parties in the transaction. These third parties include the company that issued the credit card, the bank used by the merchant, and the network handling the transaction. All of these parties take a small cut of the total amount paid, leaving the merchant with a smaller amount of profit from each item sold.
Each of these parties is, however, vital to making a credit card purchase. The payment network involved is perhaps the most important, even though they are the least understood by consumers. These different networks, which include Visa, MasterCard, and Discover, first initiate a conversation with the issuing bank via an automated system. They query the issuer to check the authenticity of the card and the amount of credit available to the consumer. Some even check to see if the purchase is in line with the consumer’s spending habits to help identify a fraudulent transaction.
Once approved, the network approves the transaction and notifies the merchant’s bank. This charges the account. The card issuer and the merchant’s bank both take their cut, which is usually between two and three percent of the total charged. The network also charges a fee to handle the transaction. This interchange fee is determined by a contract between the network and each bank that issues or accepts payments via credit card.
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