When credit cards were first introduced, they were issued by merchants and had a pretty standard set of features. As far back as the late 1800s, merchants used cards or “credit coins” as a way to extend lines of credit to their customers. These credit cards were a private arrangement between the business and the customer, and were only accepted at the business that issued the card. The credit was a way of developing customer loyalty and giving better customer service. It wasn’t until about the mid fifties that banks began issuing their own charge cards and “plastic” became a method of payment for most American consumers.
As time went on, one of the challenges facing the growing bank card industry was the difficulty of getting broad acceptance of bank-issued credit cards. A traveler in San Francisco, for instance, might not be able to use a card issued by the Bank of New York. Credit cards needed to work nationally and internationally. Thus, the concept of the credit card association was born.
If you have a MasterCard or Visa, you are participating in a credit card association. The Visa and MasterCard associations do not issue credit or debit cards directly; they are an association formed by thousands of banks worldwide, and the cards are issued by the member banks. Visa and MasterCard are not directly responsible for the credit cards or loans that are branded under their card name. The financial institutions that issue the cards are responsible for the debts.
The credit card associations create revenue by charging transaction fees to consumers, and also to the financial institutions that participate in the network. They also set what are called interchange fees, which are based on something called “basis points. can be up about $.10 per transaction, based on the size of the transaction. Some large merchants are able to negotiate directly with the card association for lowered interchange fees, but the amount of those fees are not public knowledge.
American Express, Diners Club, and Discover are not credit card associations. These companies issue their cards directly, rather than through a bank, and maintain their own clearance networks.