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Credit Card Complete Transaction Cycle

How does the credit card transaction takes place, with complete transaction process cycle?

Lets understand the complete cycle with an example.  Let's assume that you make an purchase of an good for $/  You pay with your Bank Credit Card.  The Merchant establishment accepts your card, swipes it on a console and enters the billed amount.  When the swipe is done, the information contained in the magnetic strip of the card is captured by the machine.  This is matched against the central database at the Service Provider's end.  The checks are done to verify the authenticity of the card, and the transaction amount is approved if it is withing the approved credit limit.  A bill is generated and when the customer signs on the bill, he accepts to pay the transaction amount at a future date when the bill is presented to him by the Card Issuing Bank.

Credit Card bills are generated once every month.  This statement contains the list of purchases made by the customer till a particular date.  Depending on when the purchases are made, the customer can enjoy an interest free credit, typically up to 50-55days.

The onus of collecting the money from the customer rests with the Card Issuing Bank.  The Merchant Establishment is assured of his payment from the Card Issuing Bank the moment the card is swiped.  The Card Issuing Bank usually charges a transaction fee of 2.5% from the Merchant Establishment for the service.  This is shared between the Card Issuing Bank and the Service Provider( A large part would be retained with the Card Issuing Bank as it takes the risk associated with non-payment from the customer). 

The customer is charged a joining fee and a recurring annual fee fro the usage of the card.  The competition in the credit card industry has forced many Card Issuing Bank's to waive many charges.  Also the customers can redeem the points they earn by virtue of their spending against the renewal fee.  High spenders also get other benefits based on their spending levels.

Persons Involved in the transaction: Customer, Card Issuing Bank, Merchant Establishment, Service Providers.
Risk and Return: Card Issuing Bank risk is high, so as return compared to Service Establishment.

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