Chapter 2: Payment Systems 101

With today''s technology of intelligent Point-of-Sale (POS) devices, high-speed communication networks, and hidden back-end host systems, charge processing appears simple to the uninitiated, but in fact the constituent involvement and the steps of processing are rather complex. Nothing is obvious or intuitive about the processing that goes on either. Between the sheer number of systems involved and the high volume of charges, the complexities are enough to make one''s head spin when trying to follow a charge through all its steps, from start to finish. To aid in building an understanding of how SET serves the industry, this chapter first explains what the industry is. Topics covered here include:

• A brief history of payment cards and how they operate.
• Some basic terminology.
• Running the payment process on-line with SET.

Credit cards, charge cards, bank cards, payment cards -- no matter what you call them -- all relate to a family of payment options that involve relationships rooted in trust and good faith.
You trust that the financial institution that issued you a card will pay the merchant for the goods and services you purchase. Merchants trust that the card issuers will pay them reasonably fast, and the card issuers trust that you''ll pay your bill on time each month to reimburse the money they''re advancing on your behalf.

Credit Or Charge, What''s The Difference?

Although they''re mistakenly thought by some to be the same, credit and charge cards differ in how they work and in the agreements associated with each. Many of these payment cards are considerably different from one another in several ways. In general, a credit card relates to a payment card that carries a pre-set spending limit established by the issuer based on a line of credit obtained at the time of issue. Some are signature lines of credit, while others are secured lines of credit. In addition, their balances revolve around the line of credit that may be paid in full or financed over time. As such, finance charges apply to unpaid balances left at the end of the month, at fixed Annual Percentage Rates (APR) that are set at the time of issue and may or may not change over time. VISA and MasterCards are the most prevalent examples of credit cards issued by specific banks or other financial institutions who license the use of VISA and MasterCard trademarks from the brand associations. Charge cards, like the American Express Personal (Green), Gold, and Platinum Cards carry no pre-set spending limits, are due in full at the end of the month, are not tied to revolving lines of credit, and do not accumulate interest or finance charges under normal uses.