Everything they dont want you know about Credit Cards: Part One

PART ONE

DEFINITIONS

First some terms, along with the meanings they have in the industry:

Cardholder - an individual to whom a credit card is issued. Typically, this individual is also responsible for payment of all charges made to that card. Corporate cards are an exception to this rule.

Card Issuer - an institution that issues credit cards to cardholders. This institution is also responsible for billing the cardholder for charges. Often abbreviated to "Issuer".

Card Accepter - an individual, organization, or corporation that accepts credit cards as payment for merchandise or services. Often abbreviated "Accepter" or "merchant".

Acquirer - an organization that collects (acquires) credit authorization requests from Card Accepters and provides guarantees of payment. Normally, this will be by agreement with the Issuer of the card in question.

Many issuers are also acquirers. Some issuers allow other acquirers to provide authorizations for them, under pre-agreed conditions. Other issuers provide all their own authorizations.

TYPES OF CARDS

The industry typically divides up cards by the business of the issuer. So there are bank cards (VISA, Master Card, Discover), Petroleum Cards (SUN Oil, Exxon, etc.), and Travel and Entertainment (T&E) cards (American Express, Diners' Club, Carte Blanche). Other cards are typically lumped together as "Private Label" cards. That would include department store cards, telephone cards, and the like. Most private label cards are only accepted by the issuer. People are starting to divide the telephone cards into a separate class, but it hasn't received widespread acceptance. (This is just a matter of terminology, and doesn't affect anything important.)

Cards are also divided by how they are billed. Thus there are credit cards (VISA, MC, Discover, most department store cards), charge cards (American Express, AT&T, many petroleum cards) and debit cards. Credit cards invoke a loan of money by the issuer to the cardholder under pre-arranged terms and conditions. Charge cards are simply a payment convenience, and their total balance is due when billed. When a debit card is used, the amount is taken directly from the cardholder's account with the issuer. Terminology is loose - often people use "credit card" to encompass credit cards and charge cards.

A recent phenomenon is third-party debit cards. These cards are issued by an organization with which the cardholder has no account relationship. Instead, the cardholder provides the card issuer with the information necessary to debit the cardholder's checking account directly through an Automated Clearing House (ACH), the same way a check would be cleared. This is sort of like direct deposit of paychecks, in reverse. ACHs love third-party debit cards. Banks hate them.

Another recent addition is affinity cards. These cards are valid credit cards from their issuer, but carry the logo of a third party, and the third party benefits from their use. There is an incredible variety of affinity cards, ranging from airlines to colleges to professional sports teams.

HOW THEY MAKE MONEY

Issuers of credit cards make money from cardholder fees and from interest paid on outstanding balances. Not all issuers charge fees. Even those that do, make most of their money on the interest. They really LIKE people who pay the minimum each month.

Issuers of charge cards make money from cardholder fees. Some charge cards actually run at a loss for the company, particularly those that are free. The primary purpose of such cards is to stimulate business.

Issuers of debit cards may make money on transaction fees. Not all debit card transactions have fees. Most debit cards exist to stimulate business for the bank and to offload tellers and back-room departments.
To date, third-party debit cards exist solely to stimulate business. Providers of such cards make no direct money from their use.

Acquirers make money from transaction charges and discount fees. Unlike the charges and fees mentioned above, these fees are paid by the accepter, not (directly) by the cardholder. (Technically, it is not legal for the merchants to pass these charges directly to the consumer. Some petroleum stations have gotten away with giving a discount for cash, and it has survived court challenges so far.) Transaction charges are typically in pennies per transaction, and are sensitive to the type of communication used for the authorization. Discount fees are a percentage of the purchase price and are sensitive to volume and compliance to rules. One way to encourage merchants to follow certain
procedures or to upgrade to new equipment is to offer a lower discount fee.

Until fairly recently, the only motivation for accepters was to expand their business by accepting cards. Reduction of fraud was enough reason for many merchants to pay authorization fees, but in many cases, it isn't worth the cost. (That is, it is cheaper to pay the fraud than to prevent it.) Recently, electronic settlement has provided merchants with an added benefit by reducing float on charged purchases. Merchants can now get their accounts credited much faster than before, which helps cash flow.

Companies that issue charge cards are real keen on float reduction. The sooner they can bill you, the sooner they get their money. Credit card companies are also interested in float reduction, since the sooner they bill, the sooner they can start charging interest. Debit cards typically involve little or no float.

Affinity cards usually pay a percentage of purchases to the affinity organization. Although it may seem obvious to take this money from the discount fee, this doesn't work since the issuer is not always the
acquirer. The money for this usually comes from the interest paid on outstanding balances. Essentially, the bank is giving a share of its profits to an organization in turn for the organization promoting use
of its credit card. The affinity organization is free to use its cut any way it wishes. An airline will typically put it into the frequent flyer program (and credit miles to your account). A college may put the money into the general fund or into a scholarship fund. Lord only knows what a sports team does with the money!

THE PLAYERS AND THEIR ROLES

American Express (AMEX) is a charge card issuer and acquirer. (Their other businesses are not important to this discussion.) All AMEX purchases are authorized by AMEX. They make most of their money from the discount fees, which is why they have the highest discount fee in the industry. That's one reason why AMEX isn't accepted in as many places as VISA and MC, and a reason why many merchants will prefer another card to an AMEX card. The control AMEX has over authorization allows
them to provide what they consider to be better cardholder ("cardmember" to them) services.

VISA is a non-profit corporation (SURPRISE!) that is best described as a purchasing and marketing coalition of its member banks. VISA issues no credit cards itself - all VISA cards are issued by member banks. VISA does not set terms and conditions for its member banks - the banks can do pretty much as they please in signing cardholders. All VISA charges are ultimately approved by the card issuer, regardless of where the purchase was made. Many smaller banks share their account databases with larger banks, third parties, or VISA itself, so that the bank doesn't have to provide authorization facilities itself.

Master Card (MC) is very much like VISA. There are some differences that are important to those in the industry, but from the consumers standpoint they operate pretty much the same.

Discover cards are issued by a bank owned by Sears. All Discover purchases are authorized by Sears.

Most petroleum cards, if they are even authorized, are authorized by the petroleum company itself. There are exceptions. Fraud on petroleum cards is so low that the main reason for authorization is to
achieve the float reduction of electronic settlement.

THE BUSINESS RELATIONSHIPS

Card acceptors generally sign up with a local acquirer for authorization and settlement of all credit cards. This acquirer may or may not be a card issuer, but certainly will not have issued all the cards that the merchant can accept. The accepter does not generally call one place for VISA and a different place for MC, for example. At one time, this was necessary, but more and more acquirers are connected to all networks and are offering a broader range of services.

Acquirers generally are connected to many issuers, and pay transaction charges and discount fees to those issuers for authorizations. Thus, the acquirer is actually making money on the difference between fees paid and fees billed. Most acquirers gather together transactions from many accepters, allowing them to get volume discounts on fees. Since the accepters individually have lower volume and are not eligible for those discounts, there is a markup that the acquirer can get away with. Acquirers also, of course, provide the convenience of a single contact.

Most large banks are issuers and acquirers. Things get real interesting when it's time to settle up. Some small banks are only issuers. There are third parties that are only acquirers.

In future episodes, I'll explain how standards help all this chaos work together, and give details about how the authorization process happens.

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Credit Dictionary

Credit Dictionary

Accounts Receivable: credit extended by any person or company to another (normally unsecured) with usual repayment terms requiring a monthly payment to amortize the balance owed.

Amortize: To liquidate or reduce an amount owed through a series of payments.

ANI: See Automatic Number Identifier.

Attorney: A legal agent authorized to appear before a court of law as a representative of a party to a legal controversy.

Automatic Number Identifier: The ability of a company to identify an 800-number caller's name and address. Every time a consumer calls one of these toll-free 800 numbers, there is a record of that call; the debt collection community frequently uses this to locate a consumer's home or business location after they have gone underground. (Use pay phones!)

Bad Debt Expense: An accounting category reserved for debts deemed uncollectible.

Bankruptcy: A legal maneuver allowing consumers or businesses to discharge all debts and liabilities. The actions of most debt collection agencies force consumers into bankruptcy instead of settling outstanding accounts.

Blackmail: Any payment induced by or through modation, by use of threats of injurious information or accusations. (A technique frequently used by unethical debt collection agencies.)

Bulletproofing: Insulating yourself from financial adversaries such as creditors, debt collectors, attorneys, etc. Simple techniques include obtaining an unlisted phone number and post office box to more advanced maneuvers such as use of family trusts, corporations, etc.

Cease-Commed: Term used, by the debt collection industry to describe the status of an account. When a consumer has cease-commed a debt collector this means that they have invoked federal law by sending a Cease & Desist letter via certified mail, forcing the debt collector to cease collection activity of that account.

Certified Mail: Specialized postal service technique utilized to track delivery and obtain proof of delivery of letters or packages.

Chapter 7: A consumer bankruptcy filing that liquidates all non-exempt assets to pay off creditors.

Chapter 12: Bankruptcy filing reserved for working ranches, farms, etc.

Chapter 13: A type of consumer bankruptcy filing that allows the consumer to pay off creditors within a specific time period, no longer than five years. Also referred to as a "wage eamer" plan.

Chapter 20: Ploy used by some bankruptcy attorneys to delay a foreclosure of real property by filing a Chapter 13 petition, then quickly converting the filing to a Chapter 7.

Charge-off: A creditors action taken on an uncollectible account. Alternative term used: Written Off To Bad Debt Expense. This action normally results in negative information lines on a credit report that can stay for at least 7 years. (Also see uncollectible)

Class-action lawsuit: A legal action initiated by 3 or more parties against a defendant. Many suits in this category are initiated by state or federal attorneys.

Coercion: Exercising force to obtain compliance. A favorite technique employed by debt collectors and attorneys representing creditors.

Commission: A sum or percentage paid to a person for his successful completion of services.

Consumer Credit Counseling Service (CCCS): A nonprofit organization that sells itself to the American public as the last hope for consumers buried in debt. The reality is that they are actually debt collectors for the original creditors, a fact that seems to be routinely shuffled aside and not disclosed to the consumer.

Consumer literacy test: A test proposed by the author to be given to high school students to determine competency in basic consumer skills. These skills include how to open checking and savings accounts, how to balance a checkbook, how to create/follow a budget, how credit cards work, a brief understanding of insurance, etc.

Contingency basis: A fee paid to a third party for their involvement in either a legal proceeding or debt collection. This fee is normally paid only when a successful outcome to a legal proceeding or debt has been collected, either in part or in full.

Credit grantor: Companies or individuals that extend financing to consumers. A credit grantor can be a mortgage company willing to finance a house, a bank willing to finance an automobile, or a major national credit grantor willing to extend credit through the issuance of a charge card such as Visa, MasterCard or Discover.

Credit manager: Individual that oversees the lending department in a bank, department store or other credit-granting entity. Many times this individual will work closely with the collections manager to develop collections strategies for past due/bad debts.

Credit record: National grading system filed by subject's name, birth date and social security number. Major companies providing these services include TRW, TransUnion and Equifax.

Credit repair manual: Derogatory term used by the credit reporting industry for any books that may show consumers the inside information about their industry.

Criss-cross: A directory, also known as a City Directory, that is frequently used by the debt collection community to find out information about a debtor's neighbors. One section lists households and businesses by street address; another lists all telephone numbers by exchange (in numerical order) and to whom each number is assigned. A powerful tool of information intimidation utilized to put fear into unwitting consumers.

Databases: Term used to describe the enormous pools of information managed by computers. Creditors and debt collectors will access national credit databases managed by companies like TRW, CSC/Equifax, TransUnion, etc.

Debtors' havens: Term that refers to states such as Texas and Florida which have liberal laws protecting debtors from creditors.

Deceptive forms: Another trick of the debt collector trade, these forms can take on a variety of intimidating looks-from threatening (but non-binding) documents that appear to have been issued by a court of law to demand letters that look like something issued by the IRS. Of course they're illegal ... you don't think that will stop the debt collectors from using them, do you?

Deed in lieu of foreclosure: Technique used with mixed results by consumers unable to continue making payments on their homes. Sometimes lenders will allow debtors to deed the property back to the lender instead of suffering through the embarrassment of a foreclosure sale on the courthouse steps.

Deep discount: When a creditor sells Accounts Receivable or Bad Debts at an amount normally less than 50% of the outstanding balance.- Many times these sales are made to companies that specialize in buying these types of "dead assets."

Defaulted student loans: Loan made to students to attend secondary educational institutions at low interest rates. These loans were guaranteed by the federal government as an inducement to banks to make these loans but as a result, were poorly researched before being made. Over $13 billion of these loans exist and are now owned by the U.S. government. Revised laws now enable consumers to restructure these loans. Contact the Department of Education in Washington, DC.

Deferment: Contractually agreed-to period of time a borrower is allowed to suspend payment on a debt. Usually applies to student loans and suspends the accrual of interest or late fees on the outstanding loan balance.

Deposition: Sworn statement made in the presence of a court reporter (usually) as a result of questions posed by attorneys in court (or post judgment) action. These statements are normally made outside a court of law, but are fully admissible during trial and fully binding under perjury statutes.

Discharged: To relieve of obligation, responsibility, etc. Common term used in bankruptcy court to describe the process of eliminating debtor obligations.

Discounts: Selling Accounts Receivable or Bad Debts at an amount normally in excess of 5 1 % of the outstanding balance. Many times these sales are made to companies that specialize in buying these types of "dead assets."

Dispossession of property: Taking away property against the ovmer's wishes, normally as a result of non-payment.

Erroneous information: False, misleading or incorrect data. Frequently found in consumer medical or credit files across America.

Exempt assets: Assets not at risk of being seized or forfeited as a result of legal action.

Financial management: Technique used to balance income vs. expenses. Responsible financial management usually results in an excess of monies available. (This style of managing finances has yet to be mastered by the United States Government.)

Flaky loans: Questionable loans made by banks in the 1980s such as student loans or land development loans. (see defaulted student loans)

Fraudulent activity: Transaction designed to swindle consumers or creditors, normally cheating these groups out of goods, services or assets. (see sign of the beast)

Freebie report: A copy of your credit report given to you at no charge for one of two reasons ... every consumer gets a free report from TRW just for asking and every consumer gets a free copy of their credit report if they have been declined credit.

Getting bulletproof: The process of insulating a person from lawsuits, garnishments, creditor intrusion and harassment. Popularized in Texas during the late 1980s ... now being utilized by consumers/business people in California and the East Coast.

Hired gun: The hiring of third party debt collectors or attorneys to emotionally pummel a consumer in hopes of collecting an overdue account.

Hot checks: Drafts on a bank account that will be or have been returned by the bank for insufficient funds to pay face amount of check issued.

IRS refund offset program: Effort initiated by the Department of Education to recover defaulted student loans by seizing the tax refunds of consumers with the assistance of the Internal Revenue Service.

Interrogatory: Sworn statement made in writing as a result of a list of questions/inquiries by attorneys in court (or post judgment) action

Intimidation: Inspiring or inducing fear (a favorite tactic of debt collection agencies).

Knee Breaker Collection Agency: Generic name used to describe a collection agency that may use techniques that are not endorsed by the American Collectors Association or deemed legal by the federal government under the Fair Debt Collections Practices Act. (see Vito)

Lawyers: (see Attorneys)

Leverage: A negotiating position of strength; something creditors may have, debt collectors never have, and consumers almost always have.

Mail drops: Companies like Mailboxes, Etc. and others who provide a valuable service to consumers wanting to distance themselves from intrusive individuals such as debt collectors. Allows a new mailing or street address to be instantly created by consumers trying to insulate their lives.

Medical bills: The number-one reason consumers have been filing for bankruptcy, medical bills many times can be appealed or I negotiated with the original provider. It is not uncommon to be grossly overcharged or mis-billed for medical services, so it's important for consumers to be aggressive when auditing these statements.

National Foundation For Consumer Credit: Parent organization for CCCS. (see Consumer Credit Counseling Service)

Negative information (or remarks): Statements or grades assigned on credit reports due to late payment, non-payment or default on debts owed to creditors. Bankruptcies and hens also show up under this category. Favorite point of leverage utilized by collection agencies attempting to passively blackmail consumers.

Nine-Digit Zip Code: Increasingly becoming a powerful tool for skiptracing, the 9-digit zip codes allow specific location (if a current address can be located) of a consumer, courtesy of the U.S. Post Office. (Another compelling reason to utilize post office boxes or mail drops.)

Non-dischargeable debt: Debt that cannot be eliminated through bankruptcy court. Some types of IRS debt, student loans and certain types of judgments fit into this category.

Old debt: Debt that has been charged off/written off by a creditor, normally referred to an outside 'third party" collector. Old debts are usually those debts/accounts that have not had charge or payment activity for over 2 years and are the easiest to negotiate payment/removal from credit reports with creditors.

Open account: An account with a creditor that is still on the books and, in the opinion of the original creditor, collectible. These types of accounts usually are reported/updated to the credit bureaus and report late payments. They can be the most difficult to negotiate with a creditor.

Oxymoron: A term that contradicts itself, such as "jumbo shrimp" or "military intelligence" or "ethical debt collector" or "reasonable legal fees."

Paid As Agreed: Old term used on consumer credit bureau reports to describe an account that may have been renegotiated and/or settled for less than the full amount. Many creditors are now flagging these notations as negatives, so it's important that your creditor agrees to delete all information regarding a settled account, not just re-classify the account as "paid as agreed."

Paralegal: Vague title used (and abused) by many debt collectors to misstate level of power, prestige or might Threats of lawsuits and jail time are frequently used by people espousing to be "paralegals".

Password: An identifying word or code that consumers may set up with the phone company and other service providers that allows only authorized individuals access to information concerning an account. Unprotected accounts are frequent targets by the debt collection community in order to obtain additional information about a consumer.

Positive identification: A means to identify without a doubt the identity of a consumer wishing to obtain a copy of their credit file. A check and balance designed to keep unauthorized people from gaining access to your information.

Postdated check: A check with a date in the future, a technique utilized to connate a person to make payment after the date written on the check. (Something a consumer should never, ever give to a debt collector.)

Profit & Loss Statement: A valuable accounting function that shows a reconciliation of all gross income and expenses to offset the same, arriving at a net profit (or loss) figure.

Prospective creditor: A credit grantor that has not yet agreed to loan/lend monies for the purchase or a home or automobile, or through the issuance of a credit card.

Public records: Another terrific source of information tapped into on a regular basis by the debt collection community, in an attempt to gain insight into a debtor's activities or current location. Favorite records to be studied by the debt collectors: Divorce records, property records, tax information and motor vehicle records.

Red ink: Term used to describe losses sustained by any financial entity. When individual consumers drown in red ink they may end up filing for bankruptcy; when the U.S. government engages in this financial activity it holds another treasury note or bond auction.

Regulatory agencies: Any agency empowered by either local, state or federal authorities to enforce civil laws, such as the Federal Trade Commission.

Reply card tracer: Used by Postal Service to track down return receipts that never returned to verify delivery of parcel.

Re-prioritize: The resetting, of priorities in one's life, usually due to a dramatic change in circumstances. Sometimes a necessary first step toward solving one's financial problems.

Return receipts: When a letter is sent by Certified Mail, this receipt (green card for domestic mails/pink card for international) give the sender a record of who actually received/signed for letter or package sent.

Revolving charge card (or credit line): Commonly issued by major department stores and major banks, it requires a monthly payment sufficient to amortize the outstanding balance. Example: If consumers pay only the minimum balance on a $10,000 credit card and do not use the card for any additional purchases, it will take over 25 years to amortize/pay off the debt.

Risk free: A concept used in lending to describe the risk vs. return of certain types of consumer/business loans. Also refers to overdraft protection checking accounts at the House of Representatives bank in the 1980s.

Roll over: What many consumers do when dealing with credit bureaus or collection agencies, giving up without a fight. Also used to describe the apathy displayed by most Americans when asked about their input in the law making/enforcement process or budgetary responsibility of congress.

Scam: Fraudulent plan or scheme designed to separate a consumer from their money without delivering on promised goods, services (training) or value.

Scoring system: A tool used by prospective lenders to grade the credit-worthiness of a potential borrower.

Secured creditor: Creditor whose financial position is secured by real property, such as a bank or finance company with a lien on an automobile or a mortgage company secured by the house they financed. hi the event of default the secured creditor can repossess or foreclose on the property they financed, greatly reducing their chance of total loss exposure.

Secured credit card: A major national credit card (normally Visa or MasterCard) that has a credit limit secured by a cash deposit placed with the issuing bank by the cardholders A positive recovery step for consumers who have gotten into credit problems but need a credit card in order to get a hotel room, a rental car or other business/travel- related activities.

Sign of the beast: A reference to Satan in a passage from the Revelations chapter of the Bible; also used as a derogatory term describing debt collectors and some attorneys.

Skip and skiptracing: Technique used by creditors and collection agencies to find consumers that are suddenly difficult to locate (skips). No magic here, just instant access to enormous databases containing a variety of information that, in most cases, will lead the debt collectors to your new front door.

Snake oil: A negative term used normally by an individual to discredit another. Refers to selling or promoting something that falsely claims inflated results or expectations. (A favorite term of the American Collectors Association, a trade group representing debt collectors across the U.S.)

Social security number: A nine-digit number issued by the Health and Human Services Administration to identify Americans for future social security benefits. This number has evolved into the years as a national identifier for Americans, a serial number now used for referencing credit information files, military and school records, etc.

Telephone recording device: A $20 device sold by national electronic retailer Radio Shack that allows consumers to tape telephone conversations for later review. A great equalizer when being harassed by a debt collector who thinks he's above the law.

Tele-terrorist: Term coined by this author to describe today's debt collectors who use the telephone or telefax to threaten, intimidate or coerce consumers into making (more) poor financial decisions.

Third-party debt collector: Collection agency or attorney engaged in the business of collecting debts that they did not originate. Usually taking these accounts on a contingency basis, the majority of these collection agencies work on a commission basis. The Fair Debt Collection Practices Act specifically regulates the activities of this type of collection agent.

Threats: An indication or warning of probable trouble, often illegally used by debt collectors. (see debt collectors or Vito)

Time-Value of money: A concept used by a large number of groups involved in money and finance. When relating to the debt collection business, it's an accepted fact that the longer an account goes without payment or reduced payments, the lower the chances of collecting the entire amount.

Trial by fire: Term used by individuals, often average consumers, who have acquired "street smarts" by dealing directly with their financial problems. These individuals frequently include graduates from the "school of hard knocks."

Uncollectible: Term used by creditors to describe an account that has gone past a certain period of time without payment, usually at least 6-9 months.

Underground: Another term commonly used for someone who has dropped out of sight or "skipped." Usually the result of incessant threats and phone calls from unethical debt collectors.

Unscrupulous tactics: Any number of techniques used by debt collectors in order to collect money on overdue accounts from unsuspecting consumers.

Unsecured creditor: Creditor who has no collateral covering their financial exposure. Almost all credit or charge cards fit into this category. The weakest position to be in during tough financial times, unsecured creditors are the largest employers of third-party debt collectors.

Vito: Name used to describe any individual in the debt collection industry who may use techniques that are not endorsed by the American Collectors Association or deemed legal by the federal government under the Fair Debt Collections Practices Act.

Vocational school: Non-traditional institution of higher learning designed to train students in job skills as opposed to educational degree plans in specific areas of study. Vocational schools can graduate students in 6- to 24-month course studies as opposed to 48 months in traditional colleges/university programs. This type of school is coming under increasing scrutiny by the Department of Education.

Wage-earner plan: Alternate term used to describe a Chapter 13 bankruptcy. This plan allows consumers to pay off creditors over a period not to exceed five years.

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Everything they dont want you know about Credit Cards: Part 6

Part 6 - Networks

ACCESS NETWORKS

For most credit card applications, the cost of the access network is the single biggest factor in overall costs, often accounting for over half of the total. For that reason, there are many different solutions, depending on the provider, the application, and geographical constraints.

The simplest form of access network uses 800 service, in one of its many forms. Terminals at merchant locations across the country dial an 800 number that is terminated on a large hunt group of modems, connected directly to the acquirer's front-end processor (FEP). The FEP is typically a fault-tolerant machine, since an outage here will take out the entire service. A large acquirer will typically have two or
more centers for terminating the 800 service. This allows better economy, due to the nature of 800 service tariffs, and allows for disaster recovery in case of a failure of one data center. An advantage
of 800 service is that it is quite easy to cover the entire country with it. It also provides the most effective utilization of your FEP resources. (A little queuing theory will show you why.) However, 800 service is quite expensive. It always requires 10 (or 11) digits dialed, and in areas with pulse dialing it can take almost three seconds just to dial 1-800. The delay between dialing and connection is longer for 800 calls than many other calls, because of the way the calls get routed. All of this adds to the perceived response time at the merchant location, even though the acquirer has no control over it.

Large acquirers prefer to offer some form of local access service. In this service, terminals at the merchants dial a local telephone number to gain access to the acquirer. Typically, the local number actually connects to a packet network, which then connects to the acquirer. If the packet network is a public network, the terminal must go through a login sequence to get connected across the packet network. Typically, local calls are much less expensive than 800 service calls, and local calls typically connect faster than 800 calls. The cost of those calls are absorbed by the merchants directly. In those few remaining areas where local calls are still free from a business line, this works out well for the merchant. Otherwise, the merchant can end up spending a lot of money on phone calls. Usually, the acquirer has to offer lower prices to accepters who use local calls, to help offset this. Even so, these networks are generally much less expensive for the acquirers. Such networks are difficult to maintain, due to the distributed nature of the access network. Since most packet networks are much more likely
to experience failures than the phone network is, the merchant's POS terminal is usually programmed to dial an 800 number for fallback if the local number doesn't work. Also, it is generally not cost-effec-
tive to cover every free calling area in the entire country with access equipment, so some 800 service is required anyway. There is also an administrative headache associated with keeping track of the different
phone numbers that each merchant across the country needs to dial. When you have tens of thousands of terminals to support, this can be formidable.

Acquirers are beginning to experiment with Feature Group B (FGB) access. FGB access was the method of access used to get to alternative long-distance carriers before "equal access" was available. The tariffs are still on the books, and they are favorable for this application. FGB access provides a single number, nationwide, for all merchants to dial in order to gain access to the acquirer. The call has
simpler (hence, presumably, faster) routing than 800 service, and the call is charged to the acquirer, not the accepter. FGB access does have to terminate on equipment that is physically located in the Local
Access Toll Area (LATA) where the call originated, so there is the problem of having distributed equipment, as above. This also implies that it is not cost-effective to deploy FGB access everywhere, as well. There are also some technical oddities of FGB, due to its original intent, that have made it difficult to implement so far.

The other big switched access capability that is likely to have an impact in the future is ISDN. So far, this has been inhibited by limited availability and lack of adequate equipment on the merchant end, but it could be very beneficial when these problems are solved.

Private-line networks are pretty straightforward applications of point-to-point and multipoint private lines. Since private lines are quite expensive, engineering of the networks is challenging. Usually, sophisticated software is used to determine the optimum placement of concentrators in order to minimize costs. Since tariffs, real estate prices, and business needs change frequently, maintaining a stable, cost-effective network is hard work. A typical asynchronous private line network will have multiplexers at remote sites, with backbone links to companion multiplexers at a central site. Synchronous private line networks may use multiplexers, or remote controllers, or remote FEPs, depending on the application and the availability of real estate.

INTERCHANGE NETWORKS

Interchange networks physically consist mostly of point-to-point private lines. In many of the large interchange networks, there is a central "switch" that takes transactions from acquirers (thereby acting as an issuer), and routes them to issuers (thereby acting as an acquirer). Often the switch provider will actually be an acquirer or issuer as well, but this is not always the case. Usually, the provider of the
switch defines standard message formats, protocols, and interchange rules. These formats and protocols usually comply with national and international standards, but sometimes do not. Often the switch will provide translation between different message formats and protocols.

The switch provider is generally very concerned that settlement complete successfully. Failure to settle with one or more large issuers can leave the switch provider with an overnight deficit of a couple million dollars. Even though this is a temporary situation, it has significant financial impact.

In some current networks, authorization and settlement take place on completely separate facilities, with separate hosts in some cases. This is mainly due to the history of the industry in this country. Re-
call that authorizations were originally done by voice calls, and settlement was done by moving paper around. These two processes were automated at different times, by separate means. Thus VISA has a BASE 1 network for authorization, and a BASE 2 network for settlement. Likewise, MasterCard has INET and INES, one for authorization and one for settlement. These functions are becoming less and less separated as communication and computer facilities evolve, and will probably be completely integrated over the next five to ten years.

Interchange networks are probably the most volatile part of the ATM market right now. There is currently a shakeout going on in much of the market, with larger, more aggressive regionals buying out standalone networks and smaller regionals. This causes local banks to change local and national network affiliation from time to time. So a card may work in a given ATM one day, but fail in that machine the next, which confuses many consumers. Most large regional and national networks have operating regulations requiring labeling of ATMs and cards, so that if you see the same logo on your card and the ATM, you can be pretty sure it will work.

Some regionals are interconnected, and others are not. The two biggest nationals, Cirrus and Plus, have operating regulations that effectively prohibit a member of one network from connecting to the other. But a regional on Cirrus could be connected to a regional on Plus. In that case, whether a machine will take your ATM card depends on the routing algorithm used. In most cases, the acquirer will have a table of issuers that are directly connected, and will send anything else to the regional switch. The regional switch will have a table of each issuer it is directly connected to, and tables of which cards are acceptable to other regionals it interchanges with. Anything else goes to the national switch. The same process happens in reverse from there. Often the order of search in the routing tables is determined by fee scales, not geography, so transactions can be routed in completely non-obvious ways.

So the easiest way to tell if your card will work in a given ATM is to stick the card in and try. I don't know of any machine that will eat a card just because it can't route the transaction - it will generally give some non-specific message about being unable to complete the transaction and spit the card back out. Of course, if the transaction is completed from a machine that you're not sure of, you also aren't sure what the fee is going to be if your bank passes those fees on to you. Sometimes the fee will be printed on the receipt, but usually it isn't. If you do the transaction in a foreign country, you may not know the exchange rate used. (I once couldn't balance my checkbook for a month until I got a statement with the transaction I did at Banc du Canada in Montreal.) But if you need the money and are willing to pay the fee, you have little to lose by trying out just about any ATM.

This completes the course in Credit Card 101. Hope you all found it
enjoyable and informative.

Joe Ziegler
att!lznv!ziegler

Additional reading:

Magnetic Stripe Technology Index
How plastic card magnetic stripe are encoded, ISO-7811 standards

Credit Card Validation - Check Digits
Illustrates how the Luhn formula works using an example credit-card number

Everything you ever wanted to know about CCs
An easy-to-understand, in-depth look at credit cards and the credit-card industry.

Luhn Formula
Explanation of the formula used to generate and/or validate the accuracy of credit-card numbers.

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