Among the most popular credit card companies in America are big names like Visa, MasterCard, Discover, Bank of America, and Capital One. But did you know that there’s a drastic difference between two companies like Visa and Bank of America? It’s true. One is a card association and the other is a bank. Keep reading to find out how much different they are.
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In every credit card transaction, there are at least five participants. That are the consumer, merchant, transaction processor, bank or lending institution, and the card association.
Except for the consumer, all of the other entities must make some money on the deal or it’s not worth making. Therefore, all of the fees assessed by the other four parties ultimately falls on the shoulders of the consumer by way of higher prices. The most popular credit card companies would seem to be those that keep all related fees as low as possible.
What is a card association?
A card association is a company, which actually handles the mechanical processing of a transaction at its highest level. The three biggest examples of card association s are Visa, MasterCard, and Discover. In exchange for their services, banks pay the associations a fee based on a percentage of each individual transaction. The bank is also given the right to use the association’s brand as well as offer consumers specific brand-related protections and incentives.
Ensight Merchant Services, a U.S. manufacturer of equipment for credit card transactions, does a good job of explaining how a typical credit card transaction works. Using the information they provide, will try to explain what a normal Visa transaction is like.
When you purchase something with your Visa card, the data from your credit card is transferred electronically to the processor the merchant has contracted with to handle electronic transactions. Once that data has been verified, that company sends a draft to the issuing bank that then sends funds to the merchant’s bank account. The issuing bank sends its own information to the card association (Visa in this case) who initiates electronic funds transfer between the Federal Reserve System and the issuing bank.
What does the issuing bank gain in the transaction?
Technically, the issuing bank is the entity that actually loans the money. But most banks don’t have enough cash reserves laying around to cover all the credit card debt submitted to them on a daily basis. Those banks must borrow money themselves to cover those payments. They borrow the money from the Federal Reserve System at a rate lower than what they charge their credit card customers. In the end, the difference between those two interest rates represents their profit.
So what is the real difference between Visa and Bank of America?
Visa is a card association that acts as the intermediary between the Federal Reserve and issuing banks that use the Visa brand name. Bank of America is an actual issuing bank that may carry cards under several different brands. Simply put, Bank of America loans the money needed for credit card purchases while the Visa simply processes the transaction at its highest level. When you get a credit card with the Visa brand, you’re not actually dealing with Visa, you are dealing with Bank of America as the company who issued the card.
With this knowledge at hand, it becomes abundantly clear that the most popular credit card companies are those whose banks deal most favorably with consumers. But even at that, banks are free to set their own terms within certain parameters as governed by federal law.
For example, you might have two banks, both issuing a Visa-branded card, but with different interest rates and terms. Visa has nothing to do with that because it is the prerogative of individual banks. If this still isn’t clear to you, Consumer Reports does a good job of explaining it in their credit card guide.
How do I decide what the best credit card companies are?
Visa is the most popular credit card company in the world, in terms of being a card association. Therefore, if brand is important to you it might be wise to start looking at Visa credit cards first. Regardless of the brand, you choose however, the real comparison comes by way of the banks that issue the cards. The best way to find the most favorable credit cards is to compare multiple offers from as many banks as you can find. Look at interest rates, terms, and fee schedules.
When it comes to the brands themselves, there are some advantages with each one. Just like a fast food franchise generally participates in the nationwide promotions of the parent company, banks do the same with their brand affiliates. For example, most platinum level Visa cards include a list of incentives such as travel accident insurance, rental car collision coverage, and so on. These benefits are provided by the brand, rather than the bank, but most banks will participate in the programs.
Now that you know a little bit more about the most popular credit card companies, use our FREE credit card chaser to compare offers!
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