Credit card transactions convert the creditworthiness or income potential of a customer into cash available for making a purchase. Money is available at the point-of-sale in the exact amount needed for the purchase, and in the form of a payment authorization.

Merchants are willing to pay a transaction fee not only to increase the probability of a purchase but also to reduce the overall costs and risks of completing the transaction. It is also a convenience fee, because the bank promises to make it all very easy. That convenience translates into a certain level of spontaneity in spending money from which merchants benefit. It’s inconvenient for a merchant to ask their clients to first show them the money, especially when that someone is paying for a purchase dressed in pajamas.

In effect, merchants pay banks to convert a willingness to pay, first into a promise to pay, and then into an actual payment. They pass off the risk of default to the bank, who are willing to accept the risks, weighed against the opportunity to earn profit in the form of interest, penalties and fees.

In some situations, consumers may have money in the bank which is no good if the merchant insists on a payment in the form of currency notes. In such a case there may be a need for a cash advance at an ATM machine. In other cases, hotels and car rental companies may insist on a credit card as a form of security to protect themselves against unforeseen damage, loss, and theft.

But the real value of credit card services is that even without full-blown implementations of cryptocurrency, and even after accounting for possibilities of fraud, they allow fairly quick and spontaneous transactions between two parties across a very wide network.


Posted by:Majid Iqbal

TL;DR I bring clarity to the concept of a service.