Financial Sevice-credit Cards

7/28/2019 Financial Sevice-credit Cards

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PLASTIC MONEY

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Plastic money is a termthat is used

predominantly in reference to the hard

plastic cards

we use everyday in

place of actual banknotes.

They can come inmany different forms

such as cash cards,credit cards, debitcards,

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Credit card

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About creditcards1. How credit cards work

2. Interest charges

3. Benefits to customers

4. Grace period

5. Benefits to merchants

6. Parties involved

7. Transaction steps

8. Rewards

9. Fees charged to customers10.Credit cards in ATMs

11.Tips

12.Types of cards in INDIA

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The concept of credit card was used in1950 with the launch of charge cards in

USA by Diners Club and AmericanExpress.

Credit card however became more

popular with use of magnetic strip in1970.

Credit card in India became popular

with the introduction of foreign banks inthe country.

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Credit cards are financial instruments,which can be used more than once toborrow money or buy products and

services on credit.

Basically banks, retail stores and otherbusinesses issue these.

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Creditcards Issuing bank logo

EMV chip on "smart cards"

Hologram

Credit card number

Card brand logo

Expiration Date

Card Holder Name

contactless chip

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Credit cardnumbering The card number's prefix, called the Bank Identification Number, is the

sequence of digits at the beginning of the number that determine thebank to which a credit card number belongs.

This is the first six digits for MasterCard and Visa cards.

The next nine digits are the individual account number.

And the final digit is a validity check code.

In addition to the main credit card number, credit cards also carry issue

and expiration dates (given to the nearest month), as well as extra codessuch as issue numbers and security codes. Not all credit cards have thesame sets of extra codes nor do they use the same number of digits.

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CreditcardnumberingAn example of the reverse side of a typicalcredit card:

Magnetic Stripe

Signature Strip

Card Security Code

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GLOBAL PLAYER IN CREDIT

CARD MARKET

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MasterCard

MasterCard is a product of MasterCard International and along withVISA are distributed by financial institutions around the world.

Cardholders borrow money against a line of credit and pay it back

with interest if the balance is carried over from month to month.

Its products are issued by 23,000 financial institutions in 220 countriesand territories. In 1998,

it had almost 700 million cards in circulation, whose users spent $650

billion in more than 16.2 million locations.

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VISA Card

VISA cards is a product of VISA USA and along withMasterCard is distributed by financial institutionsaround the world.

A VISA cardholder borrows money against a creditline and repays the money with interest if thebalance is carried over from month to month in arevolving line of credit. Nearly 600 million cardscarry one of the VISA brands and more than 14

million locations accept VISA cards.

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DIFFERENCE BETWEEN VISAAND MASTERCARD

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They both operate along very similar lines.

However, neither Visa nor MasterCard actually issue

any credit cards themselves. they negotiate thesetting up of the payment system between banks,merchants and other business establishments fromaround the world.

They are both simply methods of payment. They rely on banks in various countries to issue

credit cards that utilise these payment methods.

Therefore, the interest rates, rewards, annual fees,

and all other charges are issued by bank and whenclient pay bill they are paying it to the bank orinstitution that issued card and not Visa orMasterCard.

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HOW MATERCARD WORKS

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Card Issuing Bank

Card Issuing BankThe cardholders financial institution, also a licensedmember of MasterCard

Cardholder

Cardholder A consumer who is solicited, screened, and approved by theissuer who establishes a line of credit for the customer and issues thebankcard.

Merchant

Merchant Virtually any company that wants to accept cards for payment andthat meets the qualification standards of MasterCard and an acquirer.

Acquirer

Acquirer A licensed member of MasterCard that screens and acceptsmerchants into its bankcard programme, processes transactions, andcompletes financial settlement to them.

MasterCard

MasterCard Worldwide - license brand to member financial institutions that inturn provide services to consumers and merchants.

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How credit cards workCredit cards are issued after an account has been approved by the credit provider, after whichcardholders can use it to make purchases at merchants accepting that card.

i.When a purchase is made, the credit card user agrees to pay the card issuer.

ii.The cardholder indicates consent to pay by signing a receipt with a record of the card detailsand indicating the amount to be paid or by entering a personal identification number (PIN).

iii.Also, many merchants now accept verbal authorizations via telephone and electronicauthorization using the Internet, known as a 'Card/Cardholder Not Present' (CNP)transaction.

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How credit cards work Electronic verification systems allow merchants to verify that the card is valid

and the credit card customer has sufficient credit to cover the purchase in a fewseconds, allowing the verification to happen at time of purchase.

i. The verification is performed using a credit card payment terminal or Point of Sale

(POS) system with a communications link to the merchant's acquiring bank.ii. Data from the card is obtained from a magnetic stripe or chip on the card.

Other variations of verification systems are used by e Commerce merchants todetermine if the user's account is valid and able to accept the charge.

i. These will typically involve the cardholder providing additional information, such asthe security code printed on the back of the card, or the address of the cardholder.

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How credit cards work Each month, the credit card user is sent a statement indicating the purchases undertaken

with the card, any outstanding fees, and the total amount owed.

After receiving the statement, the cardholder may dispute any charges that he or she thinksare incorrect.

Otherwise, the cardholder must pay a defined minimum proportion of the bill by a duedate, or may choose to pay a higher amount up to the entire amount owed.

The credit issuer charges interest on the amount owed if the balance is not paid in full(typically at a much higher rate than most other forms of debt).

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Interest charges

Credit card issuers usually waive(not-claim) interest chargesif the balance is paid in full each month, but typically willcharge full interest on the entire outstanding balance fromthe date of each purchase if the total balance is not paid.

For example, if a user had a `1,000 transaction and repaid it infull within this grace period, there would be no interestcharged.

The general calculation formula most financial institutionsuse to determine the amount of interest to be charged isAPR/100 x ADB/365 x number of days revolved.

Take the Annual percentage rate (APR) and divide by 100then multiply to the amount of the average daily balance(ADB) divided by 365 and then take this total and multiplyby the total number of days the amount revolved beforepayment was made on the account.

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Interest charges Interest rates can vary considerably from card to card,

and the interest rate on a particular card may jump

dramatically if the card user is late with a payment on thatcard

or any other credit instrument,

or even if the issuing bank decides to raise its revenue.

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Benefits to customers The main benefit to each customer is convenience.

Compared to debit cards and cheques, a credit card allows small short-termloans to be quickly made to a customer who need not calculate a balanceremainingbefore every transaction, provided the total charges do not exceed

the maximum credit line for the card.

Credit cards also provide more fraud protection than debit cards.

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Benefits to customers Many credit cards offer rewards and benefits packages, such as

offering enhanced product warranties at no cost, free loss/damagecoverage on new purchases, and points which may be redeemed for

cash, products, or airline tickets.

Additionally, carrying a credit card may be a convenience to somecustomers as it eliminates the need to carry any cash for mostpurposes.

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Grace period A credit card's grace period is the time the customer has to pay thebalance before interest is assessed on the outstanding balance.

Grace periods vary, but usually range from 20 to 50 days depending onthe type of credit card and the issuing bank.

Usually, if a customer is late paying the balance, finance charges will be

calculated and the grace period does not apply. Finance charges incurred depend on the grace period and balance; with

most credit cards there is no grace period if there is any outstandingbalance from the previous billing cycle or statement (i.e. interest isapplied on both the previous balance and new transactions).

However, there are some credit cards that will only apply financecharge on the previous or old balance, excluding new transactions.

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Benefits to merchants For merchants, a credit card transaction is often more secure than otherforms of payment, cash, because they discourage theft by the

merchant's employees and reduce the amount of cash on the premises.

For each purchase, the bank charges the merchant a commission

(discount fee) for this service and there may be a certain delay beforethe agreed payment is received by the merchant.

The commission is often a percentage of the transaction amount, plus afixed fee (interchange rate).

Some small merchants require credit purchases to have a minimumamount to compensate for the transaction costs.

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Parties involved Cardholder: The holder of the card used to make a purchase; the

consumer.

Card-issuing bank: The financial institution or other organization thatissued the credit card to the cardholder. This bank bills the consumer forrepayment and bears the risk that the card is used fraudulently.

Merchant: The individual or business accepting credit card paymentsfor products or services sold to the cardholder.

Acquiring bank: The financial institution accepting payment for the

products or services on behalf of the merchant.

Independent sales organization: Resellers (to merchants) of the servicesof the acquiring bank.

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Parties involved Merchant account: This could refer to the acquiring bank

or the independent sales organization, but in general is theorganization that the merchant deals with.

Credit Card association: An association of card-issuingbanks such as Visa, MasterCard, Discover, AmericanExpress, etc. that set transaction terms for merchants, card-issuing banks, and acquiring banks.

Transaction network: The system that implements themechanics of the electronic transactions. May be operatedby an independent company, and one company mayoperate multiple networks.

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Transaction steps Authorization: The cardholder pays for the purchase and the

merchant submits the transaction to the acquirer (acquiring bank).

The acquirer verifies the credit card number, the transaction type andthe amount with the issuer (Card-issuing bank) and reserves thatamount of the cardholder's credit limit for the merchant.

An authorization will generate an approval code, which the merchant

stores with the transaction.

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Transaction steps Batching: Authorized transactions are stored in "batches", which are

sent to the acquirer.

Batches are typically submitted once per day at the end of the businessday.

If a transaction is not submitted in the batch, the authorization will

stay valid for a period determined by the issuer, after which the heldamount will be returned back to the cardholder's available credit.

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Transactionsteps Clearing and Settlement: The acquirer sends the batch transactions

through the credit card association, which debits the issuers forpayment and credits the acquirer.

Essentially, the issuer pays the acquirer for the transaction.

Funding: Once the acquirer has been paid, the acquirer pays themerchant.

The merchant receives the amount totaling the funds in the batch minuseither the "discount rate," "mid-qualified rate", or "non-qualified rate"which are tiers of fees the merchant pays the acquirer for processing thetransactions.

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Transaction steps

Charge backs: A chargeback is an event in which money in amerchant account is held due to a dispute relating to the transaction.

Charge backs are typically initiated by the cardholder.

In the event of a chargeback, the issuer returns the transaction to theacquirer for resolution.

The acquirer then forwards the chargeback to the merchant, who musteither accept the chargeback or contest it.

A merchant is responsible for the chargeback only if he/she hasviolated the card acceptance procedures as per the merchantagreement with card acquirers.

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Rewards

Many credit card customers receive rewards, such as frequent flyerpoints, gift certificates, or cash back as an incentive to use the card.

Rewards are generally tied to purchasing an item or service on thecard, which may or may not include balance transfers, cash advances,

or other special uses.

Depending on the type of card, rewards will generally cost the issuerbetween 0.25% and 2.0% of the spread.

Networks such as Visa or MasterCard have increased their fees toallow issuers to fund their rewards system.

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Fees charged to customers

Late payments or overdue payments Charges that result in exceeding the credit limit on the

card (whether done deliberately or by mistake), calledover limit fees

Returned cheque, fees or payment processing fees (egphone payment fee)

Cash advances and convenience cheques (often 3% of theamount)

Transactions in a foreign currency (as much as 3% of theamount). A few financial institutions do not charge a feefor this.

Membership fees (annual or monthly), sometimes apercentage of the credit limit.

Exchange rate loading fees (these may sometimes not bereported on the customer's statement, even when they areapplied)

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Credit cards in ATMs Many credit cards can also be used in an ATM to

withdraw money against the credit limit extended to thecard, but many card issuers charge interest on cashadvances before they do so on purchases.

The interest on cash advances is commonly charged fromthe date the withdrawal is made, rather than the monthlybilling date.

Many consumers have large cash balances, which have no

grace period and incur interest at a rate that is (usually)higher than the purchase rate, and will carry those balancefor years, even if they pay off their statement balance eachmonth.

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Thesetips are important: Sign your card -- as soon as you receive it! (Obviously,

this is only as effective as the clerk who's checking it.)

When you use your card at an ATM, enter your PIN insuch a way that no one can easily memorize yourkeystrokes.

Don't leave your receiptbehind at the ATM.

Your PIN and account number from a discarded receiptcould make you vulnerable to credit-card fraud. Also,don't throw out your credit-card statement, receipts or

carbons without first shredding them!

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These tips are important: Never give your credit-card number over the telephone

unless you initiated the call.

Ignore any credit-card offer that requires you to spendmoney up-front or fails to disclose the identity of thecard issuer.

Make certain you get your card back after you make apurchase

Always keep a list of your credit cards, credit-cardnumbers and toll-free numbers in case your card is stolen

or lost.

Check your monthly statement to make certain allcharges are your own, and immediately notify the cardissuer of any errors or unauthorized charges.

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Types of cardsinINDIA Premium Credit Cards Cash Back Credit Cards

Gold Credit Cards

Airline Credit Cards

Silver Credit Cards

Business Credit Cards

Balance Transfer Credit Cards

Co-branded Credit Cards

Low Interest Credit Cards

Lifetime Free Credit Cards

Rewards

There are some additional creditcards that are available in India aswell. Rewards credit cards availablein India can be subdivided into six

categories

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TYPES OF CREDIT CARDS

TRAVEL AND ENTERTAINMENT CARD, forexample: DINERS CLUB CARD

BANK CARD, for example: CITI BANK CARD, BOBCARD, ICICI CARD,SBI CARD, etc.

STORE OR RETAIL CARD for exampleSPENCERS CARD

FUEL CARD, for example: MOBIL CARD, BHARATBOB CARD, CITI BANK- INDIAN OIL CARD

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Category I: Based on mode of credit

recovery a) Credit card (Revolving credit type)

b) Charge card

Category II: Based on status ofcredit card

a) Standard card

b) Business card

c) Gold card

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Category III: Based on geographical

validity a) Domestic usage card

b) International usage card

Category IV: Based on Franchise/tie-up

a) Proprietary card

b) Master card c) VISA

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Category V: Based on the category

of the user

a) Cards issued to Individuals

b) Corporate cards

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Revolving credit card:

This credit card -built around the revolving creditprinciple.

limit is set to the amount of money one can spend ina month using the card.

At the end of every month, the card holder has topay a percentage of the outstanding credit (this maybe from 5% to 10%).

Interest is charged on the outstanding amount.

The interest rate charged by the issuer may varyfrom bank to bank.

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Charge Card: A charge card is a convenient instrument

not a credit instrument.

Instead of paying cash or cheque every time

you make a purchase, this facility gives aconsolidated bill for a specific period (usuallya month).

Bills are payable in full on presentation, so

there are no interest charges and no presetspending limits either.

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a) Standard Cards: It is a normal credit card

a card holder is able to purchasewithout having to pay cashimmediately.

It offers limited privileges to cardholders when compared to the holdersof other cards in this category. Some

banks issue standard cards in the

brand name as CLASSIC cards, etc.

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Proprietary Card: Generally credit card issuers will

have their own brand ofcredit cardreflecting the name of the bank

(example CANCARD of Canara Bank).

These cards will be issued by the

banks in addition to their other tie-upcards.

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VISA/ Mastercard: This is a type of credit card which

can be issued by any bank, that is

having tie-up with VISA InternationalCorp., USA (The original Visa Card

issuers).

The banks which are issuing VisaCards on franchise basis can avail

the facilities of Visa network for theirtransactions.

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Domestic tie up


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Domestic tie-up

Cards: These are the cards issued by abank having a tie-up with domesticcredit card brands such a Can card

and In card etc. Indian Overseas Bank has tie-up with

Can card).

These banks issue cards to usersthrough the original banks.

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CREDIT CARD

BUSINESS CYCLE

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1) Cardholder purchases goods/services and givescredit card;

2) Merchant Establishment delivers goods aftertaking credit card and noting the number and takingsignatures on some forms.

3) Merchant Establishment raises the bill for thepurchase and sends it to the credit card issuingBank for payment.

4) Issuing Bank pays the amount to the MerchantEstablishment.

5) Issuing Bank raises the bill on the creditcardholder and sends it for payment.

6) Credit cardholder makes the payment to theIssuing Bank.

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Credit cards enable the holder to make

purchases, avail the services at variousdesignated Merchant Establishments(MEs) like Departmental Stores, Star

Hotels Indian Airlines, Railways, etc.,who will accept all valid credit cards inlieu of cash payment. In this way, the

cardholder can avoid the risk ofcarrying cash.

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When a cardholder purchasesanything, he presents his credit card tothe Merchant establishment instead of

paying cash.

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The retailer checks the number on thecard against the hot list or warningbulletin provided to him by the bank.

This is the authenticity test whichproves whether the cardholder is thegenuine owner of the card or not.

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The cardholder is also required to signon the voucher, and the signature hasto tally with the one on the credit card.

The merchant establishment has tothen present the necessary salesvouchers to the bank which in turn

reimburses it for the customerspurchases.

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The bank charges a commission fromthe merchant establishment, rates ofwhich vary from bank to bank.

After the completion of this procedure,it sends the bill to the cardholder andreceives the money.

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THANK YOU

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Documents

Financial Sevice-credit Cards