Credit Card Services

Card Services

 

Credit Card: -

I’ am sure you might have heard this phrase n number of times but did you ever know how this plastic works

Credit card can be termed as an unsecured revolving credit.

There are several types of cards:

ATM Cards

Debit Cards

Smart Cards

Bank Credit Cards

Virtual Cards

Charge Cards

Etc...

 

A Bit of History

A credit card is a thin plastic card, usually 3-1/8 inches by 2-1/8 inches in size, that contains identification information such as a signature or picture, and authorizes the person named on it to charge purchases or services to his account -- charges for which he will be billed periodically. Today, the information on the card is read by automated teller machines (ATMs), POS(Point of sale) machines, Internet computers.

Timeline
The use of credit cards originated in the United States during the 1920s, when individual companies, such as hotel chains and oil companies, began issuing them to customers for purchases made at those businesses. This use increased significantly after World War II.
The first universal credit card -- one that could be used at a variety of stores and businesses -- was introduced by Diners Club, Inc., in 1950. With this system, the credit-card company charged cardholders an annual fee and billed them on a monthly or yearly basis. Another major universal card -- "Don't leave home without it!" -- was established in 1958 by the American Express company.
Later came the bank credit-card system. Under this plan, the bank credits the account of the merchant as sales slips are received (this means merchants are paid quickly -- something they love!) and assembles charges to be billed to the cardholder at the end of the billing period. The cardholder, in turn, pays the bank either the entire balance or in monthly installments with interest.
 The first national bank plan was BankAmericard, which was started on a statewide basis in 1959 by the Bank of America in California. This system was licensed in other states starting in 1966, and was renamed Visa in 1976.
Other major bankcards followed, including MasterCard, formerly Master Charge. In order to offer expanded services, such as meals and lodging, many smaller banks that earlier offered credit cards on a local or regional basis formed relationships with large national or international banks.

The Physical Structure of the Card and some info about numbers: -

Although phone companies, gas companies and department stores have their own numbering systems, ANSI Standard X4.13-1983 is the system used by most national credit-card systems.

The front of your credit card has a lot of numbers -- here's an example of what they might mean.

Here are what some of the numbers stand for:

• The first digit in your credit-card number signifies the system:
• 3 - travel/entertainment cards (such as American Express and Diners Club)
• 4 - Visa
• 5 - MasterCard
• 6 - Discover Card
• The structure of the card number varies by system. For example, American Express card numbers start with 37 and Diners Club with 38.
• American Express - Digits three and four are type and currency, digits five through 11 are the account number, digits 12 through 14 are the card number within the account and digit 15 is a check digit.
• Visa - Digits two through six are the bank number, digits seven through 12 or seven through 15 are the account number and digit 13 or 16 is a check digit.
• MasterCard - Digits two and three, two through four, two through five or two through six are the bank number (depending on whether digit two is a 1, 2, 3 or other). The digits after the bank number up through digit 15 are the account number, and digit 16 is a check digit.

Now that we know what the numbers stand for, let us know something about the stripe on the back.

The Stripe: -

The stripe on the back of a credit card is a magnetic stripe, often called a magstripe. The magstripe is made up of tiny iron-based magnetic particles in a plastic-like film. Each particle is really a tiny bar magnet about 20-millionths of an inch long.

Your card has a magstripe on the back and a place for your all-important signature.

The magstripe can be "written" because the tiny bar magnets can be magnetized in either a north or South Pole direction. The magstripe on the back of the card is very similar to a piece of cassette tape.

• A magstripe reader or technically speaking the POS machine can understand the information on the stripe.

Information on the Stripe
There are three tracks on the magstripe. Each track is about one-tenth of an inch wide.

• Your credit card typically uses only tracks one and two to store some necessary information for the functioning of the Card.

Authentication

There are three basic methods for determining whether your credit card will pay for what you're charging:

• Merchants with few transactions each month do voice authentication using a touch-tone phone.
• Point of Sale (POS) OR Electronic data capture (EDC) magstripe-card swipe terminals are becoming more common -- so is swiping your own card at the checkout.
• Virtual terminals on the Internet

This is how it works: After you or the cashier swipes your credit card through a reader, the EDC software at the point-of-sale (POS) terminal dials a stored telephone number (using a modem) to call an acquirer. An acquirer is an organization that collects credit-authentication requests from merchants and provides the merchants with a payment guarantee.
When the acquirer company gets the credit-card authentication request, it checks the transaction for validity and the record on the magstripe for:

• Merchant ID
• Valid card number
• Expiration date
• Credit-card limit
• Card usage

and then approves the transaction.

What are working behind the credit cards?

National Associations - two largest

MasterCard and Visa International

Owned by member banks

Governed by separate board of directors

Funded through assessments and fees charged to member banks

International interchange processing and authorizations via BankNet/INAS for MasterCard and VisaNet/BASEI for Visa

So these are some notes on Credit cards and now let us know briefly about the different types of cards and their functions.

Different varieties Of Cards
MasterCard – MasterCard is a product of MasterCard International and along with VISA 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 countries and territories. In 1998, it had almost 700 million cards in circulation, whose users spent $650 billion in more than 16.2 million locations.
VISA Card – VISA cards is a product of VISA USA and along with MasterCard is distributed by financial institutions around the world. A VISA cardholder borrows money against a credit line and repays the money with interest if the balance is carried over from month to month in a revolving line of credit. Nearly 600 million cards carry one of the VISA brands and more than 14 million locations accept VISA cards.
Affinity Cards - A card offered by two organizations, one a lending institution, the other a non-financial group. Schools, non-profit groups, pro wrestlers, popular singers and airlines are among those featured on affinity cards. Usually, use of the card entitles holders to special discounts or deals from the non-financial group.
Standard Card – It is the most basic card (sans all frills) offered by issuers.
Classic Card – Brand name for the standard card issued by VISA.
Gold Card/Executive Card – A credit card that offers a higher line of credit than a standard card. Income eligibility is also higher. In addition, issuers provide extra perks or incentives to cardholders.
Platinum Card – A credit card with a higher limit and additional perks than a gold card.
Titanium Card – A card with an even higher limit than a platinum card.
Secured Card – A credit card that a cardholder secures with a savings deposit to ensure payment of the outstanding balance if the cardholder defaults on payments. It is used by people new to credit, or people trying to rebuild their poor credit ratings.
Smart Card – Smart cards, sometimes called chip cards, contain a computer chip embedded in the plastic. Where a typical credit card's magnetic stripe can hold only a few dozen characters, smart cards are now available with 16K of memory. When read by a special terminal, the cards can perform a number of functions or access data stored in the chip. These cards can be used as cash cards or as credit cards with a preset credit limit, or used as ID cards with stored-in passwords.

 

The "smart" credit card is an innovative application that involves all aspects of cryptography (secret codes), not just the authentication we described in the last section. A smart card has a microprocessor built into the card itself. Cryptography is essential to the functioning of these cards in several ways:

• The user must corroborate his identity to the card each time a transaction is made, in much the same way that a PIN is used with an ATM.
• The card and the card reader execute a sequence of encrypted sign/countersign-like exchanges to verify that each is dealing with a legitimate counterpart.

Once this has been established, the transaction itself is carried out in encrypted form to prevent anyone, including the cardholder or the merchant whose card reader is involved, from "eavesdropping" on the exchange and later impersonating either party to defraud the system.
Charge Card – Falls between a debit and credit card. Works like the latter and you don't have to be an accountholder. Just pay up in full when the bill arrives with the mail. No outstanding are allowed, in other words, no revolving credit facility either. American Express and Diners are providers.
Rebate Card – This is a card that allows the customer to accumulate cash, merchandise or services based on card usage.
Co-Branded Card – This is a marriage of convenience between two service providers who want a trade-off with the other's strengths. Specific facilities are made to members through these tie-ups. So, TimesBank and Citibank have a co-branded card that allows concessional rates for add-on cards or telephone banking. Stanchart and Hindustan Lever Limited have a co-branded card to sell Aviance beauty products. SBI-GE Capital has a co-branded card for retail loans.
Cash Card – Cash cards, similar to pre-paid phone cards, contain a set amount of value, which can be read by a special cash card reader. Participating retailers will use the reader to debit the card in increments until the value is gone. The cards are like cash -- they have no built-in security, so if lost or stolen, they can be used by anyone.
Travel Card – These work mostly as debit cards for the limited purpose of travel. Citibank Dollar Card, American Express, Bobcard Global and Hongbank Bank Thomas Cook International Card are among the players in this section.
Debit Card – It is the accountholder's mobile ATM. Open an account with a bank that offers a debit card, and payments for purchases are deducted from your bank account. The retailer swipes the card over an electronic terminal at his outlet, you enter the personal identification number on a PIN pad and the money is immediately debited at the bank. Citibank and a few domestic banks like Times Bank offer this.

Jargons used by the credit card industry: -
Credit Card – A credit card is a financial instrument, which can be used more than once to borrow money or buy products and services on credit. Banks, retail stores and other businesses generally issue these.
Credit limit – The maximum amount of charges a cardholder may apply to the account.
Annual fee – A bank charge for use of a credit card levied each year, which ranges depending upon the type of card one possesses. Banks usually take an initial fixed amount in the first year and then a lower amount as yearly renewal fees.
Revolving Line Of Credit - An agreement to lend a specific amount to a borrower and to allow that amount to be borrowed again once it has been repaid. Most credit cards offer revolving credit.
Personal Identification Number (PIN) - As a security measure, some cards require a number to be punched into a keypad before a transaction can be completed. The number can usually be changed by the cardholder.
Teaser Rate - Often called the introductory rate, it is the below-market interest rate offered to entice customers to switch credit cards.
Joint Credit - Issued to a couple based on both of their assets, incomes and credit reports. It generally results in a higher credit limit, but makes both parties responsible for repaying the debt.

Financial Jargon

• Annual fee - A flat, yearly charge similar to a membership fee
• Many companies offer "no annual fee" cards today, and lenders who do charge annual fees are often willing to waive them to keep your business.
• Finance charge - The dollar amount you pay to use credit
• Besides interest costs, this may include other charges such as cash-advance fees, which are charged against your card when you borrow cash from the lender. (You generally pay higher interest on cash advances than on purchases -- check your latest bill to find out what you're paying for this service!)
• Grace period - A time period, usually about 25 days, during which you can pay your credit-card bill without paying a finance charge
• Under almost all credit-card plans, the grace period only applies if you pay your balance in full each month. It does not apply if you carry a balance forward. Also, the grace period does not apply to cash advances.
• Annual percentage rate (APR) - The yearly percentage rate of the finance charge
• Interest rates on credit-card plans change over time. Some of these adjustments are tied to changes in other interest rates, such as the prime rate or the Treasury Bill rate, and are called variable-rate plans. Others are not explicitly tied to changes in other interest rates and are called fixed-rate plans.
• Fixed rate - A fixed annual percentage rate of the finance charge
• Variable rate - Prime rate (which varies) plus an added percentage (For example, your rate may be PR + 3.9 percent.)
• Introductory rate - A temporary, lower APR that usually lasts for about six months before converting to the normal fixed or variable rate (This is a hot topic -- more about it later.)

Interchange:

Interchange refers to the function that enables banks around the world to exchange information, transactions, currency and other cardholder information in a standardized and consistent format.

Interchange fees are charged to fund the interchange functions.

Interchange Participants

Cardholder is the person in possession of the credit card. 

Card Issuer - the bank that deals with all aspects of issuing the bank credit card and the cardholder relationships

Card Acquirer - the bank that deals with all aspects of the merchant side of the credit card transactions.

Clearing

Clearing - is the process by which transaction information flows between the issuers and acquirers which allows posting of the transaction to the cardholders account. During the clearing process no funds are transferred.

Settlement

Settlement is the process by which the funds or payments of the cardholder purchases are passed between the issuer and the acquirer. 

Account
An account represents a relationship between a company (the account owner) and consumer, where the consumer purchases a product or service in such a way that represents the transfer of money over time.
Account number
A reference number assigned to accounts, by the creditor or collection agency, to uniquely identify a consumer as the owner of that account.
Bank card
A credit card issued through a bank.
Credit
A consumer's ability to make purchases, obtain services, or borrow money based on his or her promise, ability, and demonstrated willingness to repay.
Credit bureau
A company that gathers information about how consumers use credit, which the credit bureau in turn provides to potential creditors, employers and others who have a legally-recognized reason (permissible purpose) to inquire about the creditworthiness of an individual.
Credit check
An inquiry to confirm a consumer's credit payment history.
Credit fraud
A case when someone has stolen a consumer's identity by fraudulently using that consumer's social security number or other personal information to acquire credit in his or her name.
Credit history
The record of a consumer's credit accounts and manner of payment (MOP). Credit history includes high credit, current balance, credit limit, and 24 months of MOP history.
Credit limit
The maximum balance that can be carried on a credit account.
Credit report
A summary of a consumer's recent credit history plus additional facts about the consumer that will help creditors judge the consumer's creditworthiness.
Credit risk
An assessment of a consumer's likelihood of fulfilling the terms of a credit agreement.
Credit score
A mathematical calculation that reflects a consumer's creditworthiness. The score is an assessment of how likely a consumer is to pay his or her debts.
Dispute
To question the accuracy of information in a credit report if a consumer feels that there’s something wrong going on in his statement generation. This is done to recheck the disputed information with the creditor or organization that reported it, record the current status, and correct any error.
Fair Credit Reporting Act (FCRA)
The FCRA protects consumers' privacy by defining permissible purposes a business or individual must have when requesting a credit report; provides consumers with the right to obtain copies of their credit reports for free if denied credit; defines obsolete information; and declares that reasonable procedures must be used to ensure accuracy.
Fraud
Intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right.
Line of credit
Credit limit established by a creditor.
Open account
An account that is active, still in use, or is still being paid.
Hard facts
Visa International has the largest global ATM network in over 113 countries.
MasterCard International has over 23,000 member financial institutions serving consumers in 220 countries and territories and has over 3,50,000 ATM locations around the globe.
The first card was issued in India by Visa in 1981.
The country's first Gold Card was also issued from Visa in 1986.
The first international credit card was issued to a restricted number of customers by Andhra Bank in 1987 through the Visa program, after getting special permission from the Reserve Bank of India.

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