Credit card authorization
Today's world is known as the world of Plastic Money. In modern times people have started using this money instead of cash, in the form of Credit Cards, Debit Cards and Charge cards. As these cards are very convenient they have become very popular over the last few years worldwide. Today we find that most banks are offering these cards to their customers but there are certain credit card authorization formalities which are to be completed before issuing out the cards. But first lets discuss the parties to the transaction etc. to make the concept much clear.
Parties to the transaction
1) Card Issuer :
The issuers are mainly banks. Banks are interested in this business because of the high margins available to them. The banks charge upto 3% from the member establishment. They charge an annual fee from their customers and also earn very high interest on the credit made available to the user. The credit period made available to the customer is about 30 to 45 days, but this comes with a very high cost of around 2.5% per month.
The banks also have to bear the costs like the cost of marketing the cards, the credit information cost, the membership fees to be paid to Visa or Master Card, administrative costs and costs of bad debts.
2) Cardholders :
The cardholders include both the individuals and the business organisations.
3) Member Establishments (MEs) :
These are the establishments enlisted by the card issuers, who accept payment through cards for goods sold or services rendered. Member Establishments are enlisted after taking into consideration their reputation, integrity, standing and popularity. The volume of business that is likely to be generated by them is also a crucial factor of consideration. Based on the type of business, location, turnover etc. floor limit for Member Establishments is fixed. Normally, the transactions against an individual credit card should not exceed the floor limit. They have to pay to the issuer ascertain percentage of discount on the purchases made against the cards.
4) Clearing Agencies :
A card issuer affiliates itself with master card International or Visa International the 2 leading international card issuers, which act as clearing agencies. The advantage of this is affiliation is that it enables cardholder of one affiliate to use his card at the member of the other affiliate also. These companies also allow the issuing banks to use their logo on their cards.
Concept of Credit Card :
Credit card is a pay later product. It is a payment mechanism, which enables the holder to buy goods and services on credit. The credit is given by the issuing bank to the cardholder. The cardholder in turn repays the money to the bank in 1 instalment or in several instalments as per the terms of the issuing bank. When a cardholder makes a purchase with a credit card he hands over the card to the Member Establishments.
Unlike a credit card which is a pay later product, a Debit card is a pay now product., where the customers account with the issuer is immediately debited to the extent of the value of the transaction.
The debit card program needs terminal; know as the Point of sale terminal. For making the payment the card is inserted in this machine. The machine places an automatic call, checks the balance in the account and reduces the balance to the extent of the invoice. As far as the banks are concerned this mechanism is least risky, as the banks extend no credit to the customer. What the customer gets is that he need not carry cash with him and still do all the transactions he needs to do.
Types of Credit Cards
The following are the main types of credit cards you find in use these days:
Platinum cards: Platinum credit cards are essentially for those considered of high net worth, i.e. the very rich, and is essentially a card youre invited to join. Not only does this card rely on you having high net worth, but also requires frequent use of the card.
Gold cards: Unlike platinum cards, gold cards do not rely on you being invited into the programme, rather you can simply apply. However, in most cases youll not be provided any higher credit limit than you would be with a standard card, but you are
- (i) subject to higher qualifying requirements; and
- (ii) required to pay a higher annual membership fee. As such, many question the value of gold cards beyond the fact that theyre a status symbol as you have to be in a relatively high income earning bracket to qualify.
Standard cards: All credit card providers issue standard credit cards, and it is this type of credit card that a vast majority of customers have.
Collection
After the purchase is transacted the Member Establishments approaches the issuing bank or its clearing representative and claims the amount through the copy of the sales voucher. The bank in turn discounts this and makes payment to the establishment.
The credit card business has been growing very fast, with the advent of new private sector banks, pushing this business very aggressively. Many people are now willing to use the credit cards regularly especially in the urban areas. Many banks have also started issuing ATM cards, which also can be used as Debit cards by the customers. Banks are offering various facilities like free accident insurance cover, low yearly fees etc.
We must also look at the problems associated with the business of credit cards. It has been reported that in India the bad debts on account of credit cards are already amounting to a staggering Rs. 800 crores. This is a huge amount of money. Banks it would seem are marketing this product quite recklessly.
It is important that the banks offer credit cards to the individuals and organisations who have good reputation and good and good credit history. Credit appraisals of the customers must be done strictly before issuing the card to him. What is required is the credit information of defaulters must be made available to all the banks, as it has been seen that the same person is a defaulter in different banks. People who own more than one card are able to defraud many banks. Efforts are now on to gather credit information from different sources and make this data available to all the banks. A credit information company is jointly floated for this purpose.
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