Credit card processing
Credit cards are innovative ones in the line of financial services offered by commercial banks. From 1950 the commercial banks and non-banking companies in USA adopted the idea of credit cards to develop their business. Barclays Bank was the first bank to introduce the credit card in 1966 in Britain. The credit card business got momentum in the sixties and a number of banks entered the field in a big way.
Credit card culture is an old hat in western countries. The present trend indicates that the coming years will witness burgeoning growth of credit cards which will lead to a cashless society.
Meaning:
A credit card is a card or mechanism which enables cardholders to purchase goods, travel and dine in a hotel without making immediate payments. The holders can use the cards to get credit from banks up to 45 days. The credit card relieves the consumers from the bother of carrying cash, and ensures safety. It is a convenience of extended credit without formality. Thus the credit card is a passport to safety, convenience, prestige and.credit.
Who can de a credit card holder:
The general criterion for people who apply is their spending capacity and not merely their income or wealth. The other criteria are the worthiness of the client and his average monthly balance.
Types of credit card:
According to the purpose for which the credit cards are used, they can be classified into three main categories.
1. Credit card
2. Charge card
3. In-store card
4. Corporate credit cards
5. Business cards
6. Smart cards
7. Debit cards
8. ATM card
9. Virtual card
Parties to a credit card:
There are three parties to a credit card- the card holder, the issuer, and the member establishments.
1. Issuer The banks or other card issuing organizations.
2. Cardholders Individuals, corporate bodies and non-individual and non-corporate bodies such as firms.
3. Member Establishments Shops and service organizations enlisted by a credit card issuer who accept credit cards. The member establishments may be a business enterprise dealing in goods and services such as retail outlets, departmental stores, restaurants, hotels, hospitals, travel agencies, petrol bunks.
Member establishments have to pay a certain percentage of discounts on the credit card transactions to the issuer. Some organizations charge a specified sum as service charge.
Member affiliate:
There is one more party to the credit card, in the case of the up arrangement, called the member affiliate.
The issuer may sometimes enter a tie up arrangement for issuance of credit cards with other organizations. Such organizations are called member affiliates. In such cases, the organizations which have tie up arrangements also issue cards of the issuer to their clients. Credit cards issued by member affiliates contain the name and logo of the member affiliate on the face of the card, besides the name and logo of the issuer. This arrangement enlarges the scope and operations of the credit card.
Many banks have tie up arrangements with master card international and visa international. These organizations allow cardholders of one bank to use their cards in the member establishment of another bank. The bank in whose fold the member establishment falls, calls the acquiring bank, pays the amount to the merchant, lessens his discount and the transaction is routed through either master card or visa who act as the clearing agencies. Master card or visa route the transaction through their network to the issuing bank which in turn makes payment to the acquiring bank. The issuing bank gets a percentage of the merchant discount, which is stipulated by the either master card or visa.
Procedure at the time of purchase at member establishments:
When a card holder intends to make purchases, he presents his credit card for payment. The member establishment scrutinizes the card with reference to the following:
1. The validity period of the card has not expired.
2. The card has not been hot listed as per the latest hot list/warning bulletin. Whenever a bank receives information about card lost/withdrawn/cancelled it issues a warning letter. The hot list gives the latest list of invalid cards and supersedes all warning bulletin.
3. The signature of the card holder tallies with the specimen signature on the credit card.
4. The card has not been tampered in any manner.
On being satisfied with the validity of the credit card the merchant proceeds in the following way:
1. Obtain the impression of the card with the help of the imprinter.
2. Obtain the cardholders signature in the space provided and check whether the signature tallies with the signature on the card.
3. Prepare a charge slip in triplicate giving all the details. Give one copy to the consumer, keep one copy for records and forward one copy to the bank.
Procedure for reimbursement:
The following procedure is followed for reimbursement to member establishments.
1. The merchant can claim reimbursement from the designated branches of bank.
2. All transactions emanating during the day are consolidated in the summation sheet cum bar in triplicate.
3. The summation sheet cum bar in duplicate along with the banks copy of the charge slip should be submitted to the designated branch for reimbursement.
4. Reimbursement should be obtained within 30 days from the date of charge slip.
5. The banks after deducting commission credit the amount of claim to the member establishments account or pay by DD as earlier agreed.
Facilities offered to card holders:
The various facilities offered to cardholders are described below:
1. Making purchase/availing of services at any of the member establishments.
2. Cash withdrawals at any of the branches of the issuer/member affiliate of the issuer to meet emergent requirements.
3. Ask-on facility for family members. The spouse or children are entitled to use the card for making purchases.
4. Free credit period ranging from 15 to 45 days.
5. ATM facility at selected centers.
6. Wide range of insurance facilities are available which include personal accident insurance, cover for accidental death, baggage insurance, purchase protection cover against risk of fire, strike, theft, during transportation and discount premium rates for personal accident insurance and mediclaim.
Benefits of credit cards:
credit cards confer a number of advantages on cardholders, issuers and member establishments. The benefits of credit cards to various parties are given below:
1. Card holders
a. credit cards are simple to operate and easy to carry. The holders are relieved from the risk of carrying cash or check book with them.
b. A card is a convenient method of payment for goods and services. The holders have the option to purchase goods and services and pay conveniently at a later date in manageable installments compatible with their household budgets.
c. Owing to the revolving nature of credit, the customer can take advantage of it as and when he pleases within the overall limit.
d. Cash can be obtained at any branch of the issuer. The ATM facility is extended to cardholders who need not stand in queues and spend time unnecessarily at banks. By just inserting a card into an ATM the holder can withdraw crisp new notes at any time of day or night.
e. Overdraft facility is given to card holders who are entitled to spend more than their actual limit.
f. The purchasing power of the card holder increases to the extent of credit limit given in the card. If wisely used by consumers, credit cards can provide them extra money interest free. All that one has to do is to settle the bill in time.
g. Credit cards provide a certain degree of prestige to the holder. The status which one gets is not only because of his membership in a credit card organization but because the card at one makes him great in a part of a wider phenomenon.
2. Issuers
a. Credit cards offer high profit for the banks. They get commission or discount, usually 2.5 percent, on sale through credit cards. An interest charge of 1.5 percent is made on all outstanding transactions. Thus, a single transaction through credit card, assuming the customer does not repay within the stipulated period will fetch income of 5 percent to the bank which works out as much as 60 percent per annum; miles ahead of the prime lending rate of many banks. As more and more take advantage of the credit facility the credit card service becomes more profitable.
b. Where the card is issued to non-account holders, it may help to get new customers.
c. A credit card system helps control bank cost as it reduces the number of checks issued by the customers.
3. Member Establishment
a. The merchant has guarantee of payment and his account is credited immediately on submitting the charge slip into his bank. No bad debt arises in credit card transactions.
b. A good cash flow is established because of the speedy settlement of bills by banks.
c. The acceptance of card in lieu of cash reduces security risk.
d. Member establishments are able to offer credit facility to their customers without setting up their own credit arrangements.
e. More and more people accept the practical advantage of credit cards and turn to suppliers who accept the cards in settlement. This helps increase the volume of business to member establishments.
Future prospects:
There are 1 billion card holders world over. These cards have a turnover of $ 1500 million. Over 68,000 establishments in the country accept credit cards.
To realize the potential in the credit card market the following suggestions are made:
a. Reduce the membership and annual subscription fees.
b. Encourage member establishments to accept credit cards for routine items also.
c. Make the features of cards convenient to middle class people.
d. Enhance the cash withdrawal limits.
e. 80% of the card holders live in metropolitan areas. So, workout strategies to popularize the credit card among people in semi urban and rural areas.
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