Credit Card Business

Credit card allows its holder to buy goods and services based on the holder’s promise to pay for these goods and services.

• Its usage started in 1920s in US for selling the fuel to the automobile owners and became usable by the customers when Diners Club was launched in early 1950s.
• In 1958, the Bank of America issued the BankAmericard in the California state and this is known to be the first successful modern credit card.

Credit Card v/s Debit Card:

Both Debit card and credit card and other cards like smart card are plastic money which play the role of medium of payment. In credit cards the customer (credit card holder) can avail the facility of buying goods and services at a Point of Sale (POS) from merchant establishments (provided such arrangements exist) without making a prior payment. This credit facility is provided by the issuer bank to the customer for a specific period.

• However, in the case of debit cards, the customer (debit card holder) can buy goods and services by automatically debiting the payments to card holder’s banks account.

• In case of a credit card, the card holder uses credit line by making drawings within a specified or sanctioned limit and makes payment on receiving the bill along with the applicable charges and interests.
• In case of debit cards, the card holder uses the balance in his / her own bank account and payment is made immediately on purchases.

How Credit Card Works:

The entire process has the following parties:

1. Cardholder is the authorized user of a credit or debit card.
2. Merchant is any business entity that is authorized to accept cards for the payment of goods and services; it can be a brick and mortar shop or a website.
3. Merchant Bank or Acquirer is a financial institution that provides card processing services to the merchant.
4. Credit Card Network or Association is a membership organization of financial institutions that issue payment cards and/or sign merchants to accept such cards for payment of goods and services. There are two Credit Card Associations – Visa’s and MasterCard’s.
5. Card Issuer is a financial institution that issues payment cards and contracts with its cardholders for billing and payment of transactions.

The process can be divided into two parts viz. authorization and Clearing & Settlement.

Authorization:

We understand this by the following example:

Rama is a Credit card Holder who purchases Jewellery worth ` 20 thousand from a Jeweler who accepts both Visa and MasterCard. The card was issued to her by her bank which is ICICI Bank.

1. Once Rama finalizes choosing jewellery, she presents her card to the jeweler who plays as merchant.
2. The Merchant processes the card and the transaction information and requests an authorization from the Merchant Bank which may be ICICI or some other company.
3. The Merchant Bank submits the authorization request to MasterCard or VISA, which plays as Credit Card Network.
4. The Credit card network sends the request to the Card Issuer which is ICICI bank.
5. The Card Issuer approves or declines the transaction.
6. If the Issuer authorizes, the Credit Card Network forwards this authorization to merchant bank.
7. Merchant bank forwards this response to the Merchant
8. Merchant once receiving this authorization completes the transaction.

Clearing and Settlement:

1. The merchant deposits the transaction receipt with the merchant bank.
2. The merchant Bank credits the Merchant’s account and submits this transaction to Credit Card Network for settlement.
3. Credit card Network pays the Merchant Bank and debits the account of Card Issuer.
4. The Card Issuer posts the transaction to the account of Card holder.
5. The cardholder received monthly statement from the Issuer
6. The Cardholder pays as per the conditions.

Size of the Credit Card:

• The shape and size of the Credit and Debit Cards is specified by the ISO/IEC 7810 (ID-1).
• ISO/IEC 7810 is the international standard which defines the shape and size of the I-Cards.
• ID1 is commonly used for banking cards (ATM cards, credit cards, debit cards, etc.).
• ID2 is used only in a few countries.
• ID-3 is used for Passports.
• ID-000 is for SIM Cards.
• The size of the Credit Cards has been fixed by ISO/IEC 7810 (ID-1) as 85.60 × 53.98 mm.

Swipe Card:

Swipe card or magstripe or Magnetic stripe card has a band of magnetic material on the card and is capable of storing data.

• It was first developed by IBM for a US Government security system.
• IBM engineer Forrest Parry is known to have discovered Swipe Card, thanks to his wife (search Google)
• The data on the strips can be read by the most point-of-sale hardware.

Credit Card Number:

The credit Card Numbers are governed by the ISO/IEC 7812 which is a numbering system for the identification of issuers of cards that require an issuer identification number (IIN) to operate in international, inter-industry and/or intra-industry interchange.

• The Length of the number is from 14 to 19.
• The first 6 digits are known as the Issuer Identification Number (IIN). Out of them, the first 2 or more digits identify the Card network. For example:
  • The card number that begins with 34, 35, 36 or 37 is an American Express Card.
  • The card number which begins with 51,52,53,54 or 55 is a MasterCard.
  • The card number which begins with 4 is a Visa card.
  • 4026, 417500, 4508, 4844, 4913, 4917 are the IIN numbers of Visa electron.