chapter-1 introduction to cards v2

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Chapter-1 Introduction to Payment Cards

Certificate in Card Transaction Life Cycle and Loyalty Management

Confidentiality statement

This document should not be carried outside the physical and virtual boundaries of TCS and its client

work locations. Sharing of this document with any person other than TCS associates would

tantamount to violation of confidentiality agreement signed by you while joining TCS.

Notice

The information given in this course material is merely for reference. Certain third party

terminologies or matter that maybe appearing in the course are used only for contextual

identification and explanation, without an intention to infringe.

Certificate in Card Transaction Life Cycle & Loyalty Management TCS Business Domain Academy

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Table of Contents

Chapter-1 Introduction to Payment Cards ......................................................................................... 5

1.1 Payment Card Concepts..................................................................................................... 6

1.1.1 Secured Loans ................................................................................................................ 6

1.1.2 Unsecured Loans ............................................................................................................ 6

1.1.3 What is a Credit Card? .................................................................................................... 7

1.2 Entities in a Card Program ................................................................................................. 7

1.2.1 Credit Card Terminologies ........................................................................................... 10

1.3 Types of Cards ................................................................................................................. 13

1.3.1 Types of Cards with respect to technology used ........................................................... 15

1.4 Anatomy of Cards & Types of Cardholders ....................................................................... 17

1.4.1 Types of Cardholders ................................................................................................... 18

Summary ........................................................................................................................................ 20


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List of Figures

Figure 1 Benefits to parties involved in card transaction .................................................................. 10

Figure 2 Classification of Payment Cards on Technological basis .................................................... 15


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Chapter-1 Introduction to Payment Cards

Introduction

This chapter gives very generic information about payment cards. The chapter begins with a kind of

loans that are available, there by drawing a parallel line between the type of card and the respective

type of loan under which this can be grouped. With this introduction, the chapter takes the reader

through various entities that are participating in cards business, common terminologies that are used

across payment cards industry. Then the discussion turns around the various types of cards that are

predominantly available in the market.

Learning Objectives

At the end of this chapter, you would have learnt about-

Concept of Payment Cards

Entities in a Card Program

Card Terminologies

Types of Cards and types of cardholders


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1.1 Payment Card Concepts

The payment cards have become lifeline of consumers and vital source of revenue for banks. In this

chapter you will be introduced to the concept of payment cards and how cards are one kind of

unsecured loans. We shall also see the entities involved in the card operations business, types of

cards, terminology generally used in cards, and know-how about the technology in cards.

Before we understand the concept of credit cards let us understand what is a secured and an

unsecured loan.

1.1.1 Secured Loans

Secured loans are the most accepted way for financing large sums of money. Secured loan is a debt

classification in which the lender has every right on the asset that is being purchased. For example,

in a home loan the borrowers home will be kept as a collateral. This implies that, if a customer enters

into a secured loan agreement and fails to make payments, the bank or lender can repossess the

home.

In secured loans, borrower can take the loan using a co-signer who then becomes liable to make the

payment if the borrower is unable to. Some examples of secured loan are Home Loans, Vehicle

Loans etc., usually the interest rates of secured loans are lesser than unsecured loans and the

borrowers of secured loan may also get the benefit of extended repayment period. This again

depends on the credit rating and timely payments of installments by the borrower.

1.1.2 Unsecured Loans

As the name indicates, these are the loans offered to borrowers without taking any asset as security

or collateral. This is nothing but a form of debt independent of any underlying asset or security. Since

they are unsecured, the interest rates are bit higher compared to secured loans as the risk of loan not

getting paid back is higher.

Example: Credit Cards. Credit cards are issued to customers who gets a line of credit and are charged

interest only on the used component. For example: if the credit limit granted to a cardholder is $500

(credit limit depends on some important factors like credit rating of the borrower, income level, past

loans repayment history etc.,) and the card holder uses the card to an extent of $200 in a given month,

the interest will be levied only on this $200. (Assuming that the cardholder has not paid this balance

and carried forward it to the next billing life cycle).


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1.1.3 What is a Credit Card?

A plastic card used to make payment for the purchase of goods and services and cash withdrawal

within given credit limit. Cardholder pays the amount used to the card issuing company within 15 to

30 days credit period (depending on card issuer terms and conditions) from the date of statement

generated. Merchant is paid by the card issuer within 1 to 2 days from the date of transaction. There

is option for a cardholder to pay Minimum Amount Due and carry forward the rest to the next billing

cycle. In such cases, interest is levied on the whole balance (minimum amount due paid will not be

deducted from the balance while calculating interest rate)

Credit card gives the flexibility of buying products and services anytime, anywhere. Merchant and

the cardholder need not necessarily know each other, since the credit risk is borne by the card issuer

and issuer guarantees the payment to merchant on behalf of the cardholder. As discussed earlier,

issuing credit card with a predefined credit limit is done based on the credit rating/credit score of the

customer.

To explain in a lucid manner, the payment process involved in credit cards the cardholder uses the

card at a merchant location, merchant is paid by the card issuer after deducting applicable charges,

merchant prepares a credit card statement and sends to the cardholder and finally cardholder pays

the bill amount to card issuer.

Thus, credit card

Is a form of unsecured loan with a concept of Buy Now and Pay Later

Issued by bank or a financial institution to individuals after obtaining their credit report.

Since an unsecured loan, carries higher interest rate in case the balance is not paid in full.

The first real credit card was issued in 1951 by Franklin National Bank in New York.

1.2 Entities in a Card Program

Multiple entities involved in a card program and transaction life cycle are:

Issuing Bank/Card Issuer

Cardholder

Merchant Bank/Acquiring Bank/Acquirer

Merchant Establishment

Payment Card Association (Visa, MasterCard)

To understand the entities involved in a credit card transaction, lets look at some examples:


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Mr. A is not comfortable carrying large amount of cash in his wallet and is looking for an alternate

medium which is easy to carry and is equivalent to cash. His friend advises him to opt for a credit card,

which is easy to carry, is a replacement for cash, and is widely accepted by most merchants. Mr. A

goes to his bank (Best Bank) and fills out the credit card application form. The bank does some

background checks and based on the good past credit history of Mr. A, they issue a credit card to Mr.

A.

In the above example, Mr. A is the Cardholder and the bank (Best Bank) which issues him the card is

called the issuing bank.

Now lets look at a different example:

There is a shop by the name One Stop Shop. This is a departmental store that is known to sell

everything that a person requires under one roof. The shop has a turnover in millions every day. The

shop owner is finding it difficult to maintain his cash accounts and balance the cash amount at the

end of every day, not to mention the hassle he has to go through every morning to go to his bank

(Happy Bank) and deposit the previous days cash collection. One day when he goes to his bank, his

bank manager suggests that the shop should start accepting the credit card / debit card as a mode of

payment, so it will reduce a lot of hassle for the shop owner. After giving this a thought, the shop

owner agrees, and gets the bank to install the necessary devices in his shop to start accepting the

payments by credit cards.

In this case, the shop named One stop shop is the merchant establishment and the bank he has a

tie up with in order to accept and hold all credit card payments made to his shop is called the

acquiring bank.

Now one day, Mr. A goes to One Stop Shop and buys some new furniture for his house. He uses the

credit card given by Best bank to make the payment and One Stop Shop accepts the payment. The

obvious next step is that the One Stop Shop should get the money for the transaction done by Mr. A,

and this shop has no direct relationship with Best bank to collect the money. This is where an

intermediary entity comes into the picture and this entity is called the Payment Card Association (or

simply association). Both best bank and Happy Bank are members of the Association. The association

makes sure that the money from Best bank is collected and given to Happy Bank.

With the above understanding, we can look at the technical definitions for each of these entities:

Issuing Bank - A Bank, which is a member of an association (Visa / MasterCard) has arrangement with

a particular association to issue credit card under its brand name. In simple terms it refers to the bank

that issues the credit card. e.g. Citibank, Standard Chartered Bank, American Express, etc.

Card Holder - A person to whom a card is issued by the issuing bank for his/her usage as a payment

solution within the assigned credit limit.


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Acquiring Bank - A Bank which is a member of an association (Visa/MasterCard) and has

arrangement with associations to settle the card payments. Acquiring members have tie-up with

merchant establishments to acquire card payment transaction at a discount rate and pay the

transaction amount to merchant establishment. In other words, the merchant / service providers

bank is referred to as the acquiring bank.

Merchant - Commercial establishment / vendor, who accepts card payments and has settlement

arrangement for such transactions with an acquiring bank.

Association - An international body, which facilitates settlement of all international / domestic card

payment transactions between Issuer and acquirer. These associations have electronic

infrastructures that enable the payment system to work from the point of sale to the customer's

account.eg. Visa, MasterCard.

A credit card offers a wide range of benefits to all involved as given below:


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1.2.1 Credit Card Terminologies

Before we go into the details on the various aspects pertaining to credit cards, it is important to

understand certain commonly used terminologies:

i. POS Point of Sale This refers to the merchant location where the payment for a purchase

of a good or service is made. Eg. Shoppers Stop, Food world, Raymonds, etc

ii. EDC Electronic Data Capture Machine The machine/device where the card is swiped which

is used to capture the card and transaction details for any sale made. It reads the magnetic

stripe, wherein the details of the card as well as the cardholder are captured. The data that is

captured on the EDC are the card number, cardholder name, expiry date, transaction date,

transaction value.

iii. Manual Imprinter (Slug in) -The Imprint of the front and the back panel of the card is taken.

Manual authorization has to be taken by the Merchant with the Issuing Bank.

iv. CVV/ CVC Card Verification Value / Card Verification Code A 3 digit code thats generated by

the card system to uniquely identify a card.

v. MOTO Mail Order or Telephonic Order Any purchase thats done online or over the phone.

The cardholder is physically not present at the merchant location. Hence these types of

transactions are also known as card not present transactions.

To Merchant

- Increased Sales

- Established Credit

- No collections

- Easier accounting

- Promotions to a Target Group

- Visa or MasterCard brand

identification

To Customer

- No Cash / No Account / Hassle Free

- Established Credit worthiness

- Credit Period

- Easy accounting

- Product benefits

- Facilitates internet/mail order shopping

To Banks

- A cut in the transaction amount

- Fees

- Charges

- Means to sell other products

Figure 1 Benefits to parties involved in card transaction


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vi. KYC Know Your Customer A policy by which the issuer does some checks on the cardholders

to assess their credit worthiness and background.

vii. MID Merchant Identification Number Unique identification number assigned by the

Acquiring Bank to each merchant.

viii. TID Terminal Identification Number - Unique identification number assigned by the Acquiring

Bank to each merchants terminal / EDC machine

ix. EMV Card (EuroPay, MasterCard, Visa) It refers to the chip card that was introduced by the

three associations.

x. MCG Merchant Category Group There are different types of merchants who accept credit

card as a mode of payment. These merchants are divided into different categories based on

the type of business they operate in. E.g. Airlines, Hotels,

xi. MCC Merchant Category Code This is a unique code assigned to a group of merchants who

fall in a particular category, e.g. 5944 refers to jewellery stores, 6010 refers to ATM, etc

xii. Balance This refers to the amount that is spent by the cardholder and needs to be paid up

to the issuing bank after each statement.

xiii. Charge slip A physical paper slip which contains the transaction summary details like card

number, transaction date, transaction amount, cardholder name, authorization response

code. This slip is generated by the EDC machine and is manually signed by the cardholder as

a sign that he has performed the transaction.

xiv. ME Merchant Establishment Refers to any merchant / vendor who accept a credit card as a

mode of payment.

xv. SDN Specially Designated National Refers to the entities who have been put on the

negative list by various agencies/ Governments

xvi. Cash and Credit Limit

The total amount for which the cardholder can make purchases through his credit card is

known as credit limit.

The amount which the cardholder can withdraw on his card as cash is known as cash limit.

This is a specified percentage of the credit limit. This is a sub set of the credit limit.

xvii. Open to Buy (OTB) - The credit amount that is available to a cardholder at any point of time

on his credit card. After each transaction is performed the OTB is reduced by the amount of

the transaction.

(Ex.) Total credit limit of a credit card - 50000 INR

The cash limit - 5000 INR

The Card holder purchases a Air conditioner worth 20000 INR & he withdraws 2000 INR

through his credit card for meeting some emergency


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The OTB is 50000 20000 - 2000 = 28000 INR

xviii. Interest Rates

A. Annual Percentage Rate- APR is a measure of the customer's cost of credit, expressed as a yearly

rate. There are two basic categories of APRs. They are Variable and Non-variable

a) Variable Rates- Some credit card plans allow the bank to change the annual percentage rate

on an account when economic indicators (called indices, such as prime rate, rate of interest

on treasury bills, or other national financial indicators) change. Because the rate change is

linked to the performance of an index that may rise or fall, these rates change when the index

changes. Rate changes affect the interest charges a customer pays on his or her account. If

the credit card has a variable rate feature, the bank must disclose to the card holder:

- That the rate may vary and how the rate is determined,

- Which index is used,

- What additional amount (the "margin") is added to the index to determine the new

rate, and

- How much and how often the rate may change.

b) Non-variable Rates- Non-variable rates, also referred to as fixed rates, are not tied to any

indicator. These rates will remain at the same percent for either a fixed period of time or until

the change of the terms on the account. In general, the lower the rate is, the shorter the time

it remains in effect. This is true because non-variable rates cannot be readily changed in

response to economic conditions. They are therefore more of a risk to the issuer.

B. Periodic Rate

The periodic rate is the rate that is applied to the customer's outstanding account balance

to calculate the interest charge for each billing period. Depending on the account terms, the

periodic rate may be daily or monthly The periodic rate is determined by dividing the APR

by either the number of days in a year (for daily periodic rates) or 12 (for monthly periodic

rates). The example below shows the daily periodic rate for a 12.99% APR.

12.99% / 365 = 0.035589%

C. Daily compounding

The previous day's interest charges are computed and included in the ending balance owed

for the purpose of calculating the interest charges for the current day.

For example, on day one of the billing cycle, an account has an ending balance of

$74.00. The interest charges for that day total $0.026. On day two, provided the customer

makes no purchases or payments, the ending balance (for the purpose of calculating interest

charges) will be $74.03 ($74.00 from day one + $0.026 for day one's interest charge).


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Even though the interest charges are calculated this way, the interest charges themselves are

not actually a part of the account balance until the billing cycle closing date.

1.3 Types of Cards

The commonly available types of credit cards are given below:

a) A debit card is a plastic card with a magnetic strip that can be used by a consumer as a means

of payment. Unlike a credit card, there is no line of credit; the debit card is linked to your

savings / checking account. Transaction performed on a debit card is directly deducted from

the bank account it is associated with.

b) Credit card/Bank card

It is Use now, pay later financial product. A specified credit limit is assigned to the card

c) An unsecured credit card is like a debit card except that it is linked to a line of unsecured credit

with a bank. Credit cards are billed monthly, with a grace period built in that lets the

consumer borrow short term credit between the time they make the purchase and when it is

due, and balances can be carried over from month to month with interest.

d) A secured credit card is more like a debit card than an unsecured credit card because you have

to deposit funds into your secured credit card account. Funds charged to a secured credit card

are deducted from that balance. Secured credit cards, often have high fees because they are

designed for low credit score customers who need them to rebuild their credit. An example

for this is the Prepaid Card

e) Corporate Card These are credit cards that are offered to the employees of large corporate

to fund their official expenses such as travel, accommodation and other business expenses.

The two main types of corporate cards are Travel and Entertainment cards (T&E Cards) and

Purchase Cards (P Cards). T&E cards are used mainly for travel related expenses such as flight

bookings, hotel bookings, restaurant charges, cab charges, etc. P-Cards are used to make

payment for any office related procurements such as computers, stationery, raw materials,

etc.

f) Charge card- - Its very similar to the credit card but the cardholder has to pay the charges

in full.

- There is no partial payment associated with the charge cards.

- Partial payments can result in heavy late fee, restriction of future card transactions

and even cancellation of the card itself. e.g Diners card

g) Affinity cards

Banks tie up with various institutions to issue these cards where certain percentage of

purchase through this card goes to charity. E.g WWF, CRY, Indian National Army


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h) Private Label cards

A private label card is a plastic card issued by financial institutions on behalf of a merchant or

organization to their customer for the purchase of goods or services from that merchant

or organization.

i) Smart Cards

It is a plastic card carrying an embedded chip. The smart card stores encrypted and

confidential information. Using the chip the cardholder can authorise any transaction on his

card by keying in a secure PIN.

j) Co Branded Cards

Co-Branding helps a bank in adding to its card base. Co-branding is a process where two or

more facilities are combined in a card with added benefits. Here, the Bank and Merchant

Establishment join together and issue credit cards. Co-branded cards use reward

programmes and special offers such as rebates and discounts to attract new customers. E.g

Citibank & Jet Airways, ICICI Bank & HP card.

k) Virtual Cards

These are cards for which plastics are not issued. The issuing bank provides only the card

number, expiry date and CVV to the cardholder. These cards are normally given to corporate

who in turn provide these card details to their large suppliers as a mode of payment. For any

expense incurred, the supplier charges the amount to the card instead of raising separate

invoices for payments.


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1.3.1 Types of Cards with respect to technology used

Figure 2 Classification of Payment Cards on Technological basis

1.3.1.1 Magnetic Cards

Magnetic stripe cards basically have magnetic stripe on the back of the card. These cards

have less information storage capacity as compared to smart cards. The length of a magnetic

stripe is around 4 inches and it consists of three tracks. Total data carrying capacity of a

magnetic stripe card is just 900 - 1000 bits.

Example Charge cards, ATM cards and debit cards usually used in India are magnetic cards.

1.3.1.2 Smart Cards-

A Smart card consists of small microchip with memory embedded into a plastic card. Smart

cards are also called chip cards. These cards are more secure than magnetic cards and

provide multipurpose solutions. Smart cards should comply with ISO 7816 standard.

Did you know? Smart card was invented in 1970 by Roland Moreno of France.

Smart Cards can be divided into 3-sub categories-

Contact CardsThese smart cards require a contact between the card and card reader. These

cards are used extensively in different functional areas


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Example Access cards, driving license cards, medical record cards etc.

Contact-less Cards -These cards are advanced than contact cards. Contact less cards only

need a card to come into close proximity of the card reader to read the stored information

from short distance. These cards are more secure and faster than contact cards as the

cardholder need not handover the card.

Example Access cards used by TCS employees.

Combi Cards -These are hybrid cards which can be used with contact or without contact.

Basically these cards have two microchips one for contact interface and other for contact less

interface Their main advantage is that we can use single card in multi ways, such as credit

card, bank card, membership card, ID-card, etc., all in the same card.

Did you know? Combi - card technology was developed by Japan and Korea in Asia.

Smart cards can also be categorized in two ways-

Memory Card-Memory cards contain only non-volatile memory storage components and

provision for security.

Microprocessor Card- Microprocessor cards comprise of memory and microprocessor

component. Microprocessor can perform complex calculations. It has tamper-resistant

properties i.e. a secure crypto-processor, secure file system, and ensure confidentiality of

information in the memory.

Biometric Card It uses unique human physical or behavioral characteristics to verify

the identity of the individuals. There are different physical or behavioral

characteristic such as finger print impression, voice authentication, eye etc which can

be used for authentication purposes.

Did you know? Wal-Mart does payments 70% faster than traditional form by using biometric

cards.


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1.4 Anatomy of Cards & Types of Cardholders

We will learn about what a credit card is made up and the various parts on it. A card is made up of

plastic containing information both on the front and the back

A. Card Number

Normally each card has a 16 digit card number assigned to it. This is the 16 digit number present in

the Front panel of the card.

The 1st digit signifies the Association

- 5 for MASTERS

- 4 for VISA, and

- 2 for AMEX

- 3 for Diners

Digits 1-6 signify the BIN

- BIN is the Bank Identification Number. This is a unique number thats assigned to

each bank.

- BIN is useful for the purpose of identifying the bank in case of transaction

authorization as well as settlements.

Digits 7-15 are randomly generated sequence of numbers.

Digit 16 is a check digit derived from the previous 15 digits based on certain algorithms.

The number of digits on a credit card can range from 13 to 19 digits.

B. Magnetic 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. There are three

tracks on the magstripe. Each track is about one-tenth of an inch wide. The credit card typically

uses only tracks one and two. Track three is a read/write track (which includes an encrypted PIN,

country code, currency units and amount authorized), but its usage is not standardized among

banks. The information on track one and two includes the following:

- Primary account number - up to 19 characters

- Country code - three characters

- Name - two to 26 characters

- Card Expiry date

- Longitudinal redundancy check (LRC) - LRC is a form of computed check character.

In simple terms, the data present on the front panel of the card and the Card Validation Code1 (CVC1)

are stored in the Track 1 and Track 2 respectively of the Magnetic Tape Stripe.


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C. Card Verification Value / Code (CVV / CVC) or Card Security Code (CSC)

CVC1 is a three digit security code which is read by the EDC (Electronic Data Capture) machine in

the POS 90 transaction (cardholder present) mode

CVC2/CVV is a 3 digit security code which is present in the signature panel of the card. This is

used in transactions that are done on the internet or by phone. The Issuer validates the ingenuity

of the card holder doing the non-face to face transaction. It is considered to be of utmost

importance in case of non-face to face transactions such as Mail Order, Telephone Order, E-

Commerce etc.

The Card Security Code (CSC), sometimes called Card Verification Value or Code (CVV or CVC), is a

security feature for credit or debit card transactions, giving increased protection against credit card

fraud. There are actually two security codes - The first code, called CVC1 or CVV1, is encoded on the

magnetic stripe of the card and used for transactions in person.

In the card-not-present sales environment, CVV2 is an excellent tool for verifying that the customer

has a legitimate Visa card in hand at the time of the order.

The Card Security Code is located on the back of MasterCard, Visa and Discover credit or debit cards

and is typically a separate group of 3 digits to the right of the signature strip. On American Express

cards, the Card Security Code is a printed (not embossed) in a group of four digits on the front towards

the right.

D. Expiry Date

This is the period till when the credit card is valid. It normally has the month and year when the card

will expire. Normally, the credit cards have an expiry period of 3 to 6 years.

1.4.1 Types of Cardholders

Primary Card Holder

It is the person to whom the card has been issued by the Bank. A specific credit limit is assigned to

the card.

Add on Card Holder

A complimentary card offered to the person nominated by the primary card holder. It is restricted to

family members such as parents, spouse and children. The credit limit assigned to the card is less than

the limit of the primary card holder. The responsibility to pay the due amount is on the primary

cardholder.

Authorized User (AU )

In addition to providing an add on card to ones relatives, in some countries a cardholder has an option

to nominate some third person to use the cardholder account. This Authorized User (AU) is a

customer who is authorized by the primary customer or joint, either orally or in writing, to use the

account, has access to all account information, has a card embossed with his or her name, does not


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have the ability to perform certain functions on the account that will affect the credit of the primary

or joint, has account history reported to the credit bureaus, and can have his or her name removed

from the account. There can be up to ten authorized users on a single account.


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Summary The payment cards (or credit cards to be specific) have become lifeline of consumers and vital

source of revenue for banks

Secured loan is a debt classification in which the lender has been given a portion of the rights

to a specific property usually the borrowers home as collateral

If a customer enters into a secure loan and fails to make payments for that loan, the bank or

lender can repossess the collateral

Unsecured loans were developed as an alternative to the secured loans. Its a debt thats not

tied to any piece of property or real estate

Unsecured loans are more costly than the secured loans.

The rate of interest charged from an unsecured loan client is higher because of the larger risk

of not getting paid back

Credit history is a record of payments an individual does to settle the credits made and also

develop good credit behavior

Lenders prefer the borrower to have a good credit history because they do not have any

collateral to fall back on in case of unsecured loan

The dictionary defines credit card as - 'A card which can be used to obtain cash, goods or

services up to a stipulated credit limit. The supplier is later paid by the credit card company

which in due course is reimbursed by the credit card holder who will be charged interest at

the end of the credit period if money is still owing.'

A credit card generally works by giving its holder an immediate authority to purchase services

and goods such as travel and hotel reservations as well as shopping for merchandise in and

outside his own country

Issuer, Acquirer, Cardholder, Merchant and Payment card associations are the various

entities involved in card business

Magnetic cards basically have magnetic stripe on the back of the card. These cards have less

information storage capacity as compared to smart cards. The length of a magnetic stripe is

around 4 inches and it consists of three tracks

A Smart card consists of small micro chip with memory embedded into a plastic card. Smart

cards are also called chip cards.


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Smart cards are more secure than magnetic cards and provide multipurpose solutions

Smart cards are of two types contact cards and contact less cards

Combi cards are hybrid cards which can be used with contact or without contact

Cardholders are classified as Primary cardholder, Add on cardholder and Authorized User

chapter-1 introduction to cards v2

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