credit cards and rbi guideliness on credit cards

8/7/2019 CREDIT CARDS AND RBI GUIDELINESS ON CREDIT CARDS

1/83

CREDIT CARDS AND RBI GUIDELINESS ON CREDIT CARDS

1

EXECUTIVE SUMMARY ON CREDIT CARDS AND RBI

GUIDELINESS

A credit card is a system of payment named after the small plastic card

issued to users of the system. A credit card is different from a debit card in

that it does not remove money from the user's account after every

transaction. In the case of credit cards, the issuer lends money to the

consumer (or the user) to be paid to the merchant. It is also different from a

charge card (though this name is sometimes used by the public to describe

credit cards), which requires the balance to be paid in full each month. In

contrast, a credit card allows the consumer to 'revolve' their balance, at the

cost of having interest charged. Most credit cards are the same shape and

size, as specified by the ISO 7810 standard.

OBJECTIVE OF THE STUDY

y To study about the credit cards and RBI guidelines on credit cards.y To analyze the implementation of credit cards process in banking

sector.

y To study the profile ofICICI BANK andTHE INDIAN BANKandstudy their functions performance of credit cards.


2/83


2

IMPORTANCE OF CREDIT CARDS

Credit cards are a very important part of life. Credit cards are important

because they give you the ability to pay for items and necessities when you

dont have the cash or money. If you find yourself in hard times or strapped

for cash applying or using a credit card may be your only choice. However,

it is very important to keep in mind that with these terms comes ultimately a

lot of responsibility. It is important to keep your credit score in mind when

applying for a credit card. The better your credit is and the more you have in

savings and cash, the more likely you are to get a credit card with better

terms, lower fees, and a lower interest rate.

With lower fees, terms, and interest rates you are insuring yourself that you

will pay less in the long run and be paying for ultimately the cash that you

borrowed. To make sure that this happens you should extensively research

the cards that you are thinking about getting. By doing this, you will get a

card that fits you and your lifestyle. The card that fits you, your spending

habits, and your lifestyle is the smartest card for you because it will make

sure that you will get everything that you need in a credit card. Credit cards

are a vital part of everyday life.


3/83


3

RESEARCH METHODOLOGY

Research Methodology is the technique of collecting the data sources for

doing the project, i.e. primary datas and Secondary datas.

Primary data:-

Primary datas had been adopted by informal interviews to the Branch

manager. OfThe Indian bank and ICICI bankand some handbooks of

their branch related to my topics.

Secondary data:-

Secondary datas are adopted by collecting the informations from different

books, websites of banking sector and especially The Indian bankand

ICICI BANKwebsites and current news from newspaper, the name the

secondary data had been specified in the Bibliography.

LIMITATIONS OF THE STUDY

The topic ofCREDIT CARDS AND RBI GUIDELINESS ON CREDIT

CARD is a vast topic. Thus, I selected THE INDIAN BANK AND

ICICI BANK to limit my study and to learn and acquire knowledge about

the entire system and CREDIT CARDS AND RBI GUIDELINESS ON

CREDIT CARDS in a specific branch ofTHE INDIAN BANK, TILAK

NAGAR BRANCH AND ICICI BANK, ODEON, GHATKOPAR (E).

By utilizing that information. I have completed my project.


4/83


4

CHAPTER 1


Introduction to smart cards:-

Progress is being made towards developing standards for the newer payment

instruments like SMART cards. A pilot project on SMART cards technology

in India institute of technology, Mumbai to find out the viability and use of

SMART CARDS as retail payments instruments within the country. It came

out with a set of recommendation on SMART cards standards .With a view

to examine these recommendations and to determine the standards for the

banking industry the Reserve Bank in September 1999 set up a

WORKING GROUP to study and recommend a SMART card based

payment systems standards . The working group submitted its report to

reserve bank in January 2000 and they were accepted by reserve bank.

Smart cards looks like plastic card contain a small microprocessor or

computer chip on the face of the card. Smart card is actually a debit card

loaded with sum of money. It can be used for both small payments and

prepaid telephone cards. Such a card facilities small purchases with exact

change i.e. cup of coffee or tea, a newspaper , bus, railway fare etc. n

finalizing the purchases submit the smart card to merchant outlet .the

merchant establishment need a special device to transfer the money from the

smart cards. The moment the card is inserted to the merchant.


5/83


5

Introduction to credit cards:-

In India commercials banks, introduced the credit card facility in the early

eighties. Credit cards are a convenient medium of exchange. It is a cute card

made of plastic .It has method of identification or a stamp size photo of the

card holder. It authorize the holders to charge goods and services to his

account for which he is billed. Credit cards are otherwise called plastic

money. The most important difference between a credit card and a debit

cards is while credit cards is a post paid one the latter is pre paid.

Credit cards are designed to reduce the use of either cash or cheque

for transactions. It enables a customer to purchase goods or services within

prescribed limits from certain authorized retail and services establishments

without making immediate cash payments. The customer thus possessing a

credit card need not carry any cash and is empowered to spend wherever and

whenever he wants goods or services with his credit cards within the limits

prescribed by his banks. It reduces the physical movement of cash and

enables to transfer money electronically.

The customer can avail the credit card facility only in those

establishments, which accepted them. After purchase of goods or services,

the customer will hand over the card to the supplier\seller who swipe the

card in an electronic terminal, which read the cardholders name, card

number etc.on accepting the card by the machine, the supplier records the

amount of the transactions in the machine. The imprinter of the machine

print a sales voucher showing the card holders name , card number, card

type, name of business establishment ,transaction id, invoice number,

amount transaction etc. the holder signs the voucher and the signature is


6/83


6

cross checked by the suppliers with that of the specimen signature on the

card.

The signature voucher is then sent to the bank, which pays it after

deducting its service charges. Once in a month the bank sends a statement of

all the credit card purchases in the previous month to the credit card holder

and the latter has to remit the amount either by cash or cheque. Credit cards

statement will be dispatched on a particular date in every month free of cost

in the mailing address of the cardholders or online. The monthly bill amount

can be remitted to the bank either totally or in installments under the

revolving credit facility scheme. If revolving credit facilities are granted by

the bank for the payments of the bill amount, the bank charges interest for

the outstanding balance. The business establishments will receive the money

from the institutions operating the plan either in the same day or in the next

day.

Credit cards are generally issued by the banks only to those prompt

customers having either savings or current account .the bank should issue

cards to its customers only having good financial standings , with

satisfactory records of accomplishments. The credit limit or purchasing

power is fixed by the bank issuing the cards. On the basis of credit limits

bank issues different types from bank to bank. The bank assumes the risk

and responsibility of collecting the dues from the customers and they permit

cardholders a cash advance facility from its branches. The upper-limit of

the cash advances facility will be fixed by the banks.

Banks, which issue cards tie up with the international organizations

like masters, visa, maestro, cirrus, American express, diners, discover etc.

that issue credit cards. Card issuing banks gives a service charge to the card

issuing international organizations. While certain banks issues credit cards


7/83


7

free of cost to customers, some other banks charge a small amount from the

customers as annual service charges. Loyalty bonus is also given by banks to

their customers for encouraging bulk purchases using credit cards by them.

Usually the card issuing institutions supply a guide or booklet with the card

containing detailed terms and conditions, risks, on the account when the card

is lost or misused and other relevant information with regard to the usage of

the card.

Credit cards:

Money as a medium of exchange brought convenient changes in the

payment mechanism. With the introduction of paper currency the payments

are made easy to undertake major transactions. Credit card emerged recently

into banking systems as an instrument of convenient payments for the banks

customers who hold the card. Credit cards also entered into developing

countries like India and supplementing the payments mechanism

in routine life.

Meaning:-

Credit card as a part of payment system. It is issued to the users of the bank

payments system. The issuer grants a line of credit to the user. Most credit

cards are issued by banks. Credit card is a small plastic card that contains the

identity and signature of the holder is billed periodically.

A credit card is token issued by bank that represents an account that

extends credit to consumers to make payments to the traders.


8/83


8

DEFINTIONS:-

Any card issued by a bank even a nontraditional bank that accesses

customers financial resources.

{American bankers association}

A plastic card that allows it is holder to buy goods and services on credit

and to pay at fixed intervals through the card issuing agency.

{Natarajan & Parameswaran}

A card establishing the privilege of the person to whom it is issued to

charge bills.

{Banking terms}


9/83


9

CHAPTER 2

BRIEF HISTORY OF CREDIT CARDS

Credit cards originated and developed in USA and are more popular in USA

payments systems especially in e-payments. Credit cards were introduced in

1920s when the oil companies issued small tokens to customers to purchase

oil in company outlets. The first universal card issued by dinners club, USA

in 1950. Later bank credit cards entered the markets.

For the first time at national plan, the bank of America issued bank

Americard in California in 1958. it has its overseas affiliates, eventually it

evolved into visa systems . Master card entered into the market in 1966

when group of credit card issuing banks established master charge in 1969

the Citibank merged its everything card and gave significant, popularity to

master card globally. In 1966 Barclay bank UK issued first credit card

outside the US.

FEATURES OF THE CREDIT CARDS:-

Credit cards are the same size as specified by the ISO 7810 standard. The

card is small size with information on both sides. On one side it consist of

the logo of issuing bank, EMV chip, hologram ,credit card number, card

band logo, expiry date, card holders name. On the reverse side magnetic

stripe, signature stripe and security code will be given.


10/83


10

ISSUING OF CREDIT CARDS:-

To obtain credit card from the bank, customer has to apply in the prescribed

application from to the bank. He has to give details of name, occupation,

address, income, bank account number etc.along with proof of regular

income. The bank scrutinizes the application. If the banker satisfies with the

credit worthiness of the applicant, the bank issues the card. While issuing the

card the issuing bank sanctions the credit limit Up to which the card holder

can obtain credit. Bank covers the administrative costs from the service

charges and interest collected from card holders.

Parties involved in credit card transactions:

1. Card holder who uses the card to make purchases. He is the bankcustomer or consumer of card issuer.

2. Card issuing bank; the bank or the other organization that issues thecredit card. This bank bills the customer for repayment.

3. Merchant or seller who accepts credit card payments for products andservices sold to the cardholder.

4. Acquiring bank that accepts payments for the products or services onbehalf of the merchant.

5. Credit card association: an association of card-issuing banks such asVisa, master card etc. this association sets transaction terms for

merchants, card issuing banks and acquiring banks.


11/83


11

STEPS IN CREDIT CARD TRANSACTIONS:-

The transactions between the card holder and the trader through the banks is

always coordinated by card association .this is known as interchange. It

consists of the following:-

1. Purchases: the credit card holder (consumer) visits a shop andpurchases products or services and gives the card to the seller.

2. Authorization: the seller submits the transactions to the acquiringbank. The acquirer verifies the credit card number with the card

issuing bank etc. it also verifies card holders credit limit. The bank

gives approval code, which the trader stores with the transaction.

3. Batching: authorized transactions are stored in batches. They are sentto the acquirer.

4. Clearing and settlement: the acquirer sends the batch transactionsthrough the credit card association .the association debits the issuers

for payments and credits the acquirer. The issuer pays the acquirer for

the transaction.

5. Funding: now the acquirer pays to the merchant after deducting foefor processing the transaction.

6. Charge back: a charge back is an event in which money in themerchant account is held due to a dispute relating to the transaction

charge back is usually initiated by the card holder.


12/83


12

ADVANTAGES OF CREDIT CARDS:

Three parties are involved in credit card transactions.

1. consumer, the card holder2. merchant ,the seller of product or service3.banker

All these three gain some benefits out of credit card transactions.

1. Customers:bank credit cards are issued to the customers of issuingbank. they gain the following benefits;

y Important advantage to the customer is that he can purchasegoods and service without paying cash immediately. He will be

given one month time to pay back to his bank.

y A credit card is more convenient to carry and use whencompared to currency or cheque.

y Risk of dealing with cash such as storing, carrying and also thepayment risks can be reduced by using credit card.

y Card holder can purchase goods from different outlets withouttaking cash with him. This is the most useful function in times

of emergency.

y Card holders have facility to obtain cash on credit cards in timeof short term emergency needs so that it saves card holder from

embarrassing situation.

y For this type of revolving credit the customer need notapproach the banker every time and apply for loan .this facility

motivates bank customers to hold a credit cards.


13/83


13

y If the card is misused by the other, it loss will be to the extentof its value.

y Credit card can also be used for mail order shopping. Under thefacility customer selects items from order for the selected items.

He makes payment using credit card.

y Credit cards sales and purchases are perfectly recordedincluding date, time etc. all the transactions are reported to the

bank and bank prepares the statement. Such records are useful

to the customers for record keeping and support him if there are

disputes in future.y One attractive advantage to the card holder is that he need not

use his personal fund. The card permits loan facility. Due to this

benefit many prefer to take a card.

y Using the card requires simple procedures:-y Credit card issued recently by different banks carry additional

benefits such as insurance coverage , special discounts on some

items in selected shops , concessions in services etc.

y Credit cards are accepted in all small and big shops, hotels etc.

A credit card and its features:-

Having described how the transaction using a credit card works lets us see

what a credit card is and understand its features.

A credit card facility can be defined as one where the issuing bank provides

the customer access to payment services and a pre approved line of credit

usually for a time period, which is predetermined .this would enable the


14/83


14

cardholder to make transactions now, and make payments later to banks. The

issuing bank charges the customer a joining fees as well as an annual fee for

each year the credit card services are used.

The structure of the card number varies with the system .for example,

American express cards start with number 37, carte blanche and diners club

with38. Other details are as follows:-

American express: - digits three and four are typed and currency digits 5

through 11show the account number; digits 12 through 14 show the card

number within the account and digits 15 is a check digit.

Visa: - digits 2 to 6 show the bank number; digits 7 TO 12 OR 7 TO 15

show the account number and digit 13 to 16 is check digit.

Master card:- digits 2 and 3, 2 to 4 ,2 to 5 or 2 to 6 are banks numbers .digits

after the bank number up to digit 15 are account numbers and 16 is check

digit.

The backside of the card is also important. The stripe on the back of credit

cards is a magnetic stripe; often called a magstripe .The magstripe is made

up of tiny iron based magnetic particles in a plastic like film. The magstripe

on the back of the card is very similar to a piece of cassette tape. ANS

standard X4.13-1983 is the system used by most national and international

credit card systems.

A magstripe reader can understand the information on the three track stripe.

The magnetic stripe is divided into following 4 tracks:-

Track 1:- card holder name.

Track 2:-card verification value (CVV) for visa card, and (CVC) for master

card.

Track3:-the docutal standards, docutal standards are basically used for

approving ATM transactions.


15/83


15

Track4:- individual bank information.

Each track is about one tenth of an inch wide. The ISO/IEC standard 7811,

which is used by banks, specifies that:

Track one is 210bits per inch and holds 79 6-bit plus parity read only

characters.

Track two is 75 bpi and holds 40 4-bit plus parity bit characters.

Track three is 210bpi and holds 107 4-bit plus parity bit characters.

USES OF CREDIT CARDS:-

Benefits of using credit cards are manifold and these are available to all

parties concerned, via the cardholder, the retailer the acquiring bank the

issuing bank and also the network sponsors like visa /master car, etc.

Benefits to the cardholders:-

Benefits ranges from not having to carry cash to making purchases to easy

payment .some of these benefits are listed below:

Convenience: - credit cards offer no hassle shopping wherein no cashcheque or additional identification is needed. Additional care that is

normally needed to protect cash in case travelling etc. is not required

as the credit card cannot be used by the finder as it happens in the case

of cash.

Security:-lost cash can be used by the finder .if the card is lost thecard holder as soon as possible and it will preclude anyone from an

authorized use of card. However different banks may have different

liability policies.

Emergency protection: - A credit card will get the cards holderthrough almost any financial emergency .Its like a security blanket

that will cover him/her in most of situations.


16/83


16

Universal acceptance:-some credit cards are accepted at as many asover 20 million merchant locations worldwide. A personal has no

such acceptance .also in case of cash needs one can get it at ATMs of

banks around the world that accept the parties brand of credit cards.

Simplified record keeping: - Credit cards give you record of all thetransactions for the month so keep track of expenses is easier. Many

credit cards issuing banks gives records of all the transactions made at

the end of the year, consolidated for the whole year from purposes,

etc.

Consumer protection:-while purchasing goods services with creditcards, a card holder will have more clout if a product is not

satisfactory because the card issuer may intervene on the card holders

behalfs. The process takes form of charge book, etc as again this, if

payments is by cash or cheque for an item .the merchant may not be

too interested in making adjustments.

Value added benefits:-many credit cards offer rebate cash refunds,contributes to favorites charity other special value added benefits that

one may not go by paying cash.

Easier budgeting: - with credit cards it is possible to plan to finance amajor purchase and pay it off on schedule that fits ones budget.

Benefits to the retailer: A retail shop can attract more number of customers,

if it offers multiple options of payments like credit cards /cash/cheque. Also

if the retail shop does not accept payment via credit card, but its competitors

do, it could result in loss of business. People tend to buy more with credit

cards. Also acceptance of credit cards means that payment is guaranteed


17/83


17

unlike a bank cheque which may bounce. Hence, credit cards can boost sales

of retailers.

Benefits to the acquiring bank:- The acquiring bank can earn a

commission fee by mediating with retailer. And this also gives the bank a

platform to broaden its banking relationship with retailers.

Benefits to the company issuing:-As a part of the personal financial

services offered to the customers this payments services earns not only an

annual fee for a bank but also generates revenue for every transactions made

by the cardholder. The bank can get more business by cross selling its other

product to the cardholders.

Interest / services charges levied on balance outstanding of credit cards, if

any is higher than the average rate of interest charged on others loan/credit

given by a bank.

Benefits to the network sponsor: - Bank takes membership of sponsors

like visa, master card, etc. to gain access to the network of payment services

offered by the latter. The sponsors earn membership fee income percentage

of commission earned by the acquiring bank for providing clearing services

etc .given the high volume of transactions under the credit card business a

huge amount is earned by all the three parties concerned. The network

provider also charges a fee to the issuing bank for issuing warning listing,

etc.having seen what credit card is, its working and its benefits we now

examine , in brief history of the credit card industry, details of the major

players and the industry compositions.


18/83


18

Brief history, evolution and major players in the credit card industry:-

A prototype of the credit cards which was originally the charge card, was

first introduced in the city of the new York as chargeit in 1946. However

the formal launch of modern credit cards can be traced to Franklin national

bank in New York, in 1951. The year 1976 saw the birth of the trade name

visa that was previously known as the BankAmericard. While master

card was started in 1966 as the InterBankCard Association.

The main players in the industry are visa, master American express. It

should be noted that these players do not issue card directly to the customers

primarily they sponsor a payment network .this payment services network is

sponsored by one of these agencies. A bank or a financial institution desiring

to offer cards to its customers can do so by joining this network on payment

of a membership fee. The banks issue credit cards to the final consumers

with a wide range of benefits. The cardholders carry the card bearing the

logo of sponsors and that of the issuing bank. The further the networks reach

the larger will be the benefits available to the cardholder in terms of wider

acceptance in given ex. cardholder having a SBI credit card of visa can make

transaction all over the world with all retailers who accept visa cards.


19/83


19

CHAPTER3

THE INDIAN SCENARIO

With the onset of financial sector liberalization the Indian market saw an

upsurge in credit cards. The foreign banks in Indian market like HSBC,

Citibank, standard chartered bank and others were instrumental in

popularizing the concept of credit cards in India. However, many of the

major public sector banks like SBI are now taking a lead position in this

industry. incidentally, SBI launched its credit cards in exclusive arrangement

with visa and has tie-up with GE capital to process the back end

transaction.SBI now leads in card issuance thanks to its strong network of

existing branches and customers. Among the private sector banks ICICI

bank.ltd. Tops the list in card issuance with 3.5 million cards. Many of the

public sector and private sector banks have taken a keen interest in card

business in India. Some of the important players in the Indian market are:-

Andhra bank Bank of Baroda Bank of India Canara bank Citi bank HDFC HSBC ICICI SBI CARDS AND PAYMENTS SERVICES Standard chartered bank Vijaya bank Central bank of India


20/83


20

VARIOUS TYPES OF CREDIT CARDS

Credit cards: - a credit card provides consumers with access to a line of

credit .Consumers make payments using their card and receive a bill at the

end of the billing cycle. The card issuer usually demands a minimum

payment against the outstanding balance but, beyond this the customer can

choose how much of the bill he/she wishes to repay. Any balances not repaid

within the interest free period offered by the issuer attracts interest at the

rate stipulated by the card issuer.

Charge card: - Charge cards allow customers to defer the cost of purchases

made on the card until the end of the payments cycle. Accordingly a card

holder has a fixed period to settle the bill in full. A charge card account is

not directly linked to a customers account, be it savings or current

although with most cards it is possible to link the two by means of a direct

debit payments.

Debit cards: - the debit card is directly linked to the savings/ current

account of the customers and hence any transaction automatically leads to

reduction of the balance amount in the account instantaneously. This card

also is used as an ATM card. Visa issues debit card under the brand name of

ELECTRON while master card issues its debit card under the brand

name MAESTRO. In this card, electronic authorization enabled by either

a signature or personal identification number is required for each

transactions. With this authorization, a debit card is ideal for customers with

new banking relationship or for acceptances in countries requiring 100%

electronic authorization.


21/83


21

Affinity card- with affinity card a third party organization an alumni

association or a charity or a museum for example- receives a portion of each

transaction made with the card. Some affinity card partners like professional

sports teams or environmental protection foundation, may also offer perks

like discounts at selected stores or a gift with the first purchase made with

the card. These programmers are generally sponsored by nonprofit

organization, professional and fraternal societies or lifestyles association.

This affinity programmers sponsor receives a percentage of the revenues

generated by usage of the affinity card, so cardholders have a very tangible

way to support the organization.

Co-branded and affinity cards carry the name of the third party on the card

in addition to the name of the bank or financial institution that issue the card

and the card brand. Both co-branded and affinity card offer additional value

from each transaction made with card. The difference is who benefits co-

branded and affinity credit cards not only help one earn, say free air travel

etc. but also help in the support of ones favorites charitable /religious

institution.


22/83


22

SALES AND MARKETING OF CREDIT CARDS

The success of credit cards issuance business will depend on attracting

customers and making them accept a banks credit card. This calls for

substantial efforts in marketing and sales. Given the high level of

competition and multicity of credit cards issuers in the industry, it is

important that banks have an efficient and a strong sales channel. It should

be noted that an increase in customers base does not mean that the business

is saturated as customers can have more than one card. Of late it seen that

people spending amount remains constant the usage of each card is sound to

fall as more and more players enter the markets. It is here that the role of

marketing department becomes important. Various customer loyalty

programmers like bonus points etc. are introduced to make the customers

spend more by promising reward to them for the continued patronage of a

particular credit card. This works in the form of a lock in . For ex:- let us

say, a person has credit card of bank X and he /she get 1 bonus point for

every rs.100 spends on this card, the more chances of him/ her accumulating

bonus points which can be redeemed in return , for some gifts , or it can be

used to pay the annual fees. So even if the customers have more than one

banks credit cards he/ she will be incentivized to use only a particular card

to maximize his /her bonus profit. Thus the customer has been induced/

locked in customers early has benefits of maximum usage on their cards.

Therefore, it becomes difficult for the rival bank either issue card to this

customer or even if a card is issued to him /her to make him/her spend more

with the latter card. This is where creative and new ideas of marketing help

the issuer to not only issue more cards but also to increase spending on the

card which is one of the major revenue earners for the issuers.


23/83


23

In this regard, programmers like free cards, discounts on annual fees,

chances of winning gifts like foreign jaunt, cars, etc are launched by banks

to attract new customers. This leads banks to have tie-up with other leading

organizations to increase their card base as well as card spending. This co-

branded cards and affinity cards are useful to the issuers, customers and the

partners organizations.

There are various channels through which banks try to sell their cards. The

following is an illustrative list of the way sales are done:-

Cross selling to existing customers. Banks in house sales force targeting corporate clients. Use of direct selling agents.(DSAs) Advertisements and endorsements by celebrations. Special programmer during specific events like the world cup, etc. Other channels like internet and direct mail offers.

The basic tenets of marketing consist of what is known as the Four Ps.

They refer to the following parameters of marketing (which is also known as

product mix):-

1. Product2. Price3. Place4.promotion


24/83


24

PRODUCT: - This refers to various features of the product. In this case of

credit cards, the product could vary from being a classic card, more

importantly the credit limit, will be very minimum and basic in nature. In

these lower type cards, the credit limit will generally vary from 15,000 to

50,000 and insurance benefits will be of low amount, compared with gold

cards. Rate of interest or services charges may also vary .it seen that

premium products carry additional benefits and certain other services will be

available on exclusive basis. Basic cards will not have any of these

additional features. But in view of variety of customers, banks need to have

the product line complete with all types of products, i.e. from basic to

premium. This will ensure that all types of customers, viz, first time users,

loyal users and high profile users will have the features that they want. It

does not make business sense to have only one kind of card / product even if

that is the most profitable. Thus, even in those cases where gold and

platinum cards are more profitable, banks do offer classic cards as the

customer should have a choice in terms of product types.

PRICE:-The next movement is the price of the product. The price has to be

such that it has some corresponding value or interest. The bank cannot give a

platinum card at the same price as the classic card. Likewise banks cannot

price classic card too high. Pricing has to be such that customers feel that

they must get certain advantage. Also the price must be not such that the

customers get lot more that what they pay .price should be viable for the

bank. Hence there must be a good balance between the price and the benefits

derived. Thus, with different products types, the price points have to be

different. The pricing of a credit card will generally be in terms of annual fee

and the benefits derived. The pricing of credit cards will generally be in


25/83


25

terms of the annual fee and the one time joining fee. The other charges and

fees, such as interest on the use of funds remain by and large, the same

within the industry.

PLACE:-Every bank should identify its targets customers. This is referred

to in the literature as either place or population. The people, that the bank

targets have certain features and characteristics. There will be groups which

have similar features. Within a larger group there could be different features

amongst different smaller groups. The bank needs to targets each different

group in different ways. No single approach will be sufficient to tackle all

the different groups. For ex:-, groups which have predominantly young

people need to be targeted by saying using a celebrity endorsement ,while

the professional group may be targeted with financial benefits which matter

most to them . Certain other groups like doctors can be targeted with

professional cards (SBI launched one such scheme for doctors.) thus, we

come across different product types and different target groups.

PROMOTION:-This refers to the way the product is brought before the

customers, in terms of concept , design and physical appearance and the

customers are made aware of the product in terms of the various benefits that

the product in terms of the various benefits that the product carries. This is

termed as concept selling. Once the market has bought the concept then

the banks can sell the cards to those customers who are most suitable to

them. Thus promotion can start with concept selling and finally end with

selling the product. As said earlier, different promotion strategies need to be

adopted for different product types. The promotion for a classic card can

take the form of say a big push through direct selling agents (outside agency


26/83


26

which has to sell cards for the bank on commission basis). By doing so.

They may be in a position to enlist large number of classic (general)

cardholders .however, direct selling may not be the method if the banks need

to attract high profile customers for the platinum (high end) cards .for this

the banks may opt to deploy its sales force in place like the golf course,

during tournament time, where the selling can happen not so directly, but by

networking. One of the issues in the promotion is that customers are price

sensitive. If majority of the customers are price sensitive, certain promotions

can be used which give those customers benefits in terms of lower price, by

opting for a particular banks credit card. If the customers value other

benefits more than price , the banks need to pay more attention to providing

additional benefits and incidentally can sell the higher priced card to

customers who are less price sensitive.

Thus, we see the importance of taking into account a number of factors that

would make a product successful.

CUSTOMER SERVICES: -

This is one of the most important functions of an issuer. If it is very tough to

acquire a customer, it is all the more difficult to retain him/her. Therefore,

proper customers services and satisfactory resolution of customers

issues/problems are important. It is acknowledged by industry experts that it

is almost ten times more expensive to get new customers than to retain an

old one. Therefore, banks need to take care to see that old customers base is

not eroded in the course of attracting new customers. For example if the old

customers have paid a full annual fee to hold credit cards and the bank

decides to waive off all the charges to the new customers, it can lead to


27/83


27

further competition by the rivals at the end of which, banks end up losing

one set of customers to gain another set, at the cost of loss in revenue. So

any issue that may impact the customers adversely has to be dealt with care

so that inconvience caused to the customers is minimized.


28/83


28

CHAPTER4

CHANNELS OF COMMUNICATION AVAILABLE TO THE

CUSTOMERS ARE:-

Emails and websites on the internet. Post office mailers (though less preferred by the young customers). Telephone contacts with the branch. Customer services centers (generally outsourced nowadays) Drop boxes and suggestion boxes at various locations in the city. Direct contact with designated contact officer in case of corporate

customers.

These are the ways in which customers can get in touch with card

issuers for any clarifications, or to lodge a complaint. The main

contact need for customers is felt in the area of receiving statement

and remitting payments towards the same. Hence the issuers need to

make sure that the statement are sent on time at the right address and

is also convenient for cardholders to make payments. Many banks use

either the postal services or the courier services to have statements

delivered. But today we find that many banks aggressively push

statement delivered. But today we find that many banks aggressively

push statements through the email/internet. This means that a

customers needs a log on to the website of the issuers with a unique

password and can view/download the required statement on the date

of generation itself.


29/83


29

The electronic format has two benefits; one is that customers need not

worry about postal delays, or moving to another address, or having

gone out on a temporary vacation, they can still view/ print the

statement in whichever part of the world they are. Banks, on the other

hand, can be assured that customers receive the statement s promptly

and hence the chance of non-payment due to non-receipt of statements

is reduced. Another benefit is in the form of cost saving. The bank can

save money on the postal/courier charges, printing expenses on the

staff needed to handle dispatch of statements to customers. This in

itself represents a reasonable cost saving to a bank which many pass

on to customers by the way of additional bonus points for receiving

statements electronically. Thus, use of technology can lead to better

service and cost reduction for the bank over a period of time.

There are issuers who are pretty routine and simple in nature but

customers desire to know in detail. For ex: - a customer may desire to

know his outstanding balance on his /her card at a point of time or he/

she may be, interested in knowing the procedure for increasing his

credit limit. These types of queries may take up a lot of time of the

banks staff and hence can be costly for a bank in terms of time and

money to service the customers. Bank may not allot highly trained and

expensive staff for such simple queries, which are very large in

number and also are repetitive in nature .alternatively, these can be

outsourced to the technology by encouraging the customers to use the

internet for viewing the outstanding balance, etc. this means that n o

staff intervention is required in these transactions at all. If the

customers can log on to the websites and find out for themselves


30/83


30

balances outstanding in their cards, the calls made to the bank/ call

centres will come down. Consumer can. Through the internet, also

request for increase in credit limit. Banks can consolidate at end of

each day, all such request for speedy action. It is obvious that this is

more convenient for customers. Some banks have also installed

Interactive Voice Systems (IVS) whereby customers can punch in the

card number and other security identity numbers like PINs and get

the required details. This also frees up time of staff from answering

routine calls and a few staff can handle large customer base. Some of

the information which customers can access without the banks staffs

intervention is:-

Information on balance outstanding Location of ATMs to draw cash Locations of other banks ATMs to withdraw cash , when

there is a tie up

Various types of charges and fees like late fee, fee forbreaching credit limit, etc.

Latest promotion and schemes Procedure for increasing credit limit Bonus points and means of redeeming the same Various types of availability of cards and eligibility criteria

etc.

There can be specific and complex requirements of customers needing

staff intervention. Here contact may be in the nature of reporting of lost

cards, or lodging a strong complaint or making suggestions to the bank.

These are the activities that have to be handled personally by the bank.


31/83


31

These are the activities that have to be handled personally by the bank staff,

which can lead to a sense of satisfaction to customers. Human psychology

demands that while dealing with significant issues , bank staff talk to

customer either in person or over the phone ,instead of customer interacting

with a third party or lodging serious complaints over the internet . These

issues though generally small in number, can be handled person ally by the

bank staff. This personal interaction with customers we enable the bank to

resolve problems easily and also lead to customer retention. This kind of

interaction can also throw up many suggestions which may prove beneficial

to the bank. In view of the above, there is a need to understand types of

customer contact and appropriate response which can enable banks to serve

better and at low cost.

ADVICE ON CREDIT CARD:-

Credit cards are one of those modern conveniences that we seemingly cannot

do without in this day and age. Everywhere you go more and more people

are whipping out the plastic to pay for their purchases, when once upon a

time they would have laid out a pile of cash. Credit cards are convenient,

indispensable and impossible to live withoutor are they?

While it is true that credit cards offer consumers numerous advantages over

cash and checks, they have a number of disadvantages as well. Of course a

lot of it depends on the particular user, but even in the best-case scenario

with the best of intentions, credit cards can be more trouble than they are

worth.


32/83


32

One of the more obvious advantages of credit cards is that they allow you to

purchase products and services in a pinch even if you do not have enough

cashor any at all, for that matterwith you. Lets say you have a medical

emergency or your car breaks down, and you have no way of getting to a

nearby ATM. Without a credit card at hand, you will be totally out of luck

and will have to both depend on the kindness of strangers to get you through

this emergency or possibly rely on your bargaining skillsand lets face it:

without cash or a credit card at hand, you dont really have much you can

bargain with.

On the other hand, having a credit card with you at all times also means that

if you come across something that you want, but do not necessarily need,

you are more likely to fall victim to what is commonly called impulse

buying. Far too many people whip out the plastic too quickly on the spur of

the moment when faced with something that they must absolutely have,

and it is this situation that has forced so many people into credit card debt

land. Another benefit that credit cards can give you is offering you

protection against theft of your cash. Of course there are unfortunately such

criminal elements as credit card thieves, but there are ways that you can

prevent the use of your credit card once it has left your possession. In any

case it is still much harder for a thief to benefit from a stolen credit card than

from ready cash.

A further advantage to credit cards, and one that can have a lasting effect on

your financial future, is that using a credit card responsiblythat is to say

paying your bills on time and avoiding building up too much interestcan

actually build up a good credit history. This will come in useful later on

when you want to purchase a car or a house for example. If you can show a


33/83


34/83


34

If you want to avoid these as well as other similar situations, you may want

to consider applying for a secured credit card as opposed to an unsecured

one. Secured credit cards are simply a form of credit card issued to you by a

bank in exchange for money that you deposit into an account. The total

amount that you have in your account corresponds to your credit limit. If

you deposit $1,000 for example, you are limited to spending only that much

when you make a purchase with your secured credit card.

Now the obvious benefit to this is that you will be far less likely to go over

your head financially speaking. If you have earmarked the money in your

account solely for expenses, then there is no way that you can go over

budget by using that secured credit card.

A further advantage to using secured credit cards is that replenishing your

account by depositing more money in it will also serve to build a good credit

record for you. Not only will this help you become more eligible for a

secured credit card, this will also repair any bad credit history that you may

have built up.

On the other side of the coin, there are some disadvantages to secured credit

cards, the most obvious being the self imposed credit limit can actually be a

serious obstacle when you need more money than what you have in your

account. On the whole though, the advantages of secured credit cards far

outweigh the disadvantages, and for that reason alone they are worth lookinginto.

So you see, the effectiveness of a credit card is really largely a matter of

personal responsibility and accountability.


35/83


35

WHAT ARE PREPAID CARDS

Prepaid credit cards at its most basic form are a type of credit card that isissued by either banks or certain government-regulated financial institution.

Much like a regular credit card, prepaid credit cards allow consumers to pay

for a wide variety of services and products from many different stores and

business establishments. In fact, although there are a number of key

differences between the two types of cards, prepaid credit cards share many

similarities with regular credit cards. They are easy, convenient andperhaps

most importantlyyou should thoroughly acquaint yourself with every aspect

of their use before you even think about pulling out one to pay for your

purchases. It's not quite there with regular credit cards in terms of popularity,

but it's slowly gaining ground. Motley Fool, a website often used to compare

mortgages, is even predicting that it can replace the current credit card

system we have in a matter of years because of its more practical

applications.

One of the most important considerations with regard to prepaid credit card

use is the existence of any fees or miscellaneous charges. Far too many

people have neglected this important aspect in the excitement of using their

prepaid credit card, and have paid the priceboth literally and figurativelyas

a result.

You should also find out any limitations regarding the actual use of the

prepaid credit cards. Some cards cannot be used for online transactions for

example, some cards cannot be used to withdraw money from an ATM, and

still other cards cannot be used outside the United States. Being aware of


36/83


36

these restrictions beforehand will help you avoid any inconvenience in the

future.

If there is anything at all that you do not understand about your prepaid

credit card, you can ask help from the company that you purchased it from.

It is your money that we are talking about after all, and it is their job to help

you make the most of your purchase.

You may be wondering what guarantees you have in terms of the safe use of

your prepaid credit card. While it is true that these types of cards are not

normally protected by federal laws, many of the more reputable prepaidcredit card companies offer users the same type of protection that is typically

available to credit and debit card users. With these companies, you will, for

example, be provided with a replacement card if the one you have gets lost

or stolen. In the event of authorized use of your prepaid credit card, you will

also be re-credited for the full amount.

In order to be eligible for this type of protection, prepaid credit card

companies will usually require you to fill up a form to register your card, as

well as go through a card activation process.

In any case, it would be a good idea for you to write down your card

information, and keep it in a safe place so you can more easily get a

replacement in the event of loss or theft. While youre at it, you may also

want to take note of the customer service telephone number. This will come

in handy if you have any sort of problem related to your prepaid credit card.

If they cant or wont help you with your concern, you should file a

complaint with the relevant government agency.


37/83


37



WHAT ARE STUDENTS CREDIT CARDS:-

More and more students of college ageand sometimes even youngerown

credit cards nowadays. If you belong in this category, you probably already

have one yourself, or are planning to apply for one in the near future. While

this can be a good thing, it is also a potentially serious step that could have

long lasting effects on your financial life in the long term.

This issue brings up the question of why credit card companies offer credit

cards to college studentswho do not typically have a lot of moneyin the

first place. As it turns out, it is a simple matter of economics. Well, that is

the main reason at least, and there are actually a few others besides.

One of the ways that banks make their money is through the collection of

various fees for their services. These can come in the form of annual fees,

late payment charges and interest charges on existing credit card balances.

We mentioned earlier that college students usually do not have a lot of

money to spare. While this would seemingly make them poor candidates for

credit cards, the fact that they are not able pay off their balances totally

every month assures the banks that they remain in that present arrangementfor a long time; a captive audience if you will. This means that the banks in

question are in a position to earn money from these customers for a longer

period of time.


38/83


38

It is not all bad news however. There are actually a number of ways that a

credit card can work for you if you are a college student, provided that you

use them wisely.

Students typically use credit cards for purchasing books and materials that

they need in school, or for personal or medical emergencies. Over time this

can add up to quite a large amount of transactions, and if a student is able to

manage these purchases and the associated bills effectively, doing so will

not only teach him or her valuable financial lessons that will be useful later

in life, they will also contribute towards building a good credit record.

Credit records take into consideration your history of paying bills, the

accounts that you have signed up for and many other factors. A good credit

record will have a great deal to do with how easily you will be approved for

various types of loans, the rate of insurance that you will have to pay, and in

some cases it may even affect your prospects for future employment. Paying

your bills on timein full is even betterwill go a long way in building a

good credit standing.

Conversely, paying your bills past the due date or worse, not at all, will hurt

your credit standing. If you are just starting out with credit cards, you may

want to get started building a good credit record by signing up for a card

with a low limit, so that you can control the amount that you spend.




39/83


39

WHAT IS BUSINESS CARD:-

Credit cards are obviously an invaluable thing to have in a pinch. If you are

not convinced just ask someone who has been in the unfortunate position of

being stuck on the road in the middle of the night with car trouble, or the

person who finds himself in the emergency room after a car accident. It does

not even have to be such a serious situation; it could be something as

seemingly trivial as running out of cash in a crowded grocery line or finding

a tremendously good deal in a shopping mall. In all these situations and so

much more, credit cards can indeed save the day.

One other use of credit cards, which many people are probably not aware of,

is as a tool for business. One of the biggest advantages to this usage is that it

allows you to keep your business related financial transactions separate from

your personal ones. Obviously, this is tremendously useful for medium to

large-scale businesses, but even smaller startup operations can greatly

benefit from this approach.

Before you decide on any particular business credit card, you should figure

out exactly how much money you will need for your company every month.

This will help you pinpoint the credit limit that you should aim for.

You should also check out as many different business credit cards as

possible so that you can compare features. Different card companies will

have varying interest rates, customer service procedures, branch access,

protection, and miscellaneous fees. This would also be a good time to

determine how many business credit cards you really need. Depending on

the size of your operations, you may actually need more than one or two.


40/83


40

Make a list of a few of your employees who need credit cards in their line of

work, and if you feel that they are responsible enough to handle it, those are

the people you need to give credit cards to. It may be a small matter but you

may want to go with a credit card company that offers perks as part of the

contract. These can be anything from airline miles to hotel, restaurant and

even department store discounts. This will give you an idea of how the

particular company values its customers.

Finally, you will probably want to go with a credit card company that has

made a name for itself. More often than not, these will likely be the major

companies such as Visa, American Express, and MasterCard. Companies

such as these have been in the business for a long time and have a generally

excellent track record of good service and reliability. They will also usually

provide you with access to your account record through their official web

site, where you can check your balance and transactions.

When applying for a business credit card, you will typically have to wait up

to 10 business days before you find out if your application has been accepted

or not. If after 15 days you have not received any update regarding your

application, you can either call them or send an email.




41/83


41

WHAT ARE GIFT CREDIT CARDS:-

As tremendously useful as credit cards are, there are certain situations where

they are not really the ideal option for a number of people. Someone who

wishes to avoid the various fees and costs associated with credit card use for

example, may wish to sign up for another type of credit card entirely, such

as a secured credit card. The high interest rates, the credit limits which may

give a false sense of security in terms of the amount that can be spent, and

the temptation to use the card for purchases that are not really necessaryall

of these are valid reasons to not own a credit card.

There is no denying however that the convenience and flexibility of a credit

card is a good thing to have in the event of an emergency or for purchasing

something that you did not plan on. How many times after all have you

encountered a situation where in a ready supply of cash could have come in

very handy? Everyone appreciates the benefits of having a credit card at

hand, and all the more so when it comes with no strings attached. The basic

credit card does not come with this advantage however, which makes

receiving a gift credit card very welcome for those who receive them.

Gift credit cards have become an increasingly popular choice for a number

of people because they provide many of the advantages of regular credit

cards but with few of the drawbacks. Giving someone a gift credit card as a

present will surely be appreciated but before you do so, there are someissues related to their use that bear looking into.

As in any sort of financial or business transaction, you should read the terms

and conditions of use thoroughly before buying a gift credit card for


42/83


42

someone. These rules will probably come in the form of fine print so look

through them carefully to find out just what it is you are getting into. There

are many different gift credit card companies out there and some of them

will have different terms of use. If you do not like what you see in the fine

print, check out another gift credit card that offers a deal that is acceptable to

you.

Fees are one way that these companies make their money, and they can add

up to quite a lot. Find out all the related fees and miscellaneous charges that

come with the gift credit card so that there are no unpleasant surprises down

the line. Also make sure that the recipient is not liable for any additional fees

on his or her end. Think of it from the point of view of the recipient: it

would really take a bit of the pleasure away from receiving a gift credit card

when you realize that you have to pay a certain amount to use it!

Checking out as many different gift credit cards as possible will give you a

good idea of whats out there and will help you decide on what can be a very

useful and much appreciated gift.


personalresponsibility and accountability.


43/83


43

CHAPTER5

ONLINE SHOPPING

How credit cards is used for online shopping:

Online business or on line shopping became very common. To buy goods

such as books, mobile sets etc or to book tickets in airlines or railways to

pay examination fee or to pay subscription, any such payments can be made

through online payment. For online payments credit cards can be used more

conveniently. Online credit card transactions are same as in offline

purchases except one or two differences. The merchant never sees the buyer

or the card actually used for purchases. He cannot get signature of customers

or any other physical proof. Such purchases are popular as CNP (card not

present) purchases.

PROCEDURES:-

Customer visits the merchants website or through online shoppingmall gets into the homepage of the trader.

Selects the products and ads to the shopping carts.He creates secure sockets layer (SSL) and using encryption he gives

credit card information.

Once the customer is credit card information reaches the sellerssystem, the system contracts the clearing house for authentication of

credit cards.

It verifies the card and balances through the issuing bank.After verification the issuing bank credits the accounts of the trader

and debits the customer account.


44/83


44

A credit card is the only form of payment card that offers a revolving line

of credit in addition to its function as a means of electronic payment. In

contrast, charge cards as offered by American Express must be paid off

monthly.

How does a credit card work in practice?

Suppose you buy a TV and present a Visa card, bearing the logo of the

issuer, say Citibank, in payment. You swipe your card through a card

reader, which reads the data on the magnetic stripe and adds information

that identifies the merchant and the dollar value of the purchase. This

electronic message automatically goes via telephone line to a computer

maintained by the merchants acquirer, also a member of the Visa

association. That computer reads the message and determines that you

used a Visa card. It calls up Visas computer, which checks with

Citibanks computer to verify that you have a credit balance sufficient to

cover the purchase.

If you have enough credit, the Citibank computer will send back a

message to the Visa computer authorizing the transaction. Visa relays

the message back to the terminal at the store. The entire process takes just

seconds, and finishes by printing out the credit charge receipt that you

must sign. Since the transaction is captured and stored electronically, the

receipt is used only to settle disputes that might arise for example due to

a stolen card with a forged signature,

The merchant submits a request for payment to its acquirer, which in turn

sends it to Visas computer. The Visa computer passes on the request to

Citibanks computer, which posts the transaction to your account with


45/83


45

Citibank. Visas computer consolidates this transaction with all other

Visa transactions that day and settles the accounts among banks.

The merchant receives about 2 percent less than the amount you paid for

the TV. That 2 percent is called the merchant discount, and is paid to the

acquirer. The acquirer keeps a portion for his services, and pays about

1.4 percent of the purchase amount to the issuer, in this case Citibank.

That 1.4 percent is called the interchange fee which is set by Visa.

American Express does not have an interchange fee because it is both the

issuer and acquirer, and keeps the entire merchant discount.

Credit Card Associations

Visa and MasterCard are by far the largest payment card systems. Visa

accounts for more than half of global purchases, with MasterCard

ranking second and American Express third.

Surprisingly, neither Visa nor MasterCard earn profits. Both are for-

profit corporations, yet they are operated on a break-even basis. They

cover their costs with fees levied on their membership, which totals many

thousands of banks. The associations have their own management and

employees, but they are owned by the banks that issue their cards, and

are supervised by boards of directors composed of representatives of

those banks.

A bank can be a member of both associations, but may serve on the board

of directors of only one or the other. The daily operations of the two

associations are run by separate managements. The following rules apply

to the Visa association, but the MasterCard association has similar rules.

The board of directors of an association is elected by the member banks,

which are allocated votes based on the volume of various products they


46/83


46

offer. The board appoints the management which hires the staff and is

responsible for the following:

Developing operating regulations

Processing transactions and interchange payments between members.

Developing system-wide innovations such as interchange

technologies.

Promoting the association brand through advertising.

Coordinating other system wide matters, such as fraud control.

Individual members, besides being responsible for their own financial

commitments, set card interest rates, fees, special features, and sign up

card holders (as issuers) and merchants (as acquirers).

Issuers

Card issuers receive revenues from two sources: merchants who accept

their cards and consumers who use their cards. Finance charges on credit

card loans comprise over three-quarters of the revenues. By comparison,

merchant discount fees comprise over half of the revenues on American

Express charge cards.

Issuers must properly manage a number of expenses, of which the cost of

funds and bad debt charge-offs are the largest. Other expenses include

labor, data processing, system development and maintenance, and new

card solicitations.

Computerized credit scoring has increased issuers' ability to weed out

potential deadbeats, but it remains hard to predict which cardholders will

default. The delinquency rate on bankcard loans remains well above that

on mortgages, auto loans, and personal loans.

Acquirers


47/83


47

Only members of the association can enter into contracts with merchants,

although member banks can work with third-party firms to do so.

Acquirers perform the following functions:

Signing up merchants and managing the relationship

Installing terminal equipment

Providing authorization services when customers present their cards

Keeping track of transactions and reporting the data to merchants

Transferring funds to the merchant on a daily basis to cover card

purchases, i.e. clearing and settlement

Responding to merchant problems with card processing

Some acquiring banks conduct all aspects of merchant acquiring, from

signing up the merchant to transaction processing and customer service.

Other banks serve as the customers point of contact but outsource the

processing functions to third parties. Still others serve only as the

depository institution where clearing and settlement occurs, leaving the

third party as the active member of the merchant relationship.

Visa Membership

Any financial institution eligible for FDIC insurance is eligible for Visa

membership. This now includes financial institutions owned by or

affiliated with nonbanks such as retailers, investment firms, insurance

companies, and automakers. However companies issuing cards that

compete directly with Visa, namely Discover and American Express, are

precluded from issuing Visa cards.

To become a member of the Visa association, an institution must pay an

initial service fee that depends on the type of membership applied for, the

type of cards to be issued, and the number of accounts. However the


48/83


48

membership fee is trivial relative to the typical revenues from bankcard

operations.

Credit Card Loans

Credit card loans have higher interest rates than most other consumer

loan rates, due mainly to loan defaults, overhead, and the cost of

financing the loans. Unlike most other consumer loans, credit card loans

are not secured by assets that could be seized if the consumer defaulted.

In addition a card holder is more inclined to use the full line of credit

when his financial situation worsens precisely the riskiest time for a

creditor.

Credit card loans usually include other costly benefits such as frequent

flier miles, purchase guarantees, and insurance. About 40 percent of

credit card holders use them only as payment devices and pay off their

short-term loans before the issuer charges interest. In spite of these

expenses, credit cards are an important profit center for most issuers.

Grace period

A credit card's grace period is the time the customer has to pay the

balance before interest is assessed on the outstanding balance. Grace periods

vary, but usually range from 20 to 50 days depending on the type of credit

card and the issuing bank. Some policies allow for reinstatement after

certain conditions are met.

Usually, if a customer is late paying the balance, finance charges will be

calculated and the grace period does not apply. Finance charges incurred

depend on the grace period and balance; with most credit cards there is no

grace period if there is any outstanding balance from the previous billing


49/83


49

cycle or statement (i.e. interest is applied on both the previous balance and

new transactions). However, there are some credit cards that will only apply

finance charge on the previous or old balance, excluding new transactions.

Fees charged to customers

The major fees are for:

1. Late payments or overdue payments.2. Charges that result in exceeding the credit limit on the card

(whether done deliberately or by mistake), called overlimit fees.

3. Returned cheque fees or payment processing fees (e.g. phonepayment fee).

4. Cash advances and convenience cheques (often 3% of the amount)5. Transactions in a foreign currency (as much as 3% of the amount).

A few financial institutions do not charge a fee for this.

6. Membership fees (annual or monthly), sometimes a percentage ofthe credit limit.

7. Exchange rate loading fees (sometimes these might not bereported on the customer's statement, even when applied) The

variation of exchange rates applied by different credit cards can be

very substantial, as much as 10% according to a Lonely Planet

report in 2009.


50/83


50

Credit card numbering

The numbers found on credit cards have a certain amount of internal

structure, and share a common numbering scheme.

The card number's prefix, called the Bank Identification Number, is the

sequence of digits at the beginning of the number that determine the bank

to which a credit card number belongs. This is the first six digits for

MasterCard and Visa cards. The next nine digits are the individual

account number, and the final digit is a validity check code.

In addition to the main credit card number, credit cards also carry issue

and expiration dates (given to the nearest month), as well as extra codes

such as issue numbers and security codes. Not all credit cards have the

same sets of extra codes nor do they use the same number of digits.

Avoiding Credit and Charge Card Fraud

A thief goes through trash to find discarded receipts or carbons, and then

uses your account numbers illegally.

A dishonest clerk makes an extra imprint from your credit or charge card

and uses it to make personal charges.

You respond to a mailing asking you to call a long distance number for a

free trip or bargain-priced travel package. You're told you must join a

travel club first and you're asked for your account number so you can be

billed. The catch! Charges you didn't make are added to your bill, and

you never get your trip.

Credit and charge card fraud costs cardholders and issuers hundreds of

millions of dollars each year. While theft is the most obvious form of


51/83


51

fraud, it can occur in other ways. For example, someone may use your

card number without your knowledge.

It's not always possible to prevent credit or charge card fraud from

happening. But there are a few steps you can take to make it more

difficult for a crook to capture your card or card numbers and minimize

the possibility.

Guarding Against Fraud

Here are some tips to help protect you from credit and charge card fraud.

Do:

Sign your cards as soon as they arrive.

Carry your cards separately from your wallet, in a zippered compartment,

a business card holder, or another small pouch.

Keep a record of your account numbers, their expiration dates, and the

phone number and address of each company in a secure place.

Keep an eye on your card during the transaction, and get it back as

quickly as possible.

Void incorrect receipts.

Destroy carbons.

Save receipts to compare with billing statements.

Open bills promptly and reconcile accounts monthly, just as you would

your checking account.

Report any questionable charges promptly and in writing to the card

issuer.

Notify card companies in advance of a change in address.


52/83


52

Don't:

Lend your card(s) to anyone.

Leave cards or receipts lying around.

Sign a blank receipt. When you sign a receipt, draw a line through any

blank spaces above the total.

Write your account number on a postcard or the outside of an envelope.

Give out your account number over the phone unless you're making the

call to a company you know is reputable. If you have questions about a

company, check it out with your local consumer protection office or

Better Business Bureau.

AUTHORIZATIONS:-

This is one of the most important operations at the backend. customer

interaction is more intense here as all issues that are be handled are live

which can prove to be sensitive to the customers as well as to banks.

WHAT IS AUTHORIZATION:-

Authorization refers to a decision process in which issuing bank informs the

merchant via the acquiring banks system that the card the customers desires

to use , is in good standing, and has enough balance/limit to make the

transactions. This would reassure the merchant as well as the acquiring bank

that the card held by the customer is good and valid and hence the chance of

the card being fraudulent is almost low. such backing by the issuing bank in

terms of authorizing lends credibility to the whole process.


53/83


53

THE STEPS IN AUTHORIZATION ARE AS FOLLOWS:-

1. PROCESS FLOW:-once a purchase is made flow starts with therequest from the merchant to the acquiring bank, from there to the

network and finally to the issuing bank. The issuing bank checks the

balance and the status of the card and either grants an approval or

reject the request. Either way, the decision is conveyed back in the

reserve order from the issuing bank to the network, then to the

acquiring bank and finally to the merchant. This flow of messages will

take not more than a few seconds. Approval/ rejection of the

transaction is given within 7-13 seconds failing which the transaction

shows TIME OUT.

The EDC machine of the merchants is hooked on to the systems of the

acquire bank. The request for the authorization is routed to the acquire

bank and in turn the bank passes this request to the issuing bank via

the network sponsor. The issuing bank then checks the account status

of the customer and on confirmation that the customer is indeed good,

and has enough balance in his account, gives out a unique

authorization number, which means that the transaction is

authenticated .alongside, the bank also reduces the balance available

for the customer to use the card, from his overall limits, so that he

does not overshoot his limit. Then message is passed on to the

acquiring bank via the same network and from acquiring ban, the

merchants get the message. The whole process takes only 7-13

seconds beyond which the operation time out and the merchants

have to try again for authorization.


54/83


54

All the parties involved in the transaction are parties process. The

customer wants to purchase goods and hence presents his card to

merchants. The merchant, then swipes the card on the EDC(electronic

data capture) machine after a few seconds of processing gives

confirming message that the transaction is approved and gives out an

authorization number on the charge slip which the customer signs.

2. OFFLINE TRANSACTION:-

At times, the merchant may not have an EDC machine or it may not

be in a working condition of the network between the banks may have

temporal snapped and hence the online mode of transaction cannot be

used by the merchant. In this scenario, the bank will have a manual

back-up for providing authorization services. In the manual

authorization, the merchant has to call up his/her bank that can get in

touch with the issuing bank, either through their systems or by

phones/fax/telex. Then details of the transaction are given to the

issuing bank which manually verify the account of the customer and

give the authorization code. It may be noted that the code given here

will be the one which is NOT generated by the system, and hence the

master files does not have details of the transactions. That means the

balance in the customer account will still reflect a position without

taking into account the latest transaction for which the authorization

was manually requested. Therefore, the authorization officer has to

immediately update the master file so that the credit limit set by the

bank is not breached.


55/83

credit cards and rbi guideliness on credit cards

Documents