CARD PAYMENT SYSTEM

ONLINE CARD PAYMENT

Learning objectives
• Understand the card payment system
• Understand the credit card
• Understand the debit card
Online card payment
• In U.S., credit and debit cards are primary online
payment methods
• Other countries have different systems
• Credit cards: 46% of online payments in 2020
(United States)
• Debit cards: 32% online payments in 2020
(United States)
How an Online Credit Transaction Works
INTRODUCTION
• A few years ago it was easy to tell the difference
between a credit card and a debit card.
• You used your debit card at the ATM with a
personal identification number, and you used your
credit card for purchases.
• But today both types of cards carry familiar credit
company logos, both can be swiped at the checkout
counter and both can be used to make online
purchases.
 DEBIT CARD
• Debit card is a plastic card which provides a
alternative payment method to cash when making
purchases.
• Functionally, it can be called an electronic check, as
the funds are withdrawn directly from either the bank
account, or from the remaining balance on the card.
• It is also known as BANK CARD or CHECK CARD.
• Debit cards can also allow for instant withdrawal of
cash, acting as the ATM card for withdrawing cash
and as a cheque guarantee card. Merchants can
also offer "cashback"/"cashout" facilities to
customers, where a customer can withdraw cash
along with their purchase.
i4 MAESTRO DEBIT CARD

First Debit Gold card

•Debit Card
• It is used instead of a check to make purchases,
anywhere Visa is accepted
• It is used instead of a credit card to pay bills such as
utilities, insurance and car payments
• Point-of-sale funds are drawn from primary checking
account
• PIN-system security
• Change your PIN at any Merchants Bank branch
• No annual fee
• Choose from three card designs
TYPES OF DEBIT CARD
1. ONLINE DEBIT CARD

2. OFFLINE DEBIT CARD

3. PREPAID DEBIT CARD

4. ELECTRONIC PURSE CARD

5. CARDS FOR MAIL, TELEPHONE & INTERNET USE

ONLY
 1. ONLINE DEBIT CARD
• Online debit cards require electronic authorization of
every transaction.
• The debits are reflected in the user’s account
immediately.
• The transaction may be additionally secured with the
personal identification number (PIN) authentication
system and some online cards require such
authentication for every transaction, essentially
becoming enhanced automatic teller machine (ATM)
cards.
• One difficulty in using online debit cards is the
necessity of an electronic authorization device at the
point of sale (POS) and sometimes also a separate PIN
pad to enter the PIN, although this is becoming
common place for all card transactions in many
countries.
• Banks in some countries, such as Canada and Brazil,
only issue online debit cards.
• In the United Kingdom, Solo and Visa Electron are
examples of online debit cards, which are typically
issued by banks to customers whom the bank does
not want to go overdrawn under any circumstances,
for example under-18s.
2. OFFLINE DEBIT CARD
• Offline debit cards have the logos of major credit cards
or major debit cards and are used at the point of sale
like a credit card.
• This type of debit card may be subject to a daily limit,
and/or a maximum limit equal to the current/checking
account balance from which it draws funds.
Transactions conducted with offline debit cards require
2–3 days to be reflected on users’ account balances.
• In the United Kingdom, Maestro (formerly Switch) and
Visa Debit (formerly Delta) are examples of offline debit
cards.
3. PREPAID DEBIT CARD
• Prepaid debit cards, also called reloadable debit
cards or reloadable prepaid cards, are often used
for recurring payments.
• The payer loads funds to the cardholder's card
account.
• Particularly for US-based companies with a large
number of payment recipients abroad, prepaid
debit cards allow the delivery of international
payments without the delays and fees associated
with international checks and bank transfers.
4. ELECTRONIC PURSE CARD

• Smart-card-based electronic purse systems (in

which value is stored on the card chip, not in an
externally recorded account, so that machines
accepting the card need no network connectivity)
were tried throughout Europe from the mid-1990s,
most notably in Germany.
5. CARDS FOR MAIL,
TELEPHONE AND
INTERNET USE ONLY
• Special pre-paid Visa cards for Mail Order/Telephone
Order (MOTO) and Internet use only are made
available by a small number of banks. They are
sometimes called "virtual Visa cards", although they
usually do exist in the form of plastic. An example is
3V.
• Such a card prevents fraud by a card number thief
even if the card is not blocked, because the customer
normally does not store any money on the sub-
account and fraudulent transactions do not get
authorized by the bank
 ADVANTAGES
AND
DISADVANTAGES
• ADVANTAGES
1. A consumer who is not credit worthy and may find
it difficult or impossible to obtain a credit card can
more easily obtain a debit card.

2. Use of a debit card is limited to the existing funds

in the account to which it is linked.

3. For most transactions, a check card can be used to

avoid check writing altogether.
CONTD….
4. Like credit cards, debit cards are accepted by
merchants with less identification.

5. Unlike a credit card, which charges higher fees

and interest rates when a cash advance is
obtained, a debit card may be used to obtain
cash from an ATM or a PIN-based transaction at
no extra charge, other than a foreign ATM fee.
DISADVANTAGES
• Some banks are now charging over-limit fees or
non-sufficient funds fees based upon pre-
authorizations.
• Many merchants mistakenly believe that amounts
owed can be "taken" from a customer's account
after a debit card (or number) has been presented.
• In some countries debit cards offer lower levels of
security protection than credit cards.
HOW DOES IT WORK?
The Three Party Model
Purchase goods / services
using card payment
instrument
Cardholder Merchant
Card Payment Facility

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The Four Party Model (Debit
Card)
Purchase goods / services
using card payment
instrument
Cardholder Merchant
Card Payment Facility

Service Charge
Convenience

Settlement &
Transaction
instrument
& payment

Merchant
Payment
Services
Fees

Settlement & Risk

Bearing
Issuer Acquirer
Interchange Fee
CREDIT
CARD
 CREDIT CARD
• A credit card is part of a system of payments named
after the small plastic card issued to users of the
system.
• It is a card entitling its holder to buy goods and
services based on the holder's promise to pay for
these goods and services.
• The issuer of the card grants a line of credit to the
consumer (or the user) from which the user can
borrow money for payment to a merchant or as a
cash advance to the user.
 CONTD…..
• A credit card is different from a charge card, where a
charge card requires the balance to be paid in full
each month.
• In contrast, credit cards allow the consumers to
'revolve' their balance, at the cost of having interest
charged.
• Most credit cards are issued by local banks or credit
unions, and are the shape and size specified by the
ISO 7810 standard.
 WORKING PROCESS
• When a purchase is made, the credit card user agrees
to pay the card issuer.
• The cardholder indicates his/her consent to pay by
signing a receipt with a record of the card details and
indicating the amount to be paid or by entering a
Personal identification number (PIN).
• Also, many merchants now accept verbal
authorizations via telephone and electronic
authorization using the Internet, known as a
'Card/Cardholder Not Present' (CNP) transaction.
CONTD…..
• Electronic verification systems allow merchants to
verify that the card is valid.
• The verification is performed using a credit card
payment terminal or Point of Sale (POS) system with a
communications link to the merchant's acquiring
bank.
• Card is obtained from a magnetic stripe or chip on the
card, but is more technically an EMV card (Europay,
MasterCard and VISA). i.e. VSDC – VISA, Mchip –
mastercard, AEIPS – American Express, J Smart - JCB
 INTEREST CHARGES
• Credit card issuers usually waive interest charges if
the balance is paid in full each month, but typically
will charge full interest on the entire outstanding
balance from the date of each purchase if the total
balance is not paid.
• EX:- If a user had a $1,000 transaction and repaid it in
full within this grace period, there would be no
interest charged.
• FORMULAE - APR/100 * ADB/365 * number of days
revolved. (Annual %age rate, avg daily bal)
 BENEFITS TO CUSTOMER
• Cashless transaction
• Reduce bank handling charges
• Free credit for customers between 30 to 50 days of
purchase
• Availed with minimum formality
• Option to extend credit limit
• Exposure to banking operations
• Convenience of making single payment
• Additional facilities like free insurance, discounts on
purchase, free travel booking etc
• Considered as a status symbol
 BENEFITS TO CUSTOMER
• Due to intense competition in credit card industry,
credit card providers offer incentives such as
• FREQUENT FLYER POINTS
• GIFT CERTIFICATES
• CASH BACK(1% based on total purchase)
• LOW INTEREST CREDIT CARDS
• EVEN 0% INTEREST CREDIT CARDS ARE AVAILABLE
 GRACE PERIOD
• A credit card's grace period is the time the customer
has to pay the balance before interest is charged to
the balance.
• Grace periods vary, but usually range from 20 to 40
days depending on the type of credit card and the
issuing bank.
• If a customer is late paying the balance, finance
charges will be calculated and the grace period does
not apply.
 BENEFITS TO MERCHANTS
• Increase in sales
• Ensures timely and certainty of payments
• No need to send reminders of outstanding debts
• Systematic accounting system
• Development of prestigious clientele base
• Avoids cash handling problem
• Additional liquidity is achieved
• Reduced customer problems
 BENEFITS TO MERCHANTS
• A credit card transaction is often more secure than
other forms of payment, such as checks, because the
issuing bank commits to pay the merchant the
moment the transaction is authorized, regardless of
whether the consumer defaults on the credit card
payment.
• More secure than cash, because they discourage theft
by the merchant's employees and reduce the amount
of cash on the premises.
• Prior to credit cards, each merchant had to evaluate
each customer's credit history before extending
credit.
 BENEFITS TO BANKS
• Attracts potential customers
• Enhances customer satisfaction
• Increases turnover
• Enhances bank image
• Increases customer base
• Reduces expenses of cash handling
• Identification of high net worth customers
• Increases deposit base of the bank
• Helps in maintaining good relation with customers
COSTS TO MERCHANTS
• Merchants are charged many fees for the privilege
of accepting credit cards.
• The merchant may be charged a discount rate of
1% - 3% + of each transaction obtained through a
credit card.
• Usually, the merchant will also pay a flat per-item
charge of $0.05 - $0.50 for each transaction.
 PARTIES INVOLVED
• CARDHOLDER: Used to make a purchase.

• CARD ISSUING BANK: The financial institution or other

organization that issues the card to the cardholder.

• MERCHANT: The individual or business accepting

credit card payments for products or services sold to
the cardholder.
CONTD……
• ACQUIRING BANK: The financial institution accepting
payment for the products or services on behalf of the
merchant.

• INDEPENDENT SALES ORGANISATION:

Resellers (to merchants) of the services of the
acquiring bank.

• MERCHANT ACCOUNT: Organization that the

merchant deals with.
 CONTD……
• CREDIT CARD ASSOCIATION: An association of card-
issuing banks such as Visa, MasterCard, Discover,
American Express, etc.

• TRANSACTION NETWORK: The system that

implements the mechanics of the electronic
transactions.

• AFFINITY PARTNER: Some institutions lend their

names to an issuer to attract customers that have a
strong relationship with that institution, and get paid
a fee or a percentage of the balance for each card
issued using their name.
 TRANSACTION STEPS
• AUTHORIZATION – Approval code which the merchant
stores with the transaction.
• BATCHING – Transactions stored in “batches” which
are send to the acquirer.
• CLEARING AND SETTLEMENT – debits the issuers for
payment and credits the acquirer.
• FUNDING - Merchant receives the amount totaling
the funds in the batch minus the "discount rate.”
• CHARGEBACKS - Chargeback is an event in which
money in a merchant account is held due to a dispute
relating to the transaction.
 TYPES OF CREDIT CARDS
CREDIT CARDS FOR BAD CREDITS
1. SECURED CREDIT CARDS
A secured credit card is a type of credit card secured
by a deposit account owned by the cardholder.
Typically, the cardholder must deposit between 100%
and 200% of the total amount of credit desired.
Thus if the cardholder puts down $1000, they will be
given credit in the range of $500–$1000.
 2. PREPAID “CREDIT” CARDS
• A prepaid credit card is not a credit card, since no
credit is offered by the card issuer: the card-holder
spends money which has been "stored" via a prior
deposit by the card-holder or someone else, such as a
parent or employer.

• Prepaid cards can be issued to minors (above 13)

since there is no credit line involved.
STANDARD CREDIT CARDS
1. BALANCE TRANSFER CREDIT CARDS
Balance transfer credit cards allow consumers to
transfer a high interest credit card balance onto
a credit card with a low interest rate. Typical in
the market today are balance transfer credit
cards with an introductory annual percentage
rate (APR) of 0 percent, with that introductory or
"teaser" rate lasting several months up to a year.
2. LOW INTEREST CREDIT CARDS
Low interest credit cards offer either a low
introductory APR that jumps to a higher rate after a
certain period, or a single low fixed-rate APR. Low
interest cards can be very useful when consumers
need make a large purchase because it allows several
months to a year to pay it off with very low or no
interest.
SECURITY
• Credit card security relies on the physical security of
the plastic card as well as the privacy of the credit card
number.
• Whenever a person other than the card owner has
access to the card or its number, security is potentially
compromised. i.e. security PIN is required
• Some merchants will accept a credit card number for
in-store purchases, where upon access to the number
allows easy fraud, but many require the card itself to
be present, and require a signature.
CONTD….
• Thus, a stolen card can be cancelled, and if this is
done quickly, will greatly limit the fraud that can
take place in this way.

• The PCI DSS is the security standard issued by The

PCI SSC (Payment Card Industry Security Standards
Council).
CREDIT CARD COSTS
ü Annual Fees ü Low Interest Teaser
ü Interest Rates
ü Annual Percentage ü Balance Transfers
Rate (APR)
ü Late Fees
ü Average Daily Balance
Method ü Over Credit Limit
Fees
ü Cash Advances
ü Bounced Check Fees
ü Convenience Checks
ü Currency Conversion
ü Penalty Rates Fees
Credit Card Do’s
uUse a debit card vs a credit card
uUse a card with no annual fee and low interest rates
uKnow all of your card’s hidden fees
uAlways pay more than the minimum each month
uPay on time, all the time
Credit Card Don’ts
uDon’t get more than one
uDon’t use them for cash advances
uDon’t use them to pay for basics: rent, groceries, etc.
uDon’t charge more than you can pay off in a month
uDon’t let banks increase you credit limit
The Four Party Model
(Credit Card)
Purchase goods / services
using card payment
instrument
Cardholder Merchant
Card Payment Facility

Service Charge
Convenience

Settlement &
Card Fees

Merchant
Payment
Services
& Credit

Settlement & Credit Risk

Bearing
Issuer Acquirer
Interchange Fee
WHICH CARD DO YOU WANT IN
YOUR WALLET??

• Current data suggests that debit cards are more

popular with consumers than credit cards.

• A recent TNS Financial Services Consumer Credit Card

Program Study indicated that over 60 percent of
consumers prefer using debit cards to credit cards as
a payment vehicle, because debit feels more like "real
money."
CONTD…..
• Debit cards are also gaining favor as a form of
online payment. Based on data from Jupiter
Research in American Banker, debit cards will
account for 46 percent of all online purchases by
2010, compared to 41 percent in 2006. The same
data forecasts a slide in credit card use to 35
percent of all online purchases in 2010 from 41
percent in 2006