What is Plastic Money ? Plastic money is a term that is used predominantly in reference to the hard plastic cards we use everyday in place of actual bank notes. They can come in many different forms such as Cash Cards Credit Cards Debit Cards Pre-paid Cash Cards In-store cards
Cash Card or ATM Card A card that will allow you to withdraw money directly from your bank via an Automated Teller Machine (ATM) but it will not allow the holder to purchase anything directly with it. Unlike a debit card, in-store purchases or refunds with an ATM card can generally be made in person only, as they require authentication through a personal identification number or PIN. In other words, ATM cards cannot be used at merchants that only accept credit cards. In some countries, the two functions of ATM cards and debit cards are combined into a single card called a debit card or also commonly called a bank card. These are able to perform banking tasks at ATMs and also make point-of-sale transactions, both functions using a PIN.
What are Credit Cards ? Again this card will permit the card holder to withdraw cash from an ATM, and a credit card will allow the user to purchase goods and services directly, but unlike a Cash Card the money is basically a high interest loan to the card holder, although the card holder can avoid any interest charges by paying the balance off in full each month. A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holders promise to pay for these goods and services. The issuer of the card creates a revolving account and 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.
Parties involved Cardholder: The holder of the card used to make a purchase; the consumer. Card-issuing bank: The financial institution or other organization that issued the credit card to the cardholder. Acquiring bank: The financial institution accepting payment for the products or services on behalf of the merchant. Merchant account: This could refer to the acquiring bank or the independent sales organization, but in general is the organization that the merchant deals with.
Parties involved Credit Card association: An association of card-issuing banks such as Discover, Visa, MasterCard, American Express, etc. that set transaction terms for merchants, card-issuing banks, and acquiring banks. Transaction network: The system that implements the mechanics of the electronic transactions. May be operated by an independent company, and one company may operate multiple networks. 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 Insurance providers: Insurers underwriting various insurance protections offered as credit card perks
Transaction steps1. Authorization: The cardholder presents the card as payment to themerchant and the merchant submits the transaction to the acquirer(acquiring bank). The acquirer verifies the credit card number, thetransaction type and the amount with the issuer (Card-issuing bank)and reserves that amount of the cardholders credit limit for themerchant. An authorization will generate an approval code, which themerchant stores with the transaction.2. Batching: Authorized transactions are stored in "batches", whichare sent to the acquirer. Batches are typically submitted once per dayat the end of the business day. If a transaction is not submitted in thebatch, the authorization will stay valid for a period determined by theissuer, after which the held amount will be returned to the cardholdersavailable credit
Transaction steps contd…3. Clearing and Settlement: The acquirer sends the batch transactionsthrough the credit card association, which debits the issuers for payment andcredits the acquirer. Essentially, the issuer pays the acquirer for thetransaction.4. Funding: Once the acquirer has been paid, the acquirer pays the merchant.The merchant receives the amount totaling the funds in the batch minus eitherthe "discount rate," "mid-qualified rate", or "non-qualified rate" which are tiersof fees the merchant pays the acquirer for processing the transactions.5. Chargebacks: A chargeback is an event in which money in a merchantaccount is held due to a dispute relating to the transaction. Chargebacks aretypically initiated by the cardholder. In the event of a chargeback, the issuerreturns the transaction to the acquirer for resolution. The acquirer thenforwards the chargeback to the merchant, who must either accept thechargeback or contest it.
Costs Credit card issuers (banks) have several types of costs: Interest expenses Operating costs Charge offs or Bad Debts Rewards Fraud Promotion
Revenues Offsetting the costs are the following revenues: Interchange fee Interest on outstanding balances Over limit charges Fees charged to customers Late payments or overdue payments Charges that result in exceeding the credit limit on the card (whether done deliberately or by mistake), called over limit fees Returned cheque fees or payment processing fees (e.g. phone payment fee) Cash advances and convenience cheques Transactions in a foreign currency. A few financial institutions do not charge a fee for this. Membership fees (annual or monthly), sometimes a percentage of the credit limit. Exchange rate loading fees.
Merits and Demerits to Customer Merits Convenience Allows a short term credit to customer Provide more fraud protection than debit cards. Many credit cards offer rewards and benefits packages Demerits High interest and bankruptcy Inflated pricing for all consumers Weakens self regulation
What is Debit Card ? This type of card will directly debit money from your bank account, and can directly be used to purchase goods and services. While there is no official credit facility with debit cards, as it is linked to the bank account the limit is the limit of what is in the account, for instance if an overdraft facility is available then the limit will be the extent of the overdraft. A debit card (also known as a bank card or check card) is a plastic card that provides the cardholder electronic access to his or her bank account(s) at a financial institution. Some cards have a stored value with which a payment is made, while most relay a message to the cardholders bank to withdraw funds from a designated account in favor of the payees designated bank account. The card can be used as an alternative payment method to cash when making purchases.
Types of debit card systems Online Debit System :Online debit cards require electronic authorization of every transaction and the debits are reflected in the user’s account immediately. Offline Debit System : 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. Electronic Purse Card System : 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)
Advantages Customer having poor credit worthiness can opt for debit card. Instant finalization of accounts Less identification and scrutiny than personal checks, thereby making transactions quicker and less intrusive. A debit card may be used to obtain cash from an ATM or a PIN-based transaction at no extra charge
Disadvantages Limited to the existing funds in the account to which it is linked Banks charging over-limit fees or non-sufficient funds fees based upon pre-authorizations, and even attempted but refused transactions by the merchant Lower levels of security protection than credit cards More prone to frauds
Credit Card Vs Debit Card Credit Card Debit Card Transactions are of Credit Transactions are of Debit Nature Nature Risk of overspending No or less risk of over spending Interest is charged to the Only Fees are charged on holder of card in case of yearly basis for card usage overdrawing Eliminates need to carry hard Source of additional funds cash
What are In-store cards ? These are used by the departmental stores mainly as marketing tools to retain customers and increases turnover. The main features of in-store cards are as below: Issued by big department stores or retailers. Can be used only in retailers outlet or for purchasing the company’s products. Little or no cost to retailers Usually developed by the traders in partnership with banks or financing companies who undertake the administration and sometimes the financing involved.
Types on In-store card Budget Card: This card requires monthly payment on behalf of the holders. The cost of goods purchased is spread over a certain period. Option Card: Here, payment can be either be made in full or at the cardholder’s discretion. However, option available is subject to a minimum repayment and interest charged on the balance outstanding amount. Monthly Card: The card holder is required to make the payment every month. No extension of credit is given beyond a month. This card differs for budget card, where outstanding credit can be settled in 30 monthly statements.
Pre-paid Cash Cards As the name suggests the user will add credit to the card themselves, and will not exceed that amount. These are usually re-useable in that they can be topped up however some cards, usually marketed as Gift Cards are not re-useable and once the credit has been spent they are disposed of. They provide some specials benefits or discounts to the holder of the card. Pre-paid Cash Cards Examples: DMRC Smart Cards. Pantaloons Green card. Cards used in Food courts of Malls.