BusinessDictionary.com, a web based dictionary defines a Bank as ‘‘an establishment authorized by a government to accept deposits, pay interest, clear cheques, make loans, act as an intermediary in financial transactions, and provide other financial services to its customers’’.
Banking dates back to 2000 BC and has since metamorphosed into brick and mortar banking (branch banking). In recent times, with the evolution of information and communication technology (ICT), banking is increasingly becoming more virtual and electronic based. Rapid advancement in ICT has had a profound effect on the banking industry and the wider financial sector over the last twenty years.
Bank cards have changed the way we pay for goods and services and today, most consumers pay for at least half their purchases with a payment card. The forerunners are a long way from the sophisticated and widely accepted cards that we are now accustomed to but, nonetheless, laid the foundations for the convenience and ease of use that we now enjoy. In 1950, the US Dinners club issued the first charge cards with initial membership of 200 and the card was accepted in 27 restaurants. However, by the end of the year 20,000 people were using Diners Club. This opened the flood gates for bank cards and in 1958; American express introduced its own charge card. Barclays bank also introduced UK’s first credit card in 1966 called ‘Barclaycard’ and was based on the ‘BankAmericard’ that had been issued earlier in 1958 by the bank of America.
TYPES OF CARDS
A bank card is basically a plastic card issued by a bank to its clients to enable the client access to bank transactions 24/7. A bank card provides bank clients the added advantage of being able to access their bank accounts via various ICT mediums. These mediums will include ATMs (Automated Teller Machine) which allow the client access to cash at remote locations, POS (Point Of Sale) devices which allow for payment of goods and services consumed by the client and also online payment platforms which allow for payments via the internet.
These services are made possible by two major American multinational financial services corporations namely Visa and MasterCard. There are other ‘smaller’ bank card services providers such as UnionPay, Dinners Club int, American Express, JCB and Discover who are also working their way to the top. They operate global systems that assume responsibility for routing card transactions between the various parties involved in every card request. These organizations also set rules for all parties that issue or accept transactions from cards bearing their brand and promote the global recognition and acceptance of those brands through advertising and rules enforcement. According to Nerdwallet, an American personal finance website, spending on the Visa network accounted for 52.4% of global payment volume in 2010 as compared to only 32.8% for MasterCard and the rest of other providers sharing 14.8%.
There are three (3) main types of bank cards namely the Debit, Credit and Pre-paid cards.
Debit cards allow clients access to cash from an ATM or to pay for goods and services without using physical cash. The money spent is deducted from the client’s bank account because the card is directly linked to the account. Most debit cards have ‘chip and pin’ feature which is a small microchip embedded in the card to store data and a four (4) digit personal identification number (PIN). When the debit card is presented to make payment for purchases, it is inserted into a POS (Point of Sale device) which reads the chip. The client confirms the transaction details and the pin is imputed for the payment to be processed. The same PIN is used when withdrawing cash at the ATM using the debit card.
A credit card is a payment card issued to clients as a method of payment. It allows the cardholder to pay for goods and services based on the holder’s promise to pay for them. The bank creates a revolving account and grants a line of credit to the cardholder, from which the cardholder can borrow money to pay for goods and services such as consumables, stationery or webpage hosting. Credit cards allow the consumers a continuing balance of debt, subject to interest being charged. If used wisely, credit cards can be one of the cheapest sources of credit available.
Prepaid cards offer some of the same features as debit and credit cards, but the cardholder does not need a bank account to operate one because they are not linked to personal bank accounts. The holder must top-up the card by making deposit onto it at the bank. Since the cardholder’s spending is money available on the card, debt cannot run up or spend more than the available balance. These cards usually carry either the Visa or Mastercard symbol and can be used for purchases wherever a credit card is accepted.
A common feature of all the above card types is that, they can be used at the ATM, make purchases at the Point of sale terminal (POS) as well as online uses. For online uses, the client makes available vital details of the card which will be requested by the payment site. Some of these details include the thirteen digits number across the surface of the card called the Primary Account Number (PAN), three digits Card Verification Value (CVV) (except for American express issued cards which have four digits), the expiry date as well as the card holder’s name and the issuer of the card.
Example of card and card based products recently introduced into the Ghanaian market are the EZYPASS Card and the GlobaPay by Zenith Bank Ghana Ltd. The EZYPASS is a Visa enabled prepaid fuel card solution designed for VIVO/SHELL Ghana to be used at Shell filling stations to patronize their products. It can also be used on the ATM, POS and the WEB at client’s own convenience and it is chip and pin enabled. The GlobalPay on the other hand is an online collection platform which enables merchants to accept card payments on a real-time basis and available to Visa and MasterCard holders (Debit, Credit and Pre-paid) only and has a global reach.
Banks are constantly upgrading their security systems due to activities of fraudsters. Customer information cannot be compromised and as such banks are investing a lot in ICT in order to uphold their promise of confidentiality to customers.
CARD PROCESSING: HOW IT WORKS
Card transactions may appear to be a simple process but they actually require a complex process involving various participants in a series of electronic connections. These processes include various stages namely Card Authorization, Clearing and Settlement. The key players involved are Cardholder, Merchant, Acquiring bank (Merchant bank), Issuing bank (Cardholder bank) and Card association/Card network (Visa and MasterCard)
An approved applicant for a credit or debit card from a card issuing bank is referred to as a cardholder, and may be any entity for which an issuer wishes to extend a line of credit, such as a consumer, corporation or government agency. The cardholder may use the card at any merchant location that meets the qualification standards of the relevant card association.
A merchant is any business engaged in the sale of goods or services such as retail stores, including physical locations and internet sites, mail order or telephone order outlets, restaurants, universities and government agencies. The merchant maintains a merchant account that enables them to accept credit or debit cards as payment from customers (cardholders) for goods or services provided.
Acquiring Bank (Merchant Bank)
An acquiring bank is a registered member of the card associations (Visa and MasterCard). It is often referred to as a merchant bank because it contracts merchants to create and maintain accounts that allow the business to accept credit and debit cards, (i.e. merchant accounts). Acquiring banks provide merchants with equipment and software to accept cards, promotional materials, customer service and other necessary aspects involved in card acceptance.
Issuing Bank (Cardholder Bank)
An issuing bank issues bank cards to consumers. The issuing bank is also a member of the card associations (Visa and MasterCard). Card issuers are financial institutions that issue cards to approved applicants and are identifiable by their trade name typically imprinted on the issued cards. Issuing banks pay acquiring banks for purchases that their cardholders make. It is then the cardholder’s responsibility to repay their issuing bank under the terms of their card agreement.
Card Associations/Network (Visa and MasterCard)
Visa and MasterCard are not banks and do not issue bank cards or merchant accounts. Instead, their primary responsibility is to act as a custodian and clearing house for their card brand. Visa and MasterCard also function as the governing body of a community of financial institutions that work together in association to support card processing and electronic payments hence the name, “card associations.” Visa uses the VisaNet network to transmit data between association members, and MasterCard uses their Banknet network.
Card authorization simply refers to the process through which a card holder needs to go through before the card can be used for any purpose whatsoever. Authorization is done in order to ensure that the card is valid; has not been lost, stolen or forged. Below is a reflection for your understanding of the process;
Visa/Master card Network
A Cardholder begins a card transaction by presenting a card to a Merchant as payment for goods and services. The Merchant uses the Card machine, software or gateway to transmit the Cardholder’s information and details of the transaction to the Acquiring bank or the bank’s processor. The Acquiring bank (or its processor) captures the transaction information and routes it through the appropriate Card network to the cardholder’s Issuing bank to be approved or declined. MasterCard transaction information is routed between issuing and acquiring banks through MasterCard’s BankNet network while Visa transactions are routed through Visa’s VisaNet network.
The Card Issuer receives the transaction information from the Acquiring bank (or its processor) through BankNet or VisaNet and responds by approving or declining the transaction after checking to ensure among other things, that the transaction is valid, the cardholder has sufficient account balance to make the purchase and that, the account is in good standing. The Card issuer sends a response code back through the appropriate network to the Acquiring bank (or its processor). The response code reaches the Merchant’s terminal, software or the gateway and stored in a batch file awaiting clearing and settlement.
MECHANICS OF CLEARING AND SETTLEMENT
One of the most critical functions performed by a payment card network is settlement of funds between and among the banks participating in the network. It is the assurance of reliable, accurate, and timely settlement of funds that induces participation in the network in the first place. Clearing is the nonmonetary exchange of transaction-related information between issuing and acquiring banks. It basically involves calculating and reconciling who owes what to whom.
First the merchant’s bank brings together the full payment transaction details which are made up of the basic authorisation data already sent to the issuer bank plus the authorisation code. MasterCard and Visa collects the data from member banks in the morning of the day after which transactions have taken place. Their member banks have to make this data available by specified cut-off time which is already known to all parties involved in the process. The files are then prepared for delivery to the acquirer and issuer banks.
The primary purpose of these processes is to consolidate the debit transactions from different acquirers into one file for each issuer bank and files of chargebacks for the acquirer banks and to calculate the overall net balance due to be, or received, by each member bank. A fully reconciled daily clearing data file is prepared for each member bank. This clearing file is then transmitted to each member bank after three to six hours of the initial data collection. Each member bank chooses which currency or currencies they will settle in, usually the local currency. The clearing file specifies the net balance in the chosen settlement currencies that each member bank will receive or need to pay.
Settlement is the final process in the series of steps that begins with authorization and includes clearing. To participate in MasterCard and Visa’s settlement systems, member banks must open an account at a specified bank. Both MasterCard and Visa use a small number of major banks to carry out their settlements.
At a specified time and date the member banks are debited or credited at the settlement banks for the net balances outstanding for each of their settlement currencies. When the cardholder’s account is debited and the merchant’s account credited depends on business decisions taken by member banks, the payment card products used, and the size and type of merchant. Most card issuing banks (particularly for revolving credit and charge cards) debit the cardholder’s account on the same day of the purchase, even though they are not debited for the fully cleared transaction until the next business day.
The settlement process is very simple. Cardholders’ activity for Issuing bank is in the debit category; they are making purchases for which their bank will pay into settlement on the cardholders’ behalf. But some cardholder transactions, most prominently merchandise returns, fall into the credit category. The bank may also have made cash disbursements through its lobbies or ATMs to cardholders from other banks, and these transactions would be accounted for as credits to an issuer’s daily settlement amount. The network calculates the total of the debits and offsets the total value of the credits, and the net remaining amount will be collected from the issuer through settlement. For acquiring banks, most of their merchants’ activity will be credit transactions; i.e., they will generate an incoming flow of funds through the settlement process. But merchants will also conduct transactions, such as refunds and returns, which create debits to the merchant but credits to the cardholder. These debits will be deducted from the total of funds owed to the acquirer, and the net amount will be deposited to the acquiring bank’s account.
Another activity that creates a debit position for the acquirer (merchant) and a credit for the issuer (cardholder) is a chargeback. Chargebacks occur when a cardholder exercises his or her rights to a payment reversal under certain conditions, after efforts to achieve resolution directly with the merchant have failed. There are time limits for exercising these rights, and not every cause of dissatisfaction is an allowable reason for entering a dispute. Some of the permissible reasons include duplicate processing, incomplete or faulty goods, fraudulent transactions etc.
When a cardholder makes purchases (either online or at the POS) or cash withdrawals at the ATM in currencies other than primary or account holding currency, the network uses dynamic currency conversion at a rate to enable access to the local currency. However, these wholesale rates vary by banks taking into account markup charges. A Ghana cedi denominated card holder can travel to the U.S and use his Visa or MasterCard to withdraw US dollars at the ATM and his Ghana cedi account will be debited with the equivalent. These multi-currency payments also go through the process of clearing and settlement. MasterCard and Visa provide the two largest global multi-currency clearing and settlement systems in the world. At present they are used primarily for consumer to business transactions but increasingly they are being used for business-to-business transactions because they offer so many advantages over the other payment systems.
ADVANTAGES OF CARD BANKING
Card banking presents a lot of advantages to both the bank and cardholders. Banks enjoy global presence through cards issued to clients. Clients are not limited to brick and mortar branches to access funds from the bank.
Banks also benefit from floats on deposits when cardholders deposit funds into bank accounts waiting to be used. These deposits can be given to other clients in the form of loans at an interest which generates income for the bank.
When banks issue cards to clients, charges are taken as well as when these cards are used at either the ATM, POS or online. Free revenue is generated to the banks which increases their income from fees and commissions. Excellent card service provision from banks builds customer satisfaction and eventually customers are retained for long periods of time.
Cardholders enjoy convenience of wide range card use. Cardholders save time and trouble of carrying around cash and cheque books to make payment for purchases. A card in the wallet is always the best option.
Cards are also readily accepted worldwide so as to facilitate payments and the cardholder enjoys peace of mind that is nonexistent with carrying cash around.
Credit card usage helps in building credit line. Maintaining a good credit score is always essential not only for applying for credit cards but also for applying for loans and buying things on a contract basis. A Credit card is the best thing which helps to increase credit score as long as bills and other payments are made within the expected period.
In an ever changing world of technology, everything gets faster, more convenient, and more technologically advanced. Banks and other financial institutions are increasingly exploring technological platforms to introduce innovative products from their generic products and services in the form of transfer of funds, deposit mobilization and credit extension. This gave birth to the development of Debit, Credit and Pre-paid cards. Current and potential cardholders should embrace these technological advancements and contribute towards the development of the banking sector. The benefits to be enjoyed are countless and tailored to meet every day financial needs.
Writer: Edem Anewu