Monday, January 28, 2019

Credit card

A credit card system is a type of retail transaction settlement and credit system, named after the small plastic card issued to users of the system. A credit card is different from a debit card in that the credit card issuer loans the consumer money rather than having the money removed from an account. Most credit cards are the same shape and size, as specified by the ISO 7810 standard.

How they work

A credit card user is issued the card after approval from a provider (often a general bank, but sometimes from a captive bank created to issue a particular brand of credit card, such as American Express Centurion Bank), in which they will be able to make purchases from merchants supporting that credit card up to a prenegotiated credit limit. When a purchase is made, the credit card user indicates their consent to pay, usually by signing a receipt with a record of the card details and indicating the amount to be paid. More recently, electronic verification systems have allowed merchants (using a strip of magnetized material on the card holding information in a similar manner to magnetic tape or a floppy disk) to verify that the card is valid and the credit card customer has sufficient credit to cover the purchase in a few seconds, allowing the verification to happen at time of purchase. Some services can be paid for over the telephone by credit card merely by quoting the number embossed onto the card (the credit card number), and they can be used in a similar manner to pay for purchases from online vendors.

Each month, the credit card user is sent a statement indicating the purchases undertaken with the card, and the total amount owing. The cardholder must then pay a minimum proportion of the bill by a due date, and may choose to pay more or indeed pay the entire amount owing. The credit provider charges interest on the amount owing (typically, a fairly high rate much higher than most other forms of debt). Typically, credit card issuers will waive interest charges if the balance is paid in full each month, which allows the credit card to serve as a form of revolving credit.

As well as profits through interest, card companies charge merchants fees for money transfer. When the companies formally or informally prevent these fees from being passed on to credit card users but instead require them to be spread among all customers, this raises the possibility of a harmful market imperfection through the mechanism of the Tragedy of the commons. Australia is currently acting to reduce this by allowing merchants to apply surcharges for credit card users. Credit card companies generally do provide a guarantee the merchant will be paid on legitimate transactions regardless of whether the consumer pays their credit card bill. However, credit card companies generally will not pay a merchant if the consumer challenges the legitimacy of the transaction and will fine merchants who have a large number of chargebacks.

The credit card was the successor of a variety of merchant credit schemes. The concept of paying merchants using a card was invented in 1950 with Diners Club's invention of the charge card, which is similar but required the entire bill to be paid with each statement. Credit card service was first offered in 1951.

In recent times, credit card portfolios have been exceedingly profitable to banks, in lieu of the booming economy of the late nineties. However in the case of credit cards, such high returns go hand in hand with risk.

Features

As well as convenient, accessible credit, the cards offered consumers an easy way to track expenses, which is necessary both for monitoring personal expenditure and the tracking of work-related expenses for taxation and reimbursement purposes. They have now spread worldwide, and are offered in a huge variety of permutations with differing credit limits, repayment arrangements (some cards offer interest-free periods, while others do not but compensate with much lower interest rates), and other perks (such as rewards schemes in which points "earned" for purchasing goods with the card can be reclaimed for further goods and services).

In addition, some countries such as the United States limit the amount that a consumer can be held liable for fraudulent transactions which shifts the liability to the merchant. This encourages the use of credit cards for electronic and mail order transactions, collectively called "card not present" transactions. They have spread far and wide beyond their initial market of the wealthy businessman and are now ubiquitous amongst the middle class of most Western countries.


Security

The relatively low security of the credit card system presents many opportunities for fraud. However, this does not imply that the system is broken. The goal of the credit card companies is not to eliminate fraud, but to reduce it to manageable levels, such that the total cost of both fraud and fraud prevention is minimised. This implies that high-cost low-return fraud prevention measures will not be used if their cost exceeds the potential gains from fraud reduction. This opportunity for fraud has created a black market in stolen credit card numbers, which must generally be used quickly before the cards are reported stolen.

Three improvements to card security are being introduced to the more common credit card networks at the time of writing. An additional 3-4 digit code is now present on the back of most cards, for use in "card not present" transactions. The on-line verification system used by merchants is being enhanced to require a 4 digit Personal Identification Number (PIN) known only to the card holder, and the cards themselves are being replaced with similar-looking tamper-resistant smart cards which are intended to make forgery more difficult. The majority of smartcard (IC card) based credit cards comply with the EMV (Europay Visa MasterCard) standard.

The 3-4 digit numbers for use in "card not present" transactions are to be found in different places on the various cards, and are referred to differently by the card issuers:

VISA: last 3 digits of the number printed on the back signature panel of the card, referred to as the CVV, or Card Validation Value.

MASTERCARD: last 3 digits of the number printed on the back signature panel of the card, referred to as the CVC, or Card Validation Code.

AMERICAN EXPRESS: 4 digits long, printed on the front side of the card above the number, referred to as the CID, or Card Identification Number.


Controversy

There is some controversy about credit card usage in recent years. Credit card debt has soared in recent years, particularly among young people. The major credit card companies have been accused of targeting a younger audience, in particular college students, many of whom are already in debt with college tuition and loans. Credit card usage has tripled since 2001 amongst teen-agers as well.

Since the late 1990s, lawmakers, college officials, consumer advocacy groups, and higher education practitioners, have become increasingly concerned about the rising use of credit cards among college students. A recent study has shown that both the number of students owning a credit card as well as the amount of credit card debt held by students has risen in the last couple of years. Since eighteen year-olds in most states are eligible for a card without parental consent or employment, many have been concerned that students will use credit unwisely because of their financial inexperience and suffer the long-term consequences of carrying high debt.