What is Payment Cards?
Payment cards are physical or virtual cards that are issued by financial institutions or payment processors and are used to make payments for goods and services. Payment cards come in various forms, including credit cards, debit cards, prepaid cards, and gift cards.
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Currently, credit cards and debit cards represent the most common forms of e-payment. These cards are mostly plastic cards with an inbuilt magnetic stripe. These cards are assigned numbers that help in the identification and authentication of the user.
Benefits of Payment Cards
Some benefits of payment cards are as follows:
- Payment is convenient and secure.
- They allow consumers the flexibility of payment without the need to carry a large amount of cash in their pockets.
- They offer consumers the power to purchase items in a physical store, through the Internet and mail-order catalogs, or even over the phone.
- They save time for both merchants and customers.
Issues with Payment Cards
However, there are certain issues related to the use of payment cards, which are as follows:
- A payment card holds the entire information, such as the cardholder’s name, expiry date, Card Verification Value (CVV), etc. In case these cards are misplaced or stolen, they can be easily misused. However, the use of a secure Personal Identification Number (PIN) solves the problem to a great extent.
- The use of payment cards over the Internet increases the chances of information being hacked for misuse later. Customers must ensure that the website and payment gateways are secure.
- Since these cards can be used to make payments easily, people generally indulge in impulse buying exceeding their budgets. Cash statements and maintaining records can reduce this problem.
- The payment mechanism of these cards depends on technology. In case of technical failure, the payment process might be blocked.
Types of Payment Cards
Let us now study these payment cards in detail in the subsequent sections.
Credit cards are used for short-term credit and repayment options. They enable customers to cover unexpected expenses and make everyday purchases. They also help to establish the credit histories of customers. A credit history is required to apply for loans and other long-term financial commitments.
A credit card is a thin plastic card with identification information along with a person’s name and signature on it. It is used to charge customers for their purchases or services to their accounts for which they will be billed periodically. The identification information on the card is read by ATMs, store readers, banks, the Internet, etc.
The back of the credit card has a black magnetic stripe, which is made up of tiny iron-based magnetic particles in a plastic-like film. Once a customer swipes the credit card through a card reader and enters the PIN, the Electronic Data Capture (EDC) software at the Point-of-Sale (POS) terminal dials a stored telephone number (using a modem) to reach the acquirer. An acquirer is an organization that acquires credit-authentication requests from merchants and sends payment guarantees back to the merchants.
When the acquirer receives the credit card authentication request, it verifies the transaction for validity and checks the magnetic stripe for:
- Merchant ID
- Validity of the card number
- Expiration date
- Credit card limit
- Card usage
After verification, the acquirer transfers the data back to the merchant, generating an approval code. The merchant enters this code after which two copies of the charge slip are generated. The charge slip is the customer’s agreement to repay to the issuing bank the amount of the purchase within a period. One slip is retained by the merchant, while the other is the customer’s copy.
The CVV code on the back of a credit or debit card is a security feature for credit or debit card transactions, providing enhanced protection against credit card fraud.
Debit cards are directly linked to the customers’ accounts, allowing instant access to cash from ATMs around the world and at many retail POS locations. The process of payment using a debit card is much similar to that of a credit card. When a customer swipes his debit card and enters the PIN, the details are transmitted through the merchants or POS terminal to an authentication terminal. The terminal checks the magnetic strip on the back of the card and transmits the data to a card-processing network.
The network performs a fraud analysis and sends the information to the issuing bank. The bank authenticates that the card is valid and confirms the availability of funding in the customer’s account. The merchant is notified again through the network, whether the transaction has been approved.
The 16 digits on the card are used for the authorization and authentication of the cardholder. The digits consist of:
- A six-digit Issuer Identification Number (IIN), previously called the Bank Identification Number (BIN), of which the first is the Industry ID indicating the type of card, such as VISA or Maestro.
- An individual account identifier, usually up to 12 digits.
- A single check digit is calculated based on a simple checksum formula used to validate a variety of identification numbers.
Prepaid cards are also referred to as stored-value cards since a set amount of money has been loaded into these cards for use later. These are one of the most commonly used payment methods. Prepaid cards can be reloaded with cash repeatedly. They offer greater flexibility than credit cards and debit cards.
Although prepaid cards resemble credit and debit cards in appearance, they are not like credit cards, which provide you with a line of credit, or debit cards, which are linked to a bank account with an overdraft facility. When a transaction is made by a customer, the amount of purchase is reduced from the prepaid card’s value. A customer can only spend the money that has been loaded onto the card.
Prepaid cards can be of two types, which are as follows:
- Single-purpose cards: They are also called closed-loop cards, as they are designated for a specific merchant or purpose only and cannot be used beyond that. Examples of single-purpose cards are store-branded cards, prepaid telephone cards, and benefits cards offered by employers.
- Multi-purpose cards: They are also called open-loop cards and carry the logo of the bank card association that has issued the multi-purpose cards, such as VISA or MasterCard. For example, a multi-purpose card holding a Visa logo can be used to avail cash at ATMs and purchase products at places where Visa credit or debit cards are accepted. Examples of multi-purpose cards are gift cards.
A smart card is a plastic card similar in appearance to a credit or debit card, but it has an embedded microchip loaded with data. The microprocessor is enclosed in a gold contact pad on one side of the card. The microprocessor is loaded with information just like the magnetic black strip on the back of debit and credit cards. However, the information in a microprocessor is vast and programmed for different applications.
Smart cards can be used with a smart-card reader attached to a personal computer to authenticate a user. The host computer and card reader rereadshe information on the microprocessor. This microprocessor on the smart card ensures security and administers access to the data on the card. Smart cards are used for electronic payments, telephone booth calling, or satellite television access.
Smart cards can be of two types, which are as follows:
- Contact smart cards: These cards require a card reader to read and update information.
- Contactless smart cards: These cards do not require a card reader to read and update information.