Card-iology

Payment as we know is the exchange of money (or equivalent)in return of some valuable good or service which could be provided by an individual, company or business, government etc.

Since the way the money is used has evolved over the years, the mode of payments have also seen a lot of innovation. Payment in cash was the only method when the business started. It gradually evolved in various forms such as cheques, demand drafts, account transfers and then in the modern era we saw the evolution of cards (debit and credit), internet banking and most recently mobile banking and social media payments.

In all these modern payment modes technology has a huge role to play. Payments done by cards or internet banking though look to be extremely user friendly and effortless on the surface, one cannot imagine the extremely robust, efficient and complex systems that are working at the back end to make that process smooth and error free.

Let’s discuss a brief about these processes with respect to cards before moving on to international payments.

Plastic money as we call them, have made our life so easy that we cannot imagine our life without them just like we feel it with mobile phones. The hassle of carrying money, its availability, keeping it secured, making efforts to count them, wear and tear involved have all been diminished to almost zero with the advent of cards. Today if you have the card, you have your bank with you. Debit cards give you the power to make any expense from the funds available in your account and you can get the cash almost anywhere using ATMS. And credit cards gives you the additional flexibility to make an expense which could be paid on the later basis to the card companies. Keeping aside the risk associated with them, one cannot ignore the fact that we have become totally dependent on them.

Let’s have a high level process view as to what happens one swipes the card at a merchant’s point of sale.

Suppose you are carrying a debit/credit card of ICICI bank and you make a purchase of Rs 100 from a merchant whose swipe machine is belonging to HSBC bank. This machine is connected to internet via wired of wifi connectivity. When the ICICI card is swiped in HSBC terminal machine, the 1^st thing which will happen is that the HSBC bank machine will read the data which is imbibed in the black colored magnetic stripe and more recently in the chip of the cards. It will then send this data along with the amount, to the acquiring bank (which is HSBC in this case). Depending on the network service provider of the card (Mastercard or Visa), the acquiring bank would route this data via them to the issuer bank.

Here the role of network providers is very important because these providers help in maintaining the network of banks, channeling the payment details and then reconciliation of the accounts in a secure and accurate manner.

After data has reached the issuer bank, it will validate the information of the card holder, its credit limit and accordingly pass the message (confirmed or rejected) to the acquiring bank via visa/Master card. This information is finally received at the terminal of merchant and receipt is generated for both merchant and the card user.

The power of this technology can be appreciated because of the fact that this whole process gets executed in few mili seconds. Such is the power of telecommunication and data maintainance.

Settlement is done in the following manner:

After the process has been executed, the books of merchant, acquiring bank, network providers and issuer banks get updated.

If customer has made a purchase of 100 bucks, the merchant becomes the legitimate receiver of this amount by his bank (acquirer bank ie HSBC). And HSBC has the pending balance on issuer bank, which is ICICI bank.

Since there would be many exchanges of transactions via Visa and Mastercard for both these banks, at the end of the day the settlement amount or the netted amount is informed to the respective banks by the network providers.

But the merchant is aloof to this netting process and he, after submissions of the receipts which he would have collected from various customers, receives the amount by acquirer bank in his account.

And the issuer bank is liable to pay this amount to the acquirer bank at the end of the day (calculated in netting). And finally the customer will pay this amount of 100 bucks to the issuer bank as and when his credit due date is approached.

Here, an important observations is that the merchant would not be receiving full 100 bucks form the acquirer bank. Various fees are deducted for each transactions by the acquirer bank, network provider and issuer banks. So ultimately the merchant may receive, say 98 bucks for that transactions.

But because of the easy availability of the liquidity with customers, cards are so widely popular.

Now the question arises, what is the benefit to the issuer bank (ICICI) in this case, when this bank is carrying the final risk exposure on the customer.

Credit Card companies basically earns from:

1.       Joining fees paid by customers

2.       Annual fees

3.       Interest fees in case of late payments

American Express has a unique model of operating this process. In Amex cards transactions, the network service is provided by Amex itself and because of which they are able to save a lot of fees in the process. And because of this reason, they are able to provide elite services to their customers.

This was all about the small transactions which are done by cards. What if the payment of worth millions has to be paid electronically from one country to another. This would be discussed in the forthcoming article “International Payments”.