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1. CREDIT CARDS
Overview:
Credit Cands have now become a mandatory item to carry in our wallets Tor its universal acceptance as an exchange
currency and an important source of revenue for banks. Before we understand the concept of credit Cards let us

understand what is a secured and an unsecured loan.

Secured Loans: Secured loans are the most accepted way for financing large sums of
money.
-Secured loan is a debt in which the borrower pledges property or any other collateral as a security. Thebank or
lenders can encash the collateral to recover the outstanding debt in case of default such as home loan, vehicle loan,
loan against shares, etc.
-
Secured loan also has the option of co-borrower who is also liable to repay the loan if primary borrower fails to pay.
-Since the loan is backed by a security, Banks generally extend the loan for a longer period than unsecured loans.

Unsecured Loan: Thisdebt that does not have any property or any other collateral as security. In case of default, the
Bank does not have recourse to recover dues except for follow úps and filing suits. Hence unsecured loans such as
personal loans, educational loans have higher interest rates than the secured loans.
Credit card is an unsecured loan for the Bank. The rate of interest charged for an unsecured loan is higher because of
the larger risk of non-recovery of money in case of default.

Plastic Money (Credit Cards):

It is a kind of unsecured loan based on Use Now, Pay Later concept. It is issued by the bank to the individuals based
on their credit worthiness.A specified credit limit is then assigned to the card.
Credit cards have high interest rate íf not repaid within stipulated time.
Credit cards provide convenience and safety in the purchasing process. The credit cards are made of plastic. Credit
card enables the cardholders to purchase productsor services without making immediate payments and can be used
for purchase of goods and services all around the globe.

Types of Cards

1. Corporate Card - These are credit cards that are offered to the employees of large company to fund their
official expenses such as travel, accommodation and other business expenses.
The two main types of corporate
cards are
•Travel and Entertainment cards used mainly for travel related expenses journeys, food and lodging such as
flight bookings, hotel bookings, restaurant charges, cab charges, etc.
•Purchase Cards are used to make payment for any office related procurements such as computers,
stationery, corporate gifts, raw materials, etc.

2.
Charge card: It is similar to the credit card but the cardholder has to pay the charges in full e.g, Diners Card.
Partial payments in a charge card can result in heavy late fee, restriction of future card transactions and even
cancellation of the card itself.
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3. Affinity cards: Banks tie up with various institutions to issue these cards where [Link] of purchase
through this card goes to charity. E.g. WWE, CRY, Indian National Army
4. Private Label cards: A private label card is a plastic card issued by financial institutions on behalf of a merchant
or organization to their customer for the purchase of goods or services from that merchant or organization.
Matencad
Co-Branded Cards: Co-Branding helps a bank in adding to its card base. Bank and Merchant Establishment
jointly issue credit cards. Co-branded cards use reward program and special offers such as rebates and
discounts to attract new customers. E.g. Indian Oil & Citibank.
6 Virtual Cards: The issuing bank instead of issuing the plastic provides only the card number, expiry date and CVw
to the cardholder. Virtual cards are generally issued to Corporates who in turn provide
these card details to
their large suppliers as a mode of payment. For any expense incurred, the supplier charges the amount to the
card instead of raising separate invoices for payments and card dues are paid by
the corporate.
Smart Cards: This is not a card type but an added security feature built onto the card to provide
enhanced data
security against frauds. It is a plastic card carrying an embedded chip which stores
encrypted confidential
information. Using the chip the cardholder can authorize any transaction on his
card by keying in a secure PIN.
Parties Involved in Card Transaction
Cardholder: The customer or the holder of the card.

Card Issuing Bank: The Bank or Financial Institution that issues

the credit card to the cardholder. This bank bills
the consumer for repayment.

Merchant Establishment: The individual or a business

establishment, accepting credit card payments for
products or services to the cardholder.

Acquiring Bank: is the bank or financial institution

that processes credit and or debit card payments for a
merchant. The term acquirer indicates that the bank assumes
association. the credit of the card-issuing banks within an

Credit Card Association:Asso ciation is an international

body which frames the guidelines and facilitates
settlement on card payment transaction between members.
In 1950s Bank of America
introducedthe first general purpose credit card, -
bank created a separate credit card entity the BankAmericard. In 1970 the
known as VISA. In 1966, as a result of Bankof
competing banks spawned rival cards. This network America's success
of bank card owners later created an association
to be known as MasterCard. that came
There are several associations now such as MasterCard,
Visa, Diners, American Express, Discover,
etc.
Transaction Network: It is the system implementing
may be operated by a the transmission mechanics
third party independent company and a single company of electronic transactions that
may operate multiple
networks.
Affinity Partner:Some organisations with
good customer base agree to lend
sales for a fee or percentage of balance on their name to
cards issued. Charita ble organisations, sports card issuers to boost
associations / clubs (lawyers, chartered accountants), teams, professional
big retailers are examples
of affinity partners

Insurance providers:. Insurance companies

underwriting insurance covers offer
most frequent card transaction types such as additional protection offers on
travel related insurance on Hotel Burglary Security,,
Protection, Purchase Security etc. Travel Medical

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Co Branded Compay logo Bonk Narne Card Nurmber

CssO MOb
CardChip
457B g4BB
DANIEL CHOONG
BBBB UPY
VISA
Card holder narme Card expiry date CardASsoCiaion

Magnetic Strip

7599 123
Signaturestrip
Service Disdaimere erag
rvo-SLS

Card Features and Associated Equipment

1, Card Number: It can range from 13 to 19 digits but the most common are16 digit number present in
the front
panel of the card.
• The 1st digit signifies the Association
5for MASTERS
4 for VISA,
2 for AMEX
3 for Diners ..
Digits 1-6 signify the BIN or Bank ldentification Number needed to identify the bank
for transa ction authorization and settlements.
Digits 7-15 are randomly generated sequence of numbers or the account number.
• Digit 16 is a check digit derived from the previous 15 digits based on certain inbuilt logic /algorithms.

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2. Magnetic Stripe: The stripe on the back of a credit card is a magnetic strip. There are three tracks on the
magnetic strip of which the first two tracks are typically used for maximum card transaction types. Track three is
used in read / write mode for storing static information of encrypted PIN, authorized limit, currency units, and
country code. The information in track one and two are as follows:
Cardnumber-maximum of 19 characters
-
Country code three characters (internationally standardized codes)
Card holder nanme-two to 26 characters
Card expiry date
Longitudinal redundancy check (LRC) s a form of computed check character required for veliable
transmission of digital information via telecommunication channels.
3. Card Verification Value or Card Security Code: is a security feature for credit card transactions, giving
protection against credit card fraud specifically for card not present transactions for online and over the
telephone. There are actually two security codes.

• The first security code is encoded on the magnetic strip, used for cardholder present transactions and called
as CVC1 or CVV1.
The second code known as CVV2 or CVC2 is the most quoted / mentioned by card holders to secure "card
not present" transactions that happen over internet, phone or mail.
MasterCard calls it the Card Verification Code (CVC).

Charge Slip: It is a record of a transaction. It contains the cardholder account number, date of transaction,
transaction amount, authorisation code etc.

Electronic Data Capture (EDC): The EDC is a machine/device where the card is swiped. It reads the magnetic stripe,
where the details of the card as well as the cardholderare captured.

Manual Imprinter (Slug in): The imprint on the front and the back panel of the card is taken. Manual authorization
has to be taken by the Merchant with the Issuing Bank.

CON
TCS

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2. CARD TRANSACTIONS
A. Basis Card Holder & Card Presence
A credit card can be used in retail outlets, hospitals, restaurants, etc. They can be used to book airline/tailway
tickets, buy goods on the internet, online subscription of magazines and also at ATMs to withdraw cash.
1. Face-to-Face transaction
• The cardholder and card is present at the merchant location and the transaction is conducted in the
presence of cardholder.
• There are two variants, namely: EDC swiped transactions, and Non-EDC (slug-in) transactions.
2. Non-Face-to-Face transaction
•These are transaction done remotely and donot require the presence of the cardholder or the card at the
merchant location.
•Only the details of the card such as Card number, card holder name and CVV are required.
There are four variants: 1) mailorder transaction, 2) telephone transaction,3) e-commerce transaction and 4)
standing instruction.
1. Mail Order transaction: Cardholder sends in his consent to process the transaction to his/her card account
for the required merchandise /service. Based on cardholder written authorization, merchant establishment
processes the transaction amount to cardholder account through Association / Issuer.
2. Telephone transaction: Cardholder provides his authorization toprocess the transaction amount to his/her
card account for the required service /merchandise and merchant establishment process the transaction
amount to cardholder account.
3. E-commerce transactions: In this cáse, cardholder visits merchant website and orders goods / senvices
providing card details to processes the transaction amount to card account.
4. Standing Instructions: Cardholder provides standing instructions to merchant to process the periodical
charges relating to the service / merchandise delivered to cardholder. These kinds of transaction typicaly
happen in the case of various subscriber bill payments, Insurance Premiums etc.

Transaction Cycle
1. Card Present / Face to Face:
The transmission of information and transfer of fund between the parties that happen mandatorily through card
associations is called the interchange and comprises of following few steps:
1. Merchant totals up the bills of all items purchased and asks for payment
2. Buyer provides his credit card for payment.
3 Merchant swipes/ inserts credit card through the point of sale (POS) unit. The sale amount is either
manually keyed in or transmitted by the cash register.
4. POS units are devised to transmit the credit card data and sales amount for authorisation to their acquiring

banks at the time of sale and later capture the sales draft.
5. The acoquiring bank routes the authorisation request to the card-issuing bank through the relevant
association. Type of card, issuing bank, and the cardholder's account are identified from the card number.
6. The issuing bank authorises the transaction after validating card limit availability, validity (not expired, not
hot listed) and generates an authorisation code which is sent back to the acquiring bank through the card
association.
•The issuing bank places a hold on the cardholder's account for the sale amount authorised but do not
charge the card holder's account yet.

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processes the transaction, and then sends the

7. The acquiring bank receives the message from issuing bank,
approval or denial code to the merchant's POS / electronic data capture (EDC) machine identified by the
unique terminal id
8. A charge slip is printed out by the POs/ EDC unit that has to be signed by the cardholder, obligating him to
reimburse the card-issuing bank for the sale amount.
9. Later (usually at end of day), the merchant reviews and reconciles all charge slips against authorisations
stored in the POS units. After reconciliation, the merchant will capture, or transmit, the data on each
authorised credit card transaction to the acquiring bank claiming reimbursement.
10. The acquiring bank performs interchange of each sales transaction, with the appropriate card -issuing bank.
The card-issuing bank transfers the amount of the transaction, less an interchange fee to the acquiring bank.
11. The acquiring bank then credits the merchant's bank account, less a discount fee.

2. Transaction Cycle-Card Not Present

The transaction cycle is almost the same in a card not present situation with extra precautions. It is mandated in
most of the countries to use the additional security checks in order to protect all the entities involved from any
fraudulent usage of the card.
1. The cardholder contacts the merchant remotely, either through phone or over the internet.
2. In such transactions, the card expiry data and CVV2 are mandatory to secure approval.
In recent years, there are additional security features introduced by the associations, such as:
Internet Pin (IPIN),
Address Verification by the Merchant (AVS)
Secure password for online transactions and
One Time Password valid only for the said transaction communicated to card holder's mobile.

Point of Sale (POS) Modes

Based on the type of card transaction, thePOS mode is determined. The different POS modes are:
POS 01: Non EDC includes Mail/Telephone Order, E-Com, Standing Instruction, Slug-ln.
POS 02: Only Track 1 is captured, EDC transaction.
POS 05: Chip Card transactions - Normally Chip and PIN verified
POS 06: Read (Track 1) magnetic stripe
POS 07: Contactless Visa Smart Debit / Credit chip card data rules
POS 81: ECOM/ Internet Transactions
POS 90: Face to face transaction but includes only EDC. Both track 1
and track 2 are read by EDC.
POS 91: Transactions done using Pay Pass / Contact less cards.

Card Transaction Authorization

Merchant obtains confirmation for the charge through the merchant's credit card
processing company from the card
Issuing Bank. Simply put, it means - Validation of the Card, Recording/ blocking
the transaction amount in the
customer's card account with the bank. An authorization request is also referred to as a Base 1
transaction.
Authorization is very important for following reasons:
Cardholder - Acceptance of a charge
Member Establishment - Assurance of payment
IssuingBank - Concept of Balance Control,
Account monitoring and maintenance,
Authentication and fraud prevention.

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Authorization Process
The issuing bank uses its authorization system to decide whether every request that is sent to it has to be accepted
or declined. The time taken for a transaction from a merchant to the issuing bank and for the response to be sent is
only a few seconds.
The issuing bank checks the following details on the card while making a decision:
Is the card active?
e Is the card valid (Expiry date is valid)
Is sufficient credit available on the card
Is the spend type on the specified Merchant Category Code (MCC) enabled on the card?
If the answer to all of the above is yes, then the transaction is approved,else it gets declined.

The commonly seen authorization response codes are given below:

Approved -The authorization code is generated and the transaction is processed
Rejected/Declined -The required transaction does not go through. No authorization
code is generated.
a
Capture card (Pick Up) -When a transaction is being made with lost or stolen card, the issuing Bank gives
a

"Capture Card" message

Call Referral -In some special transactions, the issuing bank will give a "call referral" message to the
merchant to get additional information about the card holder and the transaction. This is usually for
cardholder's protection.

Stand in Processing (STIP) Authorisations

There may be instances when the connection / link between the issuer and the association down and when the
is
a on behalf
issuer is not responding to the authorisation request. At such times, the Card Association makes decision
a on behalf of the
of the issuer and responds to the merchant. This process, where the association makes decision
issuer is called Stand in Processing (STIP).

During a STIP authorization, the association makes a decision on whether a transaction has to be approved or
rejected based on the STiP settingsmade by the issuer. An issuer would have the STIP settings set for its entire
portfolio, so till these limits are available, the cardholder transactions will go through. The STIP settings are
determined keeping in mind the kind of spend the cardholders normally have. The decision is NOT made based on
the individual limits set on the card. For e.g.: An issuer could have the following setting:

Airline transactions: Amount - Rs. 10, 00,000, # of transactions - 1000

- -
Hotel Transa ctions: Amount Rs. 25, 00,000, # of transactions 3000
- -
Computer peripherals stores: Amount Rs. 5, 00,000, # of transactions 2000
Grocery Stores: Amount - Rs. 5,000, # of transactions- 100

cardholder having a credit limit of Rs.5000, attempts for a transaction of Rs.200 in a grocery store, the
So if a
transaction will get approved, because the issuer has a defined a limit of Rs.5,000 to be used in case of a STIP
authorization. If he tries for a transaction of Rs.1000 in a cloths store, even if this MCC is enabled in his card and
though he still has enough credit on his card, the transaction will get declined, as the STIP settings does Not have this
category defined. If the cardholder tries to transact for Rs. 6000 in an airline transaction, it will get approved, even
though he has exceeded his credit limit. The transactions will start getting declined when either the amount or the #

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of
transactions defined for each category is exhausted. The only other check that the association does is to see if the
card is listed in the negative file sent by the issuer. This file contains a list of all closed cards and is sent on a periodic
basis by the issuer to the association. So ifa card is present on this file,then the association will decline the
transaction upfront.

Types of Transaction Basis Issuer & Acquirer

Now that we understand how a credit card authorisation works, let us look at how transactions are differentiated
from an issuer and acquirers perspective.
On-Us transactions
These are the transactions where the Issuing Bank and the Acquiring Bank are the same. In other words, the bank
issuing the credit card as well as the EDC machines are the same.
-
The association Visa or MasterCard has no role to play in this transaction process. The card transaction happens
within the same bank and so the association is not contacted either at the time of authorization or settlement.
Off-Us Transactions
These are the transactions where the Issuing Bank and the Acquiring Bank are different. In other words, the bank
issuing the credit card as well as the EDC machines are different. The assoclation- Visa or MasterCard facilitates the
settlement of all international domestic card transactions between issuer and Acquirer. All the authorizations are
/
routed only through these associations.
CONFIDENTIAL

TOS

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o
3. Settlement
a get paid when a transaction is
Settlement refers to the process where the various entities in credit card transaction
done. This is also referred to as a Base 2 transaction.
a transaction and the time it
In an ideal scenario, the settlement cycle between the time the cardholder does
reflects in his account is 3 to 5 days.
at a merchant on say the of Jan. This is how
1
a
For e.g., if a cardholder uses his card to make Durchase of Rs.100
the above example will translate to monetary transactions:

1-Jan - Cardholder transacts for Rs.100, merchant submits transaction to the acquiring bank
bank
submits
2-Jan - Acquiring bank pays the Merchant Rs.98 (assuming 2% commission). Acquiring
transaction for Rs. 100 to association a 1,75% commission is taken by the
3-Jan - Association pays the acquiring bank Rs.98.25 (Assuming
as Rs.100 to the issuing bank.
association). Association forwards the transaction with amount
(Assuming 1.5 % revenue) and posts the
4- Jan - Issuing bank makes a payment of Rs.98.5 to the association
transaction in the cardholder account for Rs.100.
every month with a list of all transactions that he has done. He
The cardholder receives a statement
then makes a payment for the total amount due from him
Based on the above, following are the amounts that each entity gets:
you want to use a credit card to
Merchant - Rs.98, which is normally why the merchant charges service fee when
a
recovers the loss fromthe service fee charged.
make a payment. So the merchant actually
Acquirer - Rs.0.25
Association - Rs.0.25
Issuer-Rs.1.5

Settlement Cycle
pictorial representation of the settlement cycle
A is given below:

A Merchant can send transactions to the bank in three different ways.

Through the POS terminal, which is called online submission, as and when the transaction takes place the submission
to bank happens.
Merchant provides transaction reports to a data management company which then transfers the same to
the bank. Such submissions are called File transfers.
Through charge slips,which are manual submissions.
Irrespective of the method in which the merchant submits the charge-slip, all transactions go through the same
settlement cycle.
Ifthe transaction is an on-us transaction, the asso ciationwill not be involved in the settlement process, the bank
internally does the settlement between the acquiring and issuing department by debiting customer and crediting
merchant.

The Interchange and Settlements unit handles the function of settling the association and maintaining the books of
accounts on behalf of the bank. They ensure that the general ledgers of the bank and the Profit and Loss account is
balanced and maintained accurately.

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Statement Generation transaction is

now we seen how the settlement for each transaction takes place and how ultimately the
for a cardholder over period of
Till have a
to a cardholder account. The issuing bank consolidates all the transactions
posted which he would have
a monthly statement to the cardholders mailing address
time (normally fora month) and sends details:
form. The statement contains the following
given at the timeof filling the card application
Transaction Date-The actual date when the transaction done
is

Posting Date Date when the transaction is posted to the card

Merchant Name -Name of the Merchant and location was done.
- amount and currency in which the transaction
Transaction Amount & Currency This contains currency in which the transaction isgoing to be billed
-
Billing Amount & Currency This contains amount and
US dollars in the US, the transaction amount
is USD
to the cardholder Eg. If an Indian cardholder spends 100
100 and the billing amount will be INR 4700.
Credit Limit- The original Credit Limit of the cardholder
being generated.
Statement Period-Defines the time period for which the statement is
Typically its from the day after the previous statement date
to the current month's statement date
statement period, in
Amount Due This is the total of all transactions that has been performed during the
-

other words, it's the amount the cardholder owes to the bank
Statement Date: Date on which the statement is generated.
Payment Due Date- This is the date by when the cardholder has to make payment to the issuing bank.
If
on the card.
there is a delay in making the payment, the issuing bank levies certain fees and charges
a customer to pay. If the cardholder makes
Minimum Amount Due(MAD): This is the minimum amount has
will be
this payment by the payment due date, Late Payment Fee will not be charged, however, interest
a
a
charged on the amount that is outsta nding. Generally this is flat amount or a % of the Total Amount Due
(TAD). E.g. Rs: 100 or 5% of the TAD.
Interest -When the fullamount due is not paid by the cardholder the bank levies certain charges on the
card. Normally for any purchase transaction that is due, the interest is charged from the statement date until
the current date. For cash transactions that are due, the interest is charged from the date of the transaction
until the current date.
Fees and Charges: In some cases, there may be certain fees and charges that are charged by the bank, these
details are also included as part of the transaction details. The different types of fees and interest charged by
the bank are given below:
1. Cash Advance Fee-This is the fee that is charged by the bank when a cardholder withdraws cash
using his credit card.
2.. Late Payment Fee-This is charged when the cardholder has not made his payment (At least the
Minimum Amount Due) by the Payment Due Date
3. -
Forex fee For any transaction that is performed outside
the country of card issuance, a forex fee is
charged
Return Payment Fee-This is charged when the cheque payment made by
the cardholder bounces.
Purchase Transaction Fee -For some cardholders, for every transaction made, a small
fee is charged.
6. Annual Membership Fee- This is charged every year by the issuer as a
membership fee.
Based on the details provided on the statement, the cardholder needs to pay
the bank whatever is due on his
account. In some bank which supports a large number of card issuance,
there are units which do a sample check on
the accuracy of the data populated on the statement and also check additional things such as
marketing collaterals,
special offers, etc. which are sent along with the statement.

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4. PAYMENT PROCESSING
a payment to his card.
After the cardholder receives his statement, the cardholder has to make
The cardholder has the following options to make his payment

can make cheque /draft payments which can be dropped in drop boxes
Cheques / Drafts - The card holder
even merchant outlets. In certain countries, thís is referred
placed by the banks in ATMs, bank branches and
to as lockbox payments also way of cash. Cash
can make repayment against their card accounts by
Cash If card members so wish they
-
a
ATM the card member will be issued
can be deposited at ATM Centers. In the case of deposits through the
transaction record through the ATM can initiate a fund Linternet transfer to transfer
money
Fund Transfer / Internet Transfer-The cardholder
from his bank account to the issuing bank.
a account with the same bank from which his
Standing Instruction If the card member holds checking
-

a instruction to the bank, to automatically debit his

credit card was also issued, he can give standing
checking account and make a payment to his card
to debit his account directly every month
Direct Debit - The cardholder gives the issuing bank the authority
payment request to the cardholder's bank.
for the amount due. In this case the issuing bank initiates the

payment for the amount due on his card. When the

Based on any of
the above methods, the cardholder makesa
OTB by
(open to buy) increases the
payment is made to the card, the limit on the card gets replenished and the
payment amount received.
to pay up his money. If the
Normally a bank gives the cardholder few grace days after the due date order
a in
by the bank. The grace days are
payment is made within the grace period, Late Payment will not be charged
a

which may be outside the control of the

provided to the cardholder to accommodate any delay in transfer of funds
cardholder.
bank is responsible for allocating the
When the cardholder makes the payment, the payment processing team the
in
a has initiated a payment but
payment received to the correct cardholder. There may be instances when cardholder
an investigation to track the payments.
it hasn't reached the bank. In such cases, the payments team initiates

it may not have sufficient details to identify the

Sometimes, the bank may receive a payment into its account, but
card to which the payment needs to be allocated to. At such times, the bank tries
to identify the cardholder with the
minimal information available on the payment instruction. For
e.g., if
only the partial card number or only the first /
see if the amount paid was actually due
last name of the cardholder is given, then the team will check the system to
or they may call the
by any cardholder. Based on the match, the team might either apply the funds to the cardholder
cardholders to confirm if the payment was indeed made by them.
a
team also keeps track of cards having credit balance, this means that the cardholder has made
a
The payments
payment more than what was due and this causes the card to have an excess limit. In such cases, the team initiatesa
refund to the cardholder for the excess amount.
This is done to ensure that the cardholder is not holding illegitimate money in his card.

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Payment Allocation

There are different ways in whicha bank may use to allocate the payment received to the various types or
transactions.

Option 1: The payment is allocated against the transactions in the oldest statement first and then on to the later
statement in the following order:

1st -Interest charges

2nd- Fees
3rd- Cash advance transactions
4th - Purchase transactions.
If a payment is received for Rs.10000/- this is how the payment will be allocated vide option 1 & 2.

Statement 1 Statement 2

Cash Cash
Interest Fees Purchase Interest Fees Purchase
Advance Advance

500 300 2500 5000 700 500 3500 7000

Statement 1 - Option 1 Statement 2 - Option 1

Cash Cash
Interest Fees Purchase Interest Fees Purchase
Advance Advance

500 300 2500 5000 700 500 500

Option 2: This is where the payments are allocated across statements but based on the above order.
1 Statement 1 Interest500
2. Statement 2 Interest- 700
3. Statement 1 Fees- 300
4. Statement 2 Fees- 500
5. Statement 1 Cash Advance- 2500
Statement 2 Cash Advance- 3500
7. Statement 1 Purchase- 2000
If the cardholder does not make payment on his
card, then the card becomes delinquent. The bank will allow
the cardholder to transact on his card up to one month if the payment is not made.
After that, the bank will block the card and will start declining any
transactions of the cardholder.

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5. CARD OPERATIONS MODULE

Card Lifecycle - Functions and Support Units

Now that we understand the basics pertaining to a credit card, let's have a look at
the various functions and support
units that are involved in the entire cards life cycle.
A. Executive Management: All new card products start in Executive Management meetings.
B. ldeas are discussed and decisions are made about what might be a marketable card. These decisions are made
based on our past experience. Fraud losses and credit losses (Collections) influence these decisions.
C. Marketing: Marketing has to decide who the targeted audience for the new product willbe. They will research
and advertise to get the applications in the door.
D. Credit Approval process: Applications are reviewed in Credit. Decisions are made toapprove or decline credit.
When approving, Credit determines the credit line on the account based on the customer's information.
E. Transaction services: Transaction Services provides the following: Card lssuance,Statements, Payments, Letters,
Central Services
F. Authorizations: When customers make charges, the merchant scans their cards'magnetic strips to determine if
the charges will be honored. The MasterCard or VISA Authorization Centers handles most authorizations. In
some instances, the customer may ask the merchant to call the issuer directly and they will have to process the
authorization.
G. Customer Service: Customer service through phones and paper. CUstomers can accessaccount information by
calling, writing or accessing the issuing banks websites. Each of these areas has multiple functions serviced
across different departments.
H. Collections: If customers have difficulty making payments on
time, Collections willcontact them. The focus in
Collections is built around identifying the payment issues early and assisting customers to find ways to
bring
their accounts current. In the late stages of collections, the Bank may have to "charge off" an account.
Bankruptcies almost always result in a charge off.
. Fraud: Security and Fraud may also be in a position of having to collect on an [Link] unauthorized
transactions are made on an account, the customer is not responsible. If those unauthorized transactions were
the result of fraud, the Bank would attempt to collect from the responsible party.
J. Marketing and Fraud Analytics -There is an
analytics team in every bank which helps thebank make various
decisions starting from the segment of market to be approached, strategy to
be adopted for sales, types of fraud
detection parameters to be set, etc. This team forms the backbone for any
business as most of the business
critical decisions are made based on the inputs received from
the analytics team.

Card Lifecycle-Origination
Account Fulfillment is the gateway
for a customer to enter into the world of Credit Cards. The
first process or step in
the cards lifecycle is the application processing function. The unit that performs this function is referred to as
Application Fulfillment Unit or the Originations the
unit. As we saw earlier on in the previous chapter, a
two sides to it, the issuing side and the acquiring card product has
side. These are basically two types of businesses in
industry: the cards
Issuing Business (Customers)
Acquiring Business (Merchants)

17
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Experience certainty.

a credit card to an individual

(Issuing Business)
step in issuing
Fulfillment Unit) performs the first
Ihe AFU (Account a merchant (Acquiring Business)
and /or setting up of terminal for
a

functioning of the whole transaction cycle. If the card/terminal

a function in smooth risks involved are
very
Application Processing is critical implications and the reputational
individual/merchant, the financial every
is issued to a fraudulent iS important to meet
experience the cardholder/ merchant has with the bank, it
high. Also, since this is the first
impression the first time itself.
commitment made and create the right
The functions of AFU
can be broadly classified into two steps:
into the card processing
process in which the data of the applicant is entered
Data Entry: Data entry is the
in the application but this also
involves assigning various
process is not mere capture of data given may involve
system. The
from the reference files other than the application. This
codes and capturiìng data available eligibility, etc. This information entered is
very critical as this is
results, credit limit
capturing the credit check
This is the beginning of relationship
a
with the customer.
transactions for the customer.
used for all the future necessary documents have been provided, AFU performs various
Underwriting: After confirming that all the up of a
judges the suitability of the individual/merchant for being issued a credit card/setting
checks and
are as follows:
terminal. The checks performed

[Link] checks
Checks for Insolvency
ALN
• Checks for previous defaults
• Calculation of other financial commitments
Credit Bureau Checks

2. Negative Database Checks

• SDN (Specially Designated Nationals) Check
• CCA Checks

on these parameters, AFU approves/ declines the request of the

Based on the standings of the individual/ merchant a application is sent
some cases where
applicant. In information provided is insufficient to arrive at decision, the
the
back to the client's end for further clarifications.

the issuing business, after the individual has been approved,

In the underwriting team fixes the credit limit
for the customer.
upon after evaluating the factors like, risk involved and the
In the acquiring business, the floor limit is arrived
some pre-determined matrices.
type of business undertaken etc. after referring to

Card Lifecycle- Issuance Business

This refers to the steps involved in processing the credit card application
submitted by a potential customer. At the
a
end of this process a cardholder will receive card and PIN from the
issuing bank
system. In caseof missing
Data entry Feeding the customer details as provided in the application into the
-

details the same is clarified with the sales team.

e.g. existing loans orcards. Checking the
De-duplication Checking for any existing accounts of the customer
-

delinquency position of these accounts and making decision.

12
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-
Negative list check Checking for match against the negative lists published by the countries asper the
compliance requirements. Items checked are legal name of the individual.
-
Credit bureau verification Checking for the basic details of the customer against the creditbureau data. If
the details provided in the application are different from the credit bureau data then the customer is
contacted -for proofs. The delinquency position of the customer's liabilities with other banks is also checked.
Referrals Based on the details available with the credit bureau systems which would autoapprove or auto
are
decline the applications and in case the system is unable to make the decision then the details
forwarded to the underwriters for manual decisions (might not be applicable for all the business).
Underwriting- This is the decision on the credit limit to be assigned for the applicant based onthe existing
liabilities and the disposable income available for the applicant. The underwriter verifies all the open
account of the customer and the basic details provided by the customer before the decision is made.
-
Credit line increase This is done for the existing customers. When the customer requests forcredit limit
increase the customer's account is analyzed and also the other liabilities are checked for making decision.

Card Lifecycle- Acquiring Business

The Merchant is the key person involved in the process. The Acquiring Cycle refers to the steps involved in
processing a merchant's application to set up a terminal at his business centre. The steps involved are listed below:
-
Mandatory details To check the application is complete with all the necessary details and alsoto make sure that
the KYC docs are provided (id card, business registration docs and utility bills)

De-duplication - to check whether the merchant has existing active relationship andhighlighting it to the sales team
in case they have any account with the bank.

-
Negative list check Checking for match against the negative lists published by the countries asper the compliance
requirements. Items checked are legal name of the company, name of the directors and owners and contract signor.

Credit bureau check - Matching off the details available in the application against the credit bureau reports (legal
name, business type and legal address). Making sure that no negative details, unsatisfied judgments, etc. are
available against the merchant. Check for positive net worth and profits in case of high risk business like airlines,
travels etc. There are three channels for Acquiring Merchants
External Sales Forces
Tele Sales
Key Account Merchants KAM

Once the filed in applications are received, the checks on the application and various other credit checks are done.
The checks are:
Application Check- This is the first check done from the Acquirer's side. This check sdone to see if
the
applicant/merchant has filled in all the mandatory fields on the Application form and has affixed his genuine
signatures at the respective places assigned on the form.
KYC (Know Your Customer) Check- Knowing our customer is one
of the most important things we need to keep
in mind in our businesses .The documents required for KYC are:
Personal ID Card
Business Registration Document

1Q
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Tnere are agencies who are in business of gathering credit information of individuals and providing it to lenders,
employers, landlords, insurance companies and other service providers to help them decide whether to
approve a loan, credit card, job, housing, or to offer a product or service at a particular rate.
Association Checks - These are checks done at the Association level once all other priorchecks are done. VISA
and MASTER checks their data base to verify if this Merchant has applied earlier and does he have any adverse
information which stops Acquiring Bank from continuing relationship with him. The checks are
VMAS Visa Merchant Alert Service
MATCH - Check done by Master Card
SDN Check - Itis an advanced tool to ensure compliance with the regulationsand recommendations of the
organizations concerned with the prevention of money laundering and the fight against the financing of
terrorismn. This tool is an effective aid in detecting the names of persons (natural or legal) appearing on lists
which have been issued by these different organizations with respect to specially designated nationals (SDN).
Decline List Check- This is the last check done before the Merchants application is dataentered in the Master
data base. The name of the company to be registered is checked against the name on the decline list. This list
bears the names of organizations and individuals who have been declined for various reasons such as fraud, a
public figure, has bad credit history and many more. If the name of the company appears on this list it is
immediately declined.

Card Lifecycle- Output of Issuing and Acquiring Function

Issuing Business: When the Application Fulfillment process is completed:
The applicant details are registered with the bank as a cardholder and a unique card number is
assigned to the cardholder.
A file containing the card and PIN details is generated by the card processing system and sent to the
embossing and PIN printing teams in an encrypted form.
The file is then decrypted by the embossing team and the details such as card number, cardholder
name and expiry date are embossed onto pre-designed plastic.
The ATM Pin (APIN) and Internet PIN number (IPIN) are printed on the PIN stationery by the Pin
printing team.
The card and PIN are sent to the cardholder preferred address for correspondence.

Acquiring Business: On completion of the application fulfillment process:

The merchant is registered with the bank and a current account is opened.
An EDC machine is installed in the merchant location and a unique merchant
and terminal ID assigned
to the merchant and his terminal.

TCS

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Experience certainty.

6. CHARGEBACK /DISPUTE RESOLUTION

Sometimes, the cardholder does not recognize the transactions that appear on the statements or he disputes the
transactions on his statement because the amount is incorrect. The card holder can also dispute charges levied on
the account such as interest charge, late fee, insurance charge etc. This is referred to as a charge dispute. On a
transaction intensive product of credit card customer dispute can result in delinquency. Hence understanding and
resolution of disputes is very critical. The types of disputes are:

1 Charge not incurred: This means that the cardholder has not performed the transaction.
Double Debit: This refers to cases where the merchant charges the cardholder twice for the same transaction.
Amount Difference: The transaction amount on the charge slip and that on the statement is not the same.
Card Swiped but authorisation not received / Paid by other mode/other card: This is where an authorization
was attempted but no response was received and where the cardholder would have paid up using an alternate
mode.
ATM cash not dispensed/cash dispensed is less: This refers to the issues faced in the ATM machine, where the
machine did not dispense cash or it dispensed a lesser amount.
6. Merchant has cancelled the transaction: This is where the transaction was cancelled after it was initially done,
but the charge is still not reversed on the statement.

Chargeback Lifecycle
Chargebacks are initiated mostly after card holders reporting a problem to the card issuer.

VIBA CARD
HOLDER

1. Cardholder Disputes the transactlon

VHSA CARD
[Link] receives the dispute resoluticn
r
informatlon and may be re-billed aredited for
the itern
2. Issuer sends the transaction back electranically
to the acqurer
[Link] recelves therepresented item
•If approprlate, the issUer re-posts it to the
cardholders account.
ACQuRER
•If the chargebadk isse is not appropriately
3. Acquirer recelves chargeback, resolves the issue addressed, the issuer may submit the iterrs to
or forwards it to the merchant association for a financial liability decision

AGGURER
5. Acquirer reviews the informationrecelved from
MEHCA4NT the Merchant. If acqurer agrees to the Merchant
[Link] elther accepts the chargeback Item or information, addresses the chargebadk, the
address the chargeback lssLe and resubmits the acqurer represents the chargeback electronically
item to the 8cqurer
to issuer

21
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TATA CONSULTANCY SERVICES
Experiernce certainty.

7. CUSTOMER SERVICE

Customer Service is one of the most important components of any business and it holds good for the credit card
industry as well. This involves analysing, customising and responding effectively to transform every customer
interaction into a positive service experience.
There are multiple channels through which customers can contact their bank to get information, do non-monetary
transactions, to complain on the service provided, to dispute transactions etc.
Some of the channels that they normally use and are probably preferred by most of the card holders afe:

1 Phone services (contact centers)

2 Online (web services -secure and unsecured)
3. Snail mail (where customer writes a letter to the bank)
4
Email services
Fax (where customer faxes his request/complaint/dispute etc.
6 Regulators & other Government Bodies.

The card holder could approach the bank for various reasons. Some of them are:

Request of account information

To execute demographic changes, name changes, address changes, etc.
To report lost/stolen card
Enquiry/complaint / dispute on interest rates
Reversal of charges
Request for new cards/ replacement cards
Dispute charges incurred
Make online / phone transactions
Request for balance transfers
Clarification or dispute on Terms & Conditions of a product

Regulatory & Legal Cases

Customers can also approach regulators (Banking Ombudsman, The Central Regulatory bank of a country
RBI in India), Consumer fora) to raise a dispute against a bank.
(e.g.
These cases are handled by a specialised
service team within the bank.
Customers can also serve a legal notice through their lawyers or file a legal case.
a specialised team in conjunction with the bank's legal team. These cases are handled by

Roles &
Responsibilities of the Customer Service Department

Resolution of Customer Queries.

Monthly Analysis of complaints and problem Incidents.
Standardisation of responses sent across channels to customers. Periodic
Root cause analysis of Query volumes and query types.
review of communication templates.
Work closely with other operational units to reduce complaints and
queries.
Represent the banks in various customer service and regulatory forums.

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6
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TATA CONSULTANCY SERVICES
Experience certainty.

8. FRAUD MANAGEMENT

One of the major issues that the credit card industry faces today is the increase of fraudulent use of cards. In card
Darlance a fraud is misuse of credit facility extended to genuine customer (cardholder) by a third party or
intentional misuse of the credit facility by the card holder himself.
A
fraud may occur on a credit card in many ways. For e.g., a cardholder might lose his card and when somebody
finds it. they might misuse the card and make purchases on the lost card under the name of the cardholder. There
are also instances when people gain access to the card details when the card is still in the cardholder's possession
and misuse it. The different ways in which fraud occurs is given below:
-
1.
LOST / STOLEN This is when the cardholder has lost his card or somebody steals his card and misuses it.

CARD NOT RECEIVED -Such fraud occurs when the card has been sent by the issuing bank to the cardholder,
2
but the cardholder doesn't receive it and it has been intercepted in transit.
SKIMMING/ MANUAL COUNTERFEIT - These are cases where the original card details get compromised during
3.
a genuine transaction and then get used by the fraudster to make fraudulent purchase. There are certain
skimming devices which capture the card detail. So when a genuine transaction is performed, the fraudster
C0Dies the card details using the skimming device. These details are later used to create new card and make
fraudulent purchases.
-
4.
BIN ATTACK This kind of fraud affects an entire card portfolio of a bank. The fraudster identifies the card
numbering logic from a card and createsa large number of duplicate cards using the logic.

5. IDENTITY THEFT
ACCOUNT TAKEOVER- This is perpetrated by criminal who gathers information about the potential /
intended victim and then takes over the card account. The fraudster then contacts the card issuer
masquerading as the genuine cardholder gives address change instruction followed by reporting card
lost and replacement request.
APPLICATION FRAUD - When a criminal uses stolen or fake documents such as utility bills, bank
statements, to open an account in someone else's name.
6 IMPOSTER PICKUP - Fraudster poses as Bank employee and approaches the card holder. He promises the
cardholder to provide him with some special offers and gets the card from the cardholder. He then uses the
card to his own advantage.
7. FRIENDLY FRAUD This is where people known to the cardholder, eg wife or children, may use the card for
their personal expense
PHISHING. is a sophisticated method used by criminals for identity theft by sending fraudulent emails that
8. It
seem to have originated from genuine business organisations. These disguised authentic looking messages are
designed to trick cardholders into disclosing confidential and sensitive information of account numbers,
passwords, date of birth, PIN etc. Even if the personal information sought by the fraudsters is not provided,
simply clicking on the link initiate background installations of key logging software or viruses.

On the acquiring side of the business, the types of fraud that are seen are slightly different. While all the normal
credit card frauds affect the merchants also, there are some frauds that are initiated by the merchant himself.

Merchant Initiated Frauds

-
1. Merchant Collusion In such cases, the merchant knows that the customer is usingsomebody else's card but
still allows him to use the card. The merchant normally gets a commission from the customer for allowing
him to use a stolen / compromised card at his shop.
2. Cash Points -Some cardholders who have exhausted the cash limit on their card and requires cash urgently,
willsometimes approach a merchant and request him to swipe his card and give him cash after taking a % of
the amount swiped.

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Experience certainty.

may Sometime use

who have a shortage of cash to run his business
Working Capital Requirement
-
Merchants use. When the
3
use money received as settlement for his personal / official
his own card in his shop and the access to interest Tree
on he would make the payment.. This provides him ready
payment is due his card,
money.
or the
sides as far as fraud is concerned. Some third party could misuse the acard
The bank is at risk fromn all source of fraud, For this reason, every bank has traud risk
cardholder / merchant himself might be the on the card portfolio, with an intention to protect the bank
management team that monitors every transaction
following functions:
from any fraud loss. The fraud risk management team does the
on their card
constantly reviews the types of fraud happening
Fraud Prevention- The fraud risk management unit key fraud trends. They then create rules /
parameters that can
portfolio and across the market and identifies
are many fraudulent transactions happerning in
capture any transaction that follows a similar pattern. E.g. there USD,
If

US in a computer store for an amount ranging from

USD 500 to 5000 then the following parameter combination
will be setup on the system:
-
Country USA
-
Merchant ABC co.
- USD
Amount >500 and < 5000

Fraud Detection
Any further transaction satisfying the parameter combination defined will trigger a case for review. The analyst
as per the spend pattern of the cardholder
reviews the case and decides on whether the transaction is normal and
or if it appears to be suspicious. If the transaction appears to be fraudulent, the card is blocked anda call is made
to the cardholder to confirm the transaction. If the cardholder confirms the transaction, the card is unblocked, else
the card is replaced.
Fraud Investigation
When the cardholder confirms that a transaction is fraudulent, the fraud unit initiates a series of investigations to
determine if the transaction was indeed fraudulent or if there is any cardholder/merchant collusion involved. In
CONFID
genuinely fraudulent cases, they explore opportunities to recover the amount lost by contacting the merchants and
acquirers concerned.

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Experience certainty.

9. CARD COLLECTIONS
The first instance of delinguency of a customer is when he is misses to make
a payrment for a
statement. When a
Customer has mis-payments then the customer becomes delinquent.
Mis-payment means the customer has not made payment to clear his minimum due.
a

a payment for a complete cycle.

Delinquency: Customer becomes delinquent only when he fails to 1make
If a customer misses to make a payment for one statement he is cycle delinquent. If a customer misses payment
a customer does not make a payment for
for the consecutive statement also he is 2 cycles delinquent. Likewise, if
In other words Customer becomes delinquent when he does not
6 consequent statements he is 6 cycles delinquent.
make a payment for one statement and above.
Ageing Bucket:
Bucket 1: When the customer is 5 days to 35 days delinquent.
Bucket 2: When the customer is between 35 to 65 days of delinquency.
Bucket 3: When the customer is between 65 to 95 days of delinquency.
Bucket 4: When the customer is between 95 to 125 days of delinquency.
Bucket 5: When the customer is between 125 to 155 days of delinquency.
0
Bucket 6: When the customer is between 155 to 184 days of delinquency
are.
Charged off: Anything greater than 180-185 days is generally accounts which

Collection Activity when account becomes delingquent

When the account becomes delinquent, dunning letters
are first sent to the customer. These letters are collection
letters sent at various stages aof delinquencies. These tetters act as reminders to the customers. These letters
arrange for some
prompt the customer to make payment or direct them to call the Customer Service Center to
alternative arrangements. to 3): Collection
For credit card accounts at an early stage of delinquency (generally between buckets1 are
letters are sent, late fees and finance charges are levied on the card account. Customers offered
financial hardship programs to enable them repay on their card account and to
prevent them from
becoming more delinquent.

For credit card accounts at a later stage of delinquency: Some banks tend to close thecard
account
agency up customer to make full
automatically, report the card delinquency to a credit rating and call
customer is at fourth
payment towards their total balances. These activities generally take place when the
to fifth bucket of ageing.

Collection event at late stages of delinquency: When the customer is in Bucket and is tending to roll
5
over to bucket or when the customer is already in bucket 6, the customer could possibly be written off,
6

final settlement programs would be offered to the customer, and the account could be referred for outside
agency or for litigation. These are the intensive collection activities that can occur on a card account if the
card account remains delinquent very long.

RECOVERY
The objective Collection is to proactively manage, control and reduce Net Credit Loss (NCL) by solving the
of

customer's problems.
Delinguent accounts are first worked by Collectors. After charge off it is worked by Recovery and during this stage
the account is blocked / closed. Efforts are made to recover any payment out of the total balance
Once an account is written off, balance is removed from the books and considered as Loss. However, the Net Credit
loss takes into account the amount recovered post account getting written off. This therefore offsets part of the
overall loss to the Institution or in other words, Recovery helps reduce the net loss
= -
Therefore, Net Credit Loss (Write off Recovered Amount) Recovery helps

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Minimizes
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NCL Optimum
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Expen

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amounts

of
Collectors
certainty.

/
Attorneys