Cash, Charge or Credit card?

Card money is now available in various types, but fundamentally, they are of 3 types — cash, charge and credit. A cash card is an ATM card used to draw money from an ATM. If this card were to be used at a merchant location then the user’s PIN would be required, unlike the debit card. In both cases, the money is debited from a bank account. A charge card is not associated with an account. Instead, a bill of expenses is sent to the customer at the end of each month to be settled that same month. The card gives more leeway to customers in that it allows a certain amount of credit to be accumulated over a period of time. However, as we have seen in the recent past, this comfort may come with a heavy price.

Brief history of the Card

Granting and accepting credit has been prevalent in society since the time of the barter economy of ancient Egypt. However, the concept of using a card to keep track of this started being used in the United States in the early 1900s. Each merchant offered a card to keep a line of credit with his store or business. This was becoming very cumbersome and in 1950, Ralph Schneider and Frank McNamara decided to take steps to consolidate these cards into The Diners Club. In 1958, BankAmericard was launched, which today has become Visa. It was met with close competition in 1966 from Master Charge, which later became Master card. Barclaycard was launched in 1966 in UK, the first such card outside the states.

The pentacle of card system

There are 5 entities in the card system – Customer, issuing bank, merchant, acquiring bank and the card network. Firstly, there is the customer who holds the card. The bank that issues this card is called the issuing bank. A purchase can only be made when the merchant accepts the card for payment. For this, he should have a card account with his bank. The bank that handles the merchant side of the transaction is called the acquiring bank. Last and arguably the most vital part of the system is an international card network like the Visa or MasterCard.

Card — behind the scenes

Here is what happens when your merchant swipes your card and enters the amount of the transaction. The swipe machine is connected to a credit card network, such as Visa. The machine contacts the networks’ servers that in turn identify the issuing bank from the data read off from the magnetic strip or chip. On contacting the issuing bank, the bank checks the account information to make sure the account is valid, card is not reported stolen or missing and that the account’s credit limit is not exceeded with this transaction. If the transaction is cleared, it places a pending transaction flag against this account for the amount specified. The card network also takes care of the actual transfer of funds from the issuing bank to the acquiring bank, which takes place in one or two days after the transaction.

If you enjoyed reading this article, you should probably read more finance and law articles by Ajeet Khurana at Legal Bugle, especially consumer rights refunds.