Use Your Cash Advance Wisely

Background

The Visa bank credit card system is composed of three separate entities, Visa (the association), the issuer (bank that issues credit cards), and the acquirer (banks that sign merchants). While both issuers and acquirers are members of the association, each issuer and acquirer is a separate business entity. The Visa bank members are competitors and vie with each other for cardholders and/or the merchants business.

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Issuing Banks

or issuer s, are the financial institutions that issue credit cards to individual consumers. These banks carry the credit card loan or, in the case of debit credit cards, maintain the related personal account.

Acquiring

Banks - or acquirer s, are financial institutions that offer accounts to merchants that allow the merchant to accept bankcards. These banks process and settle credit card sales transactions for their merchant clients. These banks are also referred to as a merchant bank.

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Visa

An association of member banks that provides a global network for value exchange. Visa does this by providing a worldwide telecommunications and settlement system, setting operating standards, and developing new products. Visa itself does not deal or directly serve consumers or merchants; hence, VISA DOES NOT ISSUE credit cards NOR MAINTAIN MERCHANT ACCOUNTS.

Bankcard processing is a communications system, with banks at both ends and Visa in the middle. A single bank can serve as both a credit card-issuing and acquiring bank; but, for the moment, we will treat the functions as separate.

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As the term implies, the credit card-Issuer will, after receiving an application from an individual, family, or company, investigate their credit history and upon approval, issue a credit card. The credit cards have specified payment terms, may involve an annual fee and impose interest if the entire balance is not paid within a specified time, usually 20 days from the date of billing. The credit cards also have credit limits, ranging from a few hundred dollars, up to many thousands.

The Acquirer will arrange to accept bankcard charges from the merchant, charging a fee, generally a flat percentage, for the service. Each bank is free to determine its own fee to each merchant. This would include authorization processing and settlement processing. In a case where the merchants and cardholder use the same bank and/or processing centre, certain of the steps are short-circuited, and the cost to the bank is less. The most significant cost involved in the process is interchang e .

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When the cardholder uses their credit card to pay for goods or services, the merchant swipes the credit card through the Point of Sale terminal or imprints the credit card's information on a sales slip. The sales slip is then completed, with the date and amount of the sale and other pertinent information entered. The merchant then has the customer sign the slip, either the electronic printout or the sales slip, and confirms the validity of the credit card. The customer receives one slip while the merchant retains one for their records and sends one or more copies to the bank.

The merchant bank then transmits the sales information (either enters the data of the sale or the electronic swipe information) to Visa. Visa then assures that the account number is a legitimate number and is not “blocked”. This information, the account number, transaction amount and expiration date, are then forwarded to the issuing bank. The information can be verified and matched to the credit card verification value (CVV) and is then returned to the merchant.

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Clearing

Is the process by which the sales transaction information is gathered, sorted and forwarded to the issuing bank by Visa. Settlement is the crediting of the merchant bank for the sale and debiting the issuing bank for the transaction. The merchant bank will then forward funds to the merchant account. The issuing bank will store the sales transaction information until the end of their billing cycle. At that time a statement, the cardholder billing statement, is prepared and mailed to the cardholder for payment.

POINT-OF-SALE (POS)

POS Terminals

The POS terminal performs a variety of functions at the retail point of sale.

Terminal applications include cheque guarantee, cheque verification, credit card authorisation, data capture, and even inventory control.

Essentially, cheque guarantee, cheque verification, and credit card authorization permit a merchant to obtain immediate approval in order to honour a customer's cheque or credit card. The more sophisticated systems provide credit card data capture, by which sales information is actually captured at the point of sale, thereby eliminating the need for the merchant to gather paper sales drafts and deliver them to the bank for credit.

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THE AUTHORISATION PROCESS

Model credit card Transaction

Authorisation

A credit card transaction begins when the cardholder presents his or her credit card to a merchant for the purchase of goods or services. The merchant is required to follow established procedures:

Obtain an authorisation for the sale

Obtain the imprint of the credit card, either manually or electronically

Obtain the signature of the cardholder and compare to that on the credit card.

In order to prevent use of credit cards by unauthorised persons and the abuse of credit by the cardholder, both Visa and MasterCard have established data banks in regional authorisation centres. These data banks are linked electronically, and can quickly be accessed worldwide via telephone lines.

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If the transaction amount exceeds the merchant floor limit, the merchant is required to contact its authorisation centre to obtain an approval for the transaction amount, or swipe the credit card through an electronic terminal, referred to as a POS Terminal. Before granting the approval, the authorisation centre checks the Exception (Negative) file which contains all the statused accounts such as lost, stolen, counterfeit, and credit problems. The account number used for the transaction is matched against those accounts listed in the Exception File. If the account number is listed in the Exception File, the transaction is declined and a response is given to the merchant, which could include instruction to retain the credit card. If the transaction is approved, then an authorisation code is provided to the merchant and either written on the sales draft or printed on the sales draft in the case of an electronic terminal.

The Issuing bank generally provides the authorization code, after the information has been switched from the merchant to the Issuer via the Visa network. If the Issuer is not available for some reason, Visa will perform the checks for the Issuer.

The issuer is then notified at a later date of the transaction.

Authorisation Responses

Electronic authorisations usually only take seconds and provide an excellent protection against fraud. It is important to remember that a negative electronic response in itself does not indicate a crime has been committed or constitutes sufficient probable cause to make an arrest. The authorisation responses that could be received by a merchant are as follows:

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“Approved”

The transaction is accepted, the most common response.

“Declined” or “credit card Not Accepted”

The credit card issuer will not approve the purchase. In this case, the merchant is directed to return the credit card to the customer and refer them to their issuing bank if they need any further information. This response would not be an indication of fraud.

“Refer” (“ Call or Call Centre”)

The credit card issuer is requesting the merchant to call their voice authorisation centre.

The issuer wants more information before they will approve the transaction.

“Pick Up ”

The credit card issuer wants the merchant to keep the credit card. This is most likely due to the credit card being blocked on the Exception File for lost/stolen; or that this cardholder has not paid his bill or is over his credit limit. Even this response should not be the basis for an arrest without fur ther information.

Authorisation methods

The authorisation can be obtained by phone, POS terminal or ARU Audio Response Unit, using a touch tone phone). The merchant then enters the authorisation code on the sales slip. They must also authorise a transaction when the credit card is not present, as in mail or phone orders.

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Some qualifying merchants utilising a POS terminal or the ARU system are required to authorise all transactions regardless of the dollar amount. This is called a zero floor limit. This authorisation process dramatically reduces fraud and qualifies the merchant bank for lower interchange rates, and therefore, a lower discount rate for the merchant.

Merchants utilising a POS terminal can send their transactions via telephone lines to a host computer where the information is captured and stored. This type of terminal is referred to as a draft capture terminal. At the end of a period, usually the business day, the sales data is transmitted to the host computer, which is subsequently transmitted to the acquiring bank (or their processor). At that point merchant bank account is credited with the sales and the sales information is transmitted to Visa.

PROCESSING:CLEARING and SETTLEMENT

Banks contract directly with merchants to process the merchant's credit card transactions. Every merchant that accepts Visa credit cards does so according to terms and conditions set forth in a merchant contract with the bank. The banks, referred to as acquirers or merchant banks, may have thousands of merchants signed at any given time. At the end of each day, the merchant batches (or totals) all credit card sales and transmits the data to the acquiring bank. The banks in turn credit the merchant accounts for the full amount of the sale less a discount (small fee) for handling the transactions.

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Each day the merchant bank electronically transmits all the credit card sales information to the Visa processing centre. During this process, called clearing, Visa sorts the credit card sales data by credit card issuing bank. Clearing is the term for moving the sales transaction information from the acquiring bank to the issuing bank. Like cheques that are cleared through local clearing houses, various banks and/or a national clearing system, credit cards are cleared through the Visa network.

At the same time clearing is taking place, a process called settlement is occurring. During this process, the merchant banks are credited for the merchant sales while the issuing banks are debited. The sales transaction information transmitted to each of the issuers is posted to the appropriate cardholder account.

The cardholder billing statement is then mailed, usually monthly, to the cardholder for payment. Millions of transactions are processed daily in this manner. The merchant bank is charged an "interchange fee” for being allowed to recover the sales amount for the merchant through the network. A portion of the interchange fee is then credited to the issuing bank to cover their cost and the risk associated with issuing credit cards.

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The difference between the interchange fee and the merchant's discount rate is the gross revenue received by the merchant bank. If a bank services both the merchant and the cardholder, the interchange fee is retained, therefore, lowering the banks cost. These transactions are called "on us" transactions.

CHARGEBACKS

After a sales slip has been processed, there are several reasons that a merchant's account may be debited for the sale and the merchant suffers the cost of the transaction. These debits are called chargebacks.

If the merchant complied with the prescribed procedures, they will receive payment for all credit card sales. In instances of fraud or questionable sales practices, the cardholder may dispute a charge on their billing statement with their issuing bank. The issuing bank would request a copy of the sales draft from the acquiring bank, which may have to obtain the copy from the merchant. The information would be reviewed by the issuing bank and based on specific regulations would determine whether or not the disputed transaction can be reversed. If a chargeback is granted, the issuing bank will be refunded the transaction amount. The acquiring bank may then deduct that amount from the merchant's account. However, if the merchant followed all required procedures a chargeback may not be allowed. The issuing bank then must settle the dispute with the cardholder and often, in the case of fraudulent use of the credit card, the issuing bank is the victim.

There are many reasons for chargebacks. However, if the merchant and their employees are properly trained, follow the procedures and inspect the credit card, almost all charge-backs can be avoided.

Credit Cards: Security and Fraud