The Definitive Guide to Cards

Introduction

Morning Uber rides to office, Swiggy Lunches, Groceries in the evening from Zepto, we keep buzzing the whole day and so do our Payments. UPI, BNPL, Wallets, and Cards make your monies go round. In this piece, we’ll take a look at credit cards.

Wondering what happens behind the scenes when you make a card payment?

Let’s dive in.

Some history first.

The History of Credit Cards

It all started with Charge Plates in 1928 USA and then decades later, Diners introduced the Charge Card. Diner’s Card was the closest to today’s credit cards.

Then came the BankAmericard credit card later in 1958, the first interbank card. Other Banks wanted to offer card services too but building a system themselves would have been absurd. A collaboration felt like the right way. In 1976 BankAmericard became Visa –a name that sounds the same in all languages.

Diners Card was the first credit card in India. But the adoption moved at a snails pace. It took 15 years from the launch in 1960 to reach 8,000 Diners Card registered users in India.

Then The Central Bank of India followed with the first bank issued credit card in 1980. Andhra Bank followed suite the same year. The First two Credit Cards in India were both Visa! It was Vijaya Bank who introduced MasterCard to Indian consumers 8 years after Visa landed.

By the late 1990s, with several PSUs launching their own credit cards, the Indian Market was gearing up for the next big thing - Online Payments.

Credit Cards vs. Debit Cards vs. Prepaid Cards vs. Gift Cards

Credit Cards

A credit card is a card provided by a bank that enables the cardholder to borrow money, up to a specified limit, for purchasing items both in physical stores and online. The borrowed amount can be repaid gradually, with specified payment deadlines and the potential for accruing interest charges.

Your credit limit, which determines the maximum amount you can spend using the credit card, is determined by various factors such as your credit score, payment track record, and income. As long as you meet the minimum payment requirements, your card issuer permits you to spend up to your credit limit.

Debit Cards

Similar to a credit card, a debit card is a payment card issued by a bank that grants you the ability to make purchases, both online and at physical stores. However, the main distinction is that when using a debit card, the funds for your purchases are directly deducted from your bank account. For instance, if you make a INR 5000 purchase using your debit card, INR 5000 will be automatically subtracted from your bank account balance.

In essence, the spending power of a debit card relies on the available funds in your bank account, rather than being determined by a credit limit. Furthermore, debit cards provide a cost-effective or even free means of withdrawing cash from an ATM, while credit cards often impose a costly “cash advance” fee when used for cash withdrawals.

Prepaid Cards

Prepaid cards are a type of debit card issued by a bank or credit card company, which can be used to make online and offline purchases. A prepaid card is not linked to a bank account. Instead, you load the money into the prepaid card in advance.

Gift Cards

A gift card is a form of stored value card that is loaded with funds to be used for future discretionary purposes. However, it has a predetermined amount of money associated with it, and once this amount is depleted, the card becomes unusable. Additionally, gift cards typically have shorter expiration dates compared to prepaid cards.

Gift cards are available in various formats. The most common type is referred to as a closed loop card, which can only be used at a specific merchant or designated retailer and features the name and logo of that establishment. Some retail groups allow their gift cards to be used across multiple affiliated stores.

Understanding Credit Cards

Some very first iterations of Credit Cards were charge-plates. Now, credit cards come with enviable designs, and One Card definitely took it one notch above with a sleek metal card.

The Design and Security have evolved over the years to ensure security. Let’s take a look at some features of the credit card.

Online vs Offline - Card Present vs. Card not Present Transactions

The distinction between card-present and card-not-present transactions may seem quite obvious. In simple terms, card-present (CP) transactions occur when conducted in person, whereas card-not-present (CNP) transactions do not. However, the fundamental distinctions between the two are not solely based on the physical location of the card but rather on how the card is processed.

Typically, a transaction is deemed card-present when it is carried out through any of the following methods:

1. Swiping the card’s magnetic strip using a card-reading device.
2. Inserting the card into a card-reading device.
3. Tapping the card on a card reader to enable contactless payments.

On the other hand, a transaction is considered card-not-present when it is conducted using one of the following methods:

1. Entering card details on an online payment page.
2. Completing a payment form that includes card information and sending it via mail.
3. Providing card information over the phone to a business or individual for payment.

It’s important to note that a payment can still be classified as card-not-present even if a customer is physically present and hands over their card for you to manually enter the required information. To qualify as card-present, a card-reader must be used. This is because a card-reader can capture electronic data, serving as evidence that a card was utilized and authorized for the payment.

Let’s dive deeper into Card Not Present Transactions.

Online Credit Card Transactions Explained

Card Not Present or simply online transactions are one of the most common ways customers buy online. Let’s take an example. It’s a good evening, you feel like making a coffee but you’re out of milk. You open up Zepto, add milk to the cart and a Kit-Kat too. Now, while you wait for Zepto to deliver your groceries (It’ll take just 10 minutes), let’s take a look at what happened behind the scenes when you pressed “Pay.”

Let’s start with understanding the players involved in a Credit Card Transaction.

1. The Customer – The cardholder who is making an online payment.
2. The Merchant – The Swiggy’s and Zepto’s of the world who sell goods and Services online.
3. Issuing Bank – The bank which issues the card to the customer.
4. Acquiring Bank – The bank on the merchant’s side which processes their online card payments. Money is debited from the customer’s account and subsequently credited to the merchant’s acquiring bank.
5. Card Network – Card Networks such as Visa, MasterCard, and Rupay connect the issuing bank and acquiring bank to facilitate online card transactions.
6. Payment Processor – Payment processors act as connecting layer between merchants and third-party banks and process online payment transactions.
7. Payment Gateway – Payment Gateways are a technology wrapper that processes your online card payments. Payment Gateways are owned by the Acquiring Bank and are connected to Card Networks for verifying Payments. Every bank has their own payment gateway and these vary in success rates to process an online payment depending on various factors
8. 3DS Transaction – Card payment transactions are also called 3DS transaction i.e. 3 Domain Secure Transaction. The reason why it is called 3 Domain is because 3 major players are involved in processing the payment from customers to merchants namely the Issuing Bank, the Acquiring Bank, and the Card Network.

Now that we know all the entities involved in an online credit card transaction, let’s take a look at the multiple processes that are a part of it.

Credit Card Authentication and how does it work?

Credit Card authentication is a step to confirm the cardholder’s identity. It is a critical step to help prevent fraudulent purchases with stolen debit and credit cards.

Authentication entails a lot of complex processes. It’s about your security after all. There are various authentication methods to validate cardholders, such as CVV, AVS, CHAP, and 3DS. 3DS is widely used to to authenticate cardholders making card-not-present transactions.

What is 3-D Secure (3DS)

3DS or 3DS 1.0 was introduced in 2003 by major payment networks, including Visa, Mastercard, American Express, and Diners, with the aim of enhancing security measures for businesses in combating fraud. 3DS arms businesses against payment fraud, reduces cart abandonment, checkout times, and chargebacks.

What is 3DS 2.0?

3D Secure 2.0 is an upgrade to the existing 3DS framework. It offers the possibility of bypassing the Additional Factor of Authentication (AFA) by employing an intelligent Risk-based Authentication mechanisms.

Through Risk-based Authentication, the cardholder’s bank (issuer bank) is responsible for determining whether a second-factor authentication is necessary or if it can be waived for a specific card transaction. This determination is made based on the analysis of multiple data points(Transaction value, New or Repeat customer, behavioural history, etc. ) collected by card networks (such as Visa, Mastercard, etc.)

Post Authentication, the next step in an online credit card transaction is Authorization.

Credit Card Authorization and how does it work?

Authorisations are real-time decisions that permit/deny you( the cardholder) from paying for that latte with your credit card. Let’s understand the Credit Card Authorization flow.

When a card transaction takes place, the merchant initiates a request to the acquirer.

Subsequently, the acquirer contacts the issuer bank to perform validity checks on the cardholder’s card, such as verifying card details and confirming the availability of sufficient funds to complete the transaction. Based on these checks, the acquirer receives either an approval or an error code.

The entire authorization procedure can be broken down into the following steps:

1. A customer makes a purchase of a product or service from your store.
2. The payment gateway encrypts the data and securely transmits it through the payment network.
3. The transaction undergoes a review for authorization or decline, and the results are sent back via the payment gateway.
4. The customer receives a confirmation receipt, and you proceed to fulfil the order.
5. Once the transaction is processed, a ledger entry is made for recording the transaction. The actual funds, however are transferred from the customer’s bank account to your merchant bank account in the settlement leg.

Authorization simply involves acknowledging the availability of funds in the cardholder’s account and placing a hold on those funds.

Credit Card Settlement and how does it work?

The authorization process does not involve any money movement between the merchant bank and the customer’s bank. That’s where Settlements come in. Settlements is how funds are transferred from the cardholder’s bank account to merchant’s bank account.

Let’s understand how credit card settlement flow works?

1. At the end of each day, the Payment Gateway submits a batch of approved authorizations to the merchant’s Acquirer processor to request cash settlement.
2. Acquirer Processor segregates the batch basis the card network and sends these smaller batches to the Card Networks.
3. The Card network then further subdivides its batch according to the applicable issuing bank, then sends these smaller batches to the issuer processor associated with the issuing banks.
4. Issuer processor posts transactions to the applicable cardholder’s statement.
5. Each card network calculates the net settlement positions for Merchant Acquirer and Issuing Bank, then submits a funds transfer order to the issuing bank.
6. Issuing Bank then transfers funds to the Acquirer processor.
7. Acquirer Processor deposits funds to the merchant’s account, typically held by the Acquiring Bank.

Card Security & Tokenisation

Authentication and authorization are effective ways of protecting against fraud but Tokenisation effectively supercharges your Payment Security for online transactions.

Payment tokenization improves your data security, checkout experience, and customer loyalty. Additionally, you can save the headache of PCI compliance by leveraging a tokenisation provider.

We’ve covered Tokenisation in depth here. If you want to understand how it works and how it can unlock Customer Loyalty for your business, do check it out.

Tokenization is the process of replacing a card’s primary account number (PAN) - the 16-digit number on the plastic card - with a unique alternate card number, or “token.” Tokens can be used for mobile point-of-sale transactions, in-app purchases or online purchases.
(Source: MasterCard)

Tokenization provides a secure and safe way of doing transactions and thus, lower fraudulent transactions.

Credit Card Statistics in India

2022 saw UPI emerge as the most preferred medium for digital payments with a volume and value market share of 84 per cent. Debit and credit cards collectively accounted for 7 per cent of the transactions in terms of volume and 14 per cent in terms of value. Credit card spends in India witnessed a remarkable 47 per cent year-on-year increase to reach Rs 14 lakh crore in the financial year 2022-23, according to RBI data. The upswing is largely attributed to e-commerce and POS transactions.

Credit Cards continue to grow in popularity

In India, credit cards came in vogue only after the market liberalizations of the 1990s and the diversification of the banking sector. Fast forward, nearly 73 million credit cards were issued in India in 2022.

Why do Customers pay via Credit Cards?

The adoption of credit cards has grown at a healthy pace and it has long been a preference of customers when it comes to high ticket size transactions. Add the lucrative rewards on top, and you can see that Credit Cards will continue to be a customer favourite for large ticket purchases.

The Future of Credit Card Payments

With Credit Card linkage with UPI, one-click transactions, Auto-OTP reading, and 3DS 2.0, the future state of Credit card transactions is shaping up to be simple, seamless, and secure. Let’s understand where we stand with these innovations.

Credit card-UPI linkage

The RBI allowed linking of Credit cards to UPI last year in June, thereby expanding the scope of digital payments and providing convenience to customers. The linkage of credit cards and UPI should contribute to an increase in acceptance rates. UPI’s vast network of asset-light QR codes provides customers with a broader range of locations where they can utilise the platform. This is especially beneficial for merchants operating in semi-urban areas, where card-based point-of-sale terminals are less prevalent.

The credit card and UPI linkage could result in a 30x increase in credit card acceptance with 21 crore UPI QR payment terminals being able to accept credit cards in addition to the existing 70 lakh PoS terminals.

While only RuPay credit cards have been given exclusive access to the UPI network in the initial stages, Visa and MasterCard are expected to follow the suit soon.

Frictionless Auto-OTP Reading

It started with Juspay Safe which improved the security and convenience of online payments with features like Auto Processing OTP. Now, a decade later, Juspay has introduced major improvements to the auto-OTP functionality, essentially making the transaction process frictionless. It automates the process of reading and submitting OTPs (One-Time Passwords) during online card transactions, streamlining the payment process with a major overhaul to the entire User Experience. Read more about it here.

Seamless Card Payments with Juspay

Juspay is a certified Token requestor with all major networks and enables merchants to offer tokenization solutions to their customers. Merchants can integrate with Juspay to generate tokens and process token-based transactions through the PA/PGs of their choice. Alongside the experience of the saved card via Tokenization, Juspay has also built solutions to support all flows that depend on customer card numbers like EMI, Offers, Native OTP, 1-click checkouts, etc. We work tirelessly behind the scenes, so you can focus on delivering a great experience to your customers.