Credit & Debit Cards: CAIIB Retail banking (Module B),Unit 5
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CAIIB exams are conducted twice in a year. Candidates should have completed JAIIB before appearing for CAIIB Exam. Here, we will provide detailed notes of every unit of the CAIIB Exam on the latest pattern of IIBF.
So, here we are providing “Unit 5: Credit & Debit Cards” of “Module B: Retail Products” from “Optional Paper: Retail Banking”.
The Article is CAIIB Unit 5: Credit & Debit Cards
- A credit card is a thin plastic card, usually 3-1/8 inches by 2-1/8 inches in size that contains identification information such as a signature or picture, and authorizes the person named on it to charge purchases or services to his account — charges for which he will be billed periodically.
- The concept behind Credit Card is “Buy Now, Pay Later”.
- Credit Cards had their origin right from 1800s.
- The first universal credit card that could be used at a variety of stores and businesses — was introduced by Diner’s Club Inc., in 1950.
- Another major universal card — “Don’t leave home without it!” — was established in 1958 by the American Express Company.
- The first national bank plan was BankAmericard, which was started on a statewide basis in 1959 by the Bank of America in California. This system was licensed in other states starting in 1966, and was renamed Visa in 1976.
- Other major bank cards followed, including MasterCard formerly Master Charge.
- Citibank and HSBC were the pioneers in the Indian credit card market in the 1980s.
- Among the public sector banks, Andhra Bank, Bank of Baroda were the early starters followed by Bank of India.
- Citibank, Standard Chartered Bank, State Bank of India, ICICI Bank and HDFC Bank dominate the credit card market with more than 90% market share.
- Mainly credit cards are issued by banks in two formats viz.,
- The proprietary format – banks issue the card in different brand names like Classic, Silver, Gold, Platinum, Titanium Credit limits, cash withdrawal limits and other facilities will depend on the type of card.
- The Cobranded format – banks tie up with service providers like Hotels, Oil Companies, Airline Companies etc. and offer the cards as a co branded product with the brand name of the tied up company also embossed in the card.
Salient Features of Credit Cards
- Credit Cards are accepted globally through their affiliation with Visa and Master Card.
- Credit Cards are issued with limits of usage called “Card Limit” which fix the upper limit upto which the cards can be used.
- Credit cards have a regular billing cycle and billing date and due date of payment is decided from the billing date. The period after which payment is to be made after the billing date is called as the free credit period and will be usually between 20 days and 50 days and differ across banks.
- To induce usage of cards, reward points are awarded based on the amount and type of usage. Reward points vary for different classes like Silver, Gold, Platinum, Titanium etc.
- Another promotional concept is in vogue now for usage of credit cards. The concept of “Cash Back Offer” was introduced in credit cards to promote more usage by incentivizing the usage. This incentivisation is offered from 2% to 10% and adjusted in the payment. Cash Back Offer always comes with a cap on the total amount.
- The payment for the usage of the card after the credit period and on the due date can be paid in different ways. The payment can be made in full on or before the due date. Alternatively, a minimum of 10% of the outstanding amount can be paid every month on due date. The third option for payment is to convert the outstanding amount into a loan and repay the same in equated monthly installments (EMIs).
- Charges for late payment beyond the due date is collected as late fees and varies from Rs.200 to Rs.500 across banks.
- Cards are issued with photos also as add on feature.
- Liability for the card holder in case of loss of cards is limited to a small amount in case of most of the credit card issuers. Usually the liability is restricted to Rs. 1000/- (Rupees One Thousand Only) and the balance liability if any is borne by the card issuer through an insurance protection. Liability for lost card can be controlled from the time the loss is reported to the card centers which operate on a 24 hour basis.
- For online purchases using credit cards, additional password protection just like PIN for ATM transactions can be secured with special security features such as Verified by Visa, Mastercard Secure Code etc., and the above procedure is mandated by Reserve Bank of India.
- Some banks offer free personal accident insurance cover for the card holders ranging from Rs. 1 Lac to Rs. 10 Lacs depending on the type of card.
Credit Card Issuing Process
Issue of credit card involves the following processes.
- Obtaining an application from the prospect.
- Processing the application.
- Analysing and arriving at the Credit Score.
- Decision on the type of card to be issued.
- Issue of Card & PIN Mailer
- Dispatch of Card & Acknowledgement of Receipt.
- Card Operations.
- Finance Charges
- Minimum Amount Due
- Maximum Interest Free Period
- Annualised Percentage Rate (APR)
- Other Charges & Penalties
Eligibility of Credit Card
- At least 18 years of age
- Compliance of KYC norms
- A regular sources in income to repay one’s credit card bills (Salaried or self employee)
- A good credit History
Types of Credit cards
- The proprietary format – banks issue the card in different brand names like Classic, Silver, Gold, Platinum, Titanium etc. Credit limits, cash withdrawal limits and other facilities will depend on the type of card.
- The Co branded format – banks tie up with service providers like Hotels, Oil Companies, Airline Companies etc. and offer the cards as a co branded product with the brand name of the tied up company also embossed in the card.
Credit Scoring Module for credit cards consists of two parts
- Part I deals with the criterion to take a decision to issue a card or not.
- Part II deals with the scoring for various parameters submitted by the applicant.
Prepaid cards have radically changed the way individuals pay for their purchases on a daily basis. Most individuals tend to pay by using their card rather than cash. Prepaid cards are very similar to debit cards and credit cards in the way it looks. It even comes with a signature strip, the name of the company that has issued the card, and a card number.
NPCI offers Rupay prepaid cards of different variants. They are Gift card, Payroll card, student card and Virtual card.
Prepaid Payment Instrument (PPI)
PPIs that can be issued in the country are classified under three types:
- Closed System PPIs: These PPIs are issued by an entity for facilitating the purchase of goods and services from entity only and do not permit cash withdrawal.
- Semi- Closed System PPIs: These PPIs are used for purchase of goods and services, including financial services, remittance facilities etc.
- Open system PPIs: These PPIs are issued only by banks and are used at any merchant for purchase of goods ad services, including financial services, remittance facilities etc.
Issuance, loading, and reloading of PPIs
- PPI issuers shall ensure that no interest is payable on PPI balance.
- Cash loading to PPIs shall be limited to Rs 50,000/month subject to overall limit of PPl.
- PPIs may be issued as cards, wallets, and any such form/instrument.
- Issuers shall enable the facility of cross- border outward transaction only on explicit request of the PPI holders and shall apply a per transaction limit no exceeding Rs 10,000/ while per month limit shall not exceed Rs. 50000/-for such cross-border transactions.
The characteristics of Debit Cards differ vastly from Credit Cards. As already explained, Credit Cards define the concept of “Buy Now, Pay Later” but Debit Cards explain the concept of “Buy Now and Pay Now“. The important aspect of Debit Card is that at the point of purchase itself, the payment is made directly from their account balances.
In a bid to make transactions through debit cards and credit cards more secure and convinient, the Reserve Bank of India (RBI) has issued new guidelines that have come into effect from (October 1, 2020).
- All new credit and debit cards issued by the banks will be only enabled for domestic transactions at ATMs and point of sale (PoS) terminals.
- All the debit card and credit card users from now on are allowed to set up transaction limits.
- Card users now have an option to opt-in or opt-out of services on their credit/debit cards such as online transactions (e-commerce), international transactions, and contactless transactions (NFC-based).
- RBI has asked all the banks and card issuing companies to disable online payments for all those debit and credit cards which have never been used for online or contactless transactions in India or abroad.
Debit Cards v Credit Cards
|Debit Cards||Credit Cards|
|Spending limits||– Daily limits on spends and cash withdrawals||– Monthly credit limits based on card.
– Monthly and daily limits on cash withdrawals
|Benefits||– What you spend is instantly debited from your account
– No repayment needed
– No interest charges
– Get cashbacks and discounts
|– Buy now, pay later
– Enjoy 50-days of interest free credit
– Get cashbacks, discounts, rewards and miles
– EMI-based repayment
|Annual fees||– Low to nil||– Depends on card|
|Security features||– PIN, OTP, SMS notifications||– Zero liability insurance on lost or stolen card
PIN, OTP, SMS notifications
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