CHAPTER 1.

OVERVIEW OF FINANCIAL SERVICES &

BANKING

1.1 Introduction to financial service

1.2 Definition
1.3 Type of financial services
1.4 Evolution of banking
1.5 Meaning of bank & definitions
1.6 Functions of bank

1.1 INTRODUCTION TO FINANCIAL SERVICES

Financial services are those that help with borrowing and funding, lending
and investing, buying and selling securities, making and enabling payments
and categories of financial services are funds intermediation, payments
mechanism, and provision of liquidity, risk management and financial
engineering.
Financial services are necessary for the management of risk in the
increasingly complex global economy. They enable risk transfer and
protection from risk. The four financial system components discussed do not
function in isolation. They are independent and interact continuously with
each other. Their interaction leads to the development of a smoothly
functioning financial system.
A financial service is a term used to refer to the services provided by the
finance industry. Banks, insurance companies, investment banks, and
brokerages, are examples of the types of firms forming this industry: They
provide money and investment and related services. Financial services are
the term used to describe those organizations that deal with the management
of money. Financial services include banking, insurance, stock broking (i.e.
the buying and selling of stocks and shares), credit card companies, etc.

1.2 DEFINITION
The term Financial Services means mobilizing and allocating savings.
In general, all types of activities, which are of a financial nature, could be
brought under the term financial services. Thus, it includes all activities
involved in the transformation of saving into investment.
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The financial service can also be called financial intermediation.

Financial intermediation is process by which funds are mobilized from a
large number of savers and make them available to all those who are in need
of it and particularly to corporate customers. Thus, financial services sector
is a key area and it is very vital for industrial developments.

1.3 TYPES OF FINANCIAL SERVICES

Today the importance of the financial services is gaining momentum all over
the world. In these days complex finance, people accept a financial service
company to play a very dynamic role not only as a provider of finance but as
a departmental store of finance. They can be grouped under two heads:
Chart 1.1 Types of Financial Services

Types of Financial Services

Fund Based Activities

Non-Fund Based Activities

1.
2.
3.
4.
5.
6.
7.

1. Issue Management
2. Portfolio Management
3. Capital Restructuring
4. Loan Syndication
5. Mergers and Acquisitions
6. Corporate Counseling
7.Arranging Foreign Collaboration

Leasing
Hire Purchase
Discounting
Loans
Venture Capital
Housing Finance
Factoring

Source: By Researcher

(A) Fund based activities

1. Leasing: - A lease is an agreement under which a company or a firm
acquires a right to make use of a capita asset like machinery, on payment of
a prescribed fee called rental charges. Many financial companies have
started equipment leasing. A lease is an agreement under which a company
or a firm acquires a right to make use of a capital asset like machinery, on
payment of a prescribed fee called rental charges. The lessee cannot
acquire any ownership to the asset, but he can use it and have full control
over it. He is expected to pay for all maintenance charges and repairing and
operating costs. In India, many financial companies have started equipment
leasing business. Commercial banks have also been permitted to carry on
this business by forming subsidiary companies.

2. Hire purchase: - Hire purchase is the legal terms for a contract, in these
persons usually agree to pay for goods in parts or a percentage at a time.
Hire purchase is financial facilities which allow a business to use an asset
over a fixed period, in return for regular payments. The business customer
chooses the equipment it requires and the finance company buys it on behalf
of the business. With a hire purchase agreement, after all the payments have
been made, the business customer becomes the owner of the equipment. This
ownership transfer either automatically or on payment of an option to
purchase fee. Under a hire purchase agreement, the business customer is
normally responsible for maintenance of the equipment.

3. Discounting: -Discounting is a financial mechanism in which a debtor

obtains the right to delay payments to a creditor, for a defined period of
time, in exchange for a charge or fee.
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4. Loans: - A loan is a type of debt. Like all debt instruments, a loan entails
the redistribution of financial assets over time, between the lender and the
borrower. A loan is a type of debt. The borrower initially does receive an
amount of money from the lender, which they pay back, usually but not
always in regular installments, to the lender. This service is generally
provided at a cost, referred to as interest on the debt.

5. Venture Capital: - A venture capital is another method of financing in

the form of equity participation. It is in contrast to the conventional security
based financing. A venture capital is another method of financing in the form
of equity participation. A venture capitalist finances a project based on the
potentialities of a new innovative project. It is in contrast to the conventional
security based financing. Much thrust is given to new ideas or
technological innovations. Finance is being provided not only for
development capital by the financial intermediary.

6. Housing Finance: - In housing finance there are various schemes like

purchase of new house, construction of in home, home improvement,
repairs, land purchase, bridge loans etc. In house financing is a facility by
which prospective buyer of any type of goods is provided required finance
by the seller. Thus, seller becomes financier too in case of in-house
financing. There are many types of advantages associated with this facility.
First of all, a person is able to get finance at lower costs as there are no
middlemen involved .Middlemen here mean financial institutions and other
lenders that provide finance for buying goods. Second advantage is getting
finance at easy terms and conditions as seller of goods is making profit out
of sale also. Third advantage of in-house financing is that a person is not
required to approach different lenders and compare them for getting finance
at lowest cost.
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7. Factoring: - Factoring is an arrangement in which receiving arising out

of sale by a firm to the factor. The factor becomes responsible for credit
control, accounting of sale ledger and debt collection. Factoring refers to the
process of managing the sales ledger of a client by a financial service
company. In other words, it is an arrangement under which a financial
intermediary assumes the credit risk in the collection of book debts for its
clients. The entire responsibility of collecting the book debts passes on to the
factor. His service can be compared to a Del credre agent who undertakes to
collect debts. But, a factor provides credit information, collects debt,
monitors the sales ledger and provides finance against debts. Thus, he
provides a number of services apart from financing.

(B)Non-Fund based activities

a) Issue management: - Issue management covers marketing of securities
i.e. equity shares, preference shares, debentures or bonds. It covers
marketing of securities i.e. equity shares, preference shares, debentures and
bond. It involves pre-issue and post-issue management. Pre-issue
management can be through prospectus offer for sale or provide placement.
Post-issue management covers collection of application forms, deciding
allotment procedure, share certificate, refund order etc.

b) Portfolio Management: Portfolio means combination of various

securities and investment. Here merchant bankers assist in maintain the
proper portfolio by having good qualification of shares, debentures, bonds,
government securities, equities etc.

c) Loan Syndication: It refers to assistance to get term loan for project. It

may be obtain from single institution. The decision of which financial
institutions to be approach and it is given by merchant banking.

This is more or less similar to consortium financing. But, this work is taken
up by the merchant banker as a lead manager. It also enables the members of
the syndicate to share the credit risk associated with a particular loan among
them.

d) Advisory Services Relating to Mergers & Takeovers: A merger is

a combination of two or more companies into a single company where one
survives and other lose their corporate existence. A Takeover is the purchase
by one company acquiring controlling interest in the share capital of another
existing company. Merger means that the two merging companies become
history and a new firm is established while acquisition means only one
company become history which is the acquired company while the acquiring
company remains.

e) Corporate Counseling: Its covers activities related to companies such

as project counseling, capital restricting, project management, loan
syndication, fixed deposits, working capital, lease finance, public issue
management. It is provide to every business unit to ensure better
performance, stay growth and better image among investor.

1.4 EVOLUTION OF BANKING:

The meaning of the bank can be understood only by its function just as a tree
is known by its fruits. As any other subject, it has its own origin, growth &
development. Let us briefly trace the evaluation of banking:
It is interesting to trace the origin of the word bank in the modern sense to
the German word Banck which means, heap or mound or joint stock fund.
From this, the Italian word Banco meaning heap of money was coined.
Some people have the opinion that the word bank is derived from the
French words bancus of banque which means a bench. Initially, the
bankers, the Jews in Lombardy, transacted their business on benches in the
market place and the bench resembled the banking counter. If a banker
failed, his banque (bench) was broken up by the people; hence the word
bankrupt has come. In simple term, bankrupt means a person who has lost
all this money, wealth or financial resources.
Thus, the origin of the work bank can be traced as follows:
Banck-German (joint stock fund)

Banco-Italian (help of money)

Bancus/ Banque -French (a place where valuables are kept)

Bank-English (Common meaning prevalent today i.e., as an institution

accepting money as deposit for lading). In India, the Banking Regulation
Act, 1949, under which banks are regulated by the Reserve Bank of India,
defines a banking company and banking au under

1.5 MEANING OF BANK & DEFINITIONS

A bank is an institution that deals with money and credit. Different people
understand the meaning of a bank in different ways. For a common man
bank means a storehouse where money is stored; for a businessman it is a
financial institution and for a day to day customer it is an institution where
he can deposit his savings. In reality banks are service organization selling
banks services.
Banks play an important role in the economy of any country as they hold the
savings of the public provide means of payment for goods and services and
provide necessary finance for the development of business and trade. Thus
bank is a link in the flow of funds from savers to the users. Hence they
should render an efficient customer service in order to retain the present
customer and also to attract the potential customers.
1. Crowther defines a bank as, one that collects money from those who
have it to spare or who are saving it out of their income and lends the money
so collected to those who require it.
2. According to Section 5(1) (b), Banking means accepting for the purpose
of lending or investment, of deposit of money from the public, repayable on
demand or otherwise and withdraw able by cheques, draft, order or
otherwise.
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1.6 FUNCTIONS OF BANK

Functioning of a Bank is among the more complicated of corporate
operations. Since Banking involves dealing directly with money,
governments in most countries regulate this sector rather stringently.
The process of financial reforms, which started in 1991, has cleared
the cobwebs somewhat but a lot remains to be done. Banks essentially
perform the following functions.
1.2 Function Of Banks

1.1 source: Finacial services management (TYBI)

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(1) ACCEPTING DEPOSITS:

Tapping the savings of the public by means of different kinds of deposits is
one of the major functions of a bank. When a bank accepts deposits, it is said
to borrow money. As a borrower, the bank has to safeguard its position.
Therefore before opening an account a bank has to observe certain general
precautions. Every deposit is the property of the bank. The bank is
responsible for safety of the deposit. A bank may use its discretion in
allowing or not allowing a person to deposit and it cannot be questioned. In
order to open an account in a bank, the depositor has to furnish all his details
in an application form with his specimen signatures. The account is opened
with proper introduction, and verification of documents. Banks are also
called custodians of public money. Basically, the money is accepted as
deposit for safe keeping. But since the Banks use this money to earn interest
from people who need money, Banks share a part of this interest with the
depositors. However, accepting deposits and keeping track of the money
involves a lot of book-keeping and other operations. Let us see what the
Banks must maintain to provide this service

(2) LENDING MONEY TO PUBLIC

Lending money is one of the two major activities of any Bank. In a way, the
Bank acts as an intermediary between the people who have the money to
lend and those who have the need for money to carry out business
transactions.
A bank has to invest funds in different ways to earn income. The bulk of
income is derived from lending funds. Banks provide loans and advances to
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traders, industrialists against the security of some assets. They also advance
loans to the people on personal security. In both the cases the run the risk of
default in repayment. Therefore, the banks have to follow a sound lending
policy. Banks in India have the responsibility of fulfilling social obligations.
Therefore, in order to protect the own interest as well as national interest the
following principles should be followed by the banks.
(a)Safety: Safety depends upon the security offered by the borrower and
repaying capacity and willingness of the borrower to repay the loan with
interest. Thus, the bank should ensure that the security offered is adequate
and readily realizable.

(b)Liquidity: The banks have to repay the depositors on demand. In order to

meet the demand of the depositors in time, the bank should keep its funds in
liquid form. Liquidity refers to the ability of an asset to convert into cash in
short time.

(c)Profitability: Banks are commercial institutions. They should earn profit

to pay interest on deposits, declare dividend to their shareholders, meet
administrative and operating expenses and provide for depreciation,
reserves, etc. In other words the banks should earn profit for their survival.
The banks should utilize funds in such a way that they will bring adequate
return.

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This activity places its own requirements on the resources of the Bank. For
effective functioning of this, a bank must possess:
Sufficient deposits.
Skills to appraise the potential borrowers and the activity.
Legal skills for documentation.
Legal skills for recovery of its dues through the courts.
Skills to follow up and monitor the end-use of money lent by it.
An effective credit delivery system.
Review of credit portfolio.
(3) TRANSFERING MONEY FROM ONE PLACE TO ANOTHER
Apart from accepting deposits and lending money, Banks also carry out, on
behalf of their customers the act of transfer of money - both domestic and
foreign from one place to another. This activity is known as "remittance
business". Banks issue Demand Drafts, Banker's Cheques, and Money
Orders etc. for transferring the money. Banks also have the facility of quick
transfer of money also know as Telegraphic Transfer or Tele Cash Orders.
To deliver this service, a Bank must have:
An effective branch network or correspondent relationships.
A system of Inter branch reconciliation
A system of reconciliation with the correspondents
Availability of funds at all the centers
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(4) TRUSTEE BUSINESS:

Banks also act as trustees for various purposes. For example, whenever a
company wishes to issue secured debentures, it has to appoint a financial
intermediary as trustee who takes charge of the security for the debenture
and looks after the interests of the debenture holders.
Such entities necessarily have to have expertise in financial matters and also
be of sufficient standing in the market/society to generate confidence in the
minds of potential subscribers to the debenture.
A track record of sufficient length.
Facilities for safe keeping.
Legal skills to take necessary steps for the trusteeship.

(5) KEEPING VALUBLES IN SAFE CUSTODY:

Bankers are in the business of providing security to the money and valuables
of the general public. While security of money is taken care of through
offering various types of deposit schemes, security of valuables is provided
through making secured space available to general public for keeping these
valuables. These spaces are available in the shape of LOCKERS. The latter
are small compartments with dual locking facility built into strong
cupboards. These are stored in the Bank's Strong Room and are fully secure.

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To make this facility available to its customers, the Bank must provide:
Physical structures to house the lockers
Locker cabinets
Security arrangements
Record of access to lockers

(6) GOVERNMENT BUSINESS:

Earlier Government business used to be exclusively carried out by
Government Treasuries where all type of transactions took place. However,
now Banks act on behalf of the Government to accept its tax and non tax
receipts. Most of the Government disbursements like pension payments and
tax refunds also take place through banks. While the Banks carry out this
business for a fee to be paid by the Government, providing this service
requires a lot of effort and organisation. The Banks must provide:
Interface with the public
Liaison with local government departments and government treasury
Arrangement for reconciliation with the Government Accounts
Department
Necessary infrastructure, stationery etc. to cater to the numbers.
.

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CHAPTER 2. CREDIT CARDS

2.1 Introduction
2.2 Definition
2.3 Who can be the credit cards holder?
2.4 Type of credit cards
2.5 New types of credit cards after log
2.6 Facilities offered to credit card holders
2.7 Benefits of credit card
2.8 Demerits of credit card
2.9 Future of credit cards industry in India
2.10 Keys to use credit card safely
2.11 Distinguish between credit card and debit card:
2.12 Keys to use credit card safely

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2.1 INTRODUCTION
Plastic money was a delicious gift to Indian market. Giving respite from
carrying too much cash. Now several new features added to plastic money to
make it more attractive. It works on formula purchase now repay later. There
are different facts of plastic money credit card is synonyms of all. A credit
card is a card or mechanism which enables cardholders to purchase goods,
travel and dine in a hotel without making immediate payments. The holders
can use the cards to get credit from banks up to 45 days. The credit card
relieves the consumers from the botheration of carrying cash and ensures
safety. It is a convenience of extended credit without formality. Thus, credit
card is a passport to, safety, convenience, prestige and credit.
Credit card is a financial instrument, which can be used more than once to
borrow money or buy products and services on credit. Banks, retail stores
and other businesses generally issue these. On the basis of their credit limit,
they are of different kinds like classic, gold or silver.
Over the years, the banking sector in India has seen a no. of changes. Most
of the banks have begun to take an innovative approach towards banking
with the objective of creating more value for customers and consequently,
the banks. Some of the significant changes in the banking sector are
discussed below.

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2.2

DEFINITION

A credit card issuer is a bank or credit union who offers credit cards. The
credit card issuer makes the credit limit available to cardholders and is
responsible for sending payments to merchants for purchases made with
credit cards from that bank. Also called member banks. Chase and Citi are
examples of credit card issuers. Credit card issuers can't issue credit cards all
by themselves, they need the help of payment processing networks like Visa
and MasterCard. However, American Express and Discover act as both the
credit card issuers and the payment processing network.

2.3

WHO CAN BE THE CREDIT CARD HOLDER?

The general criteria applied are a persons spending capacity and not

merely his income or wealth. The other criteria are the worthiness of the
client and his average monthly balance. Most of the banks have clear out
norms for giving credit cards.
1 A person who earns a salary of Rs. 60,000/- per annum is eligible for
a card.
2 A reference from a banker and the employers of the applicant is
insisted upon.

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2.4

TYPES OF CREDIT CARD

2.1:Type of Credit cards

By Researcher

1. Business Credit Cards

A business credit card offers the business owner the opportunity to keep
business and personal expenses separate. The credit card may offer special
business rewards and saving opportunities that go above and beyond what
the individual credit card owner may have. Since money management is
essential in successfully running a business, the card may offer an expense
management service that will allow you to keep track of the outgoing
money. You can obtain additional credit cards for employees who may need
them for travel expenses and such as well as have a higher credit limit than
you normally would on an individual credit card.

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2. Student Credit Cards

Many credit card companies will issue student credit cards that have lower
credit limits and fewer incentives to help keep their spending in check. Still,
take note. Many college students graduate with a credit balance that
averages between Rs. 3, 000 and Rs.7, 000 and with interest rates; this can
be a real problem when trying to pay them off.

3. Prepaid Debit Cards

Prepaid debit cards are one type of credit card that has grown significantly in
recent years. Although they work like a traditional credit card when making
a purchase, that is where the similarities end. With prepaid debit cards, you
have actually prepaid and set the credit limit by depositing money onto the
debit card. Depending on how much you have deposited into the debit cards
account depends on how much credit limit you want on that card. This is a
great way to have the convenience of a credit card without the chance of
charging more than you can afford to pay off.

4. Credit Cards for Bad Credit

It is possible, even with bad credit to obtain a credit card. These cards will
come with some restrictions not typically found on other types of credit
cards. Your credit limit will be lower and your interest rate higher. Some
may require you to have a secured credit card, meaning you have to maintain
a savings or some other type of account that will cover the expenses on the
credit card. Once you have established that you will be responsible, some, if
not all, of your restrictions may be lifted.

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5. Cash Back Credit Cards

Many credit cards will now offer you cash back incentives for using their
credit cards. Depending on how much your balance is and how often you use
the credit card, you can earn cash back for your purchases. Some companies
offer 1% off your balance while others, like Sears, will offer you cash off
purchases made in their store. Either way, if you are planning on using a
credit card, finding one that will offer you a cash incentive is a smart choice.

6. Prepaid Debit Cards (junior credit cards)

These cards are sometimes called junior credit cards. They are not truly
credit cards at all, since you are not getting credit or loans from the credit
card company. Instead, these cards work by having you deposit some money
into the card account. You can then use your card to charge any amount up to
the amount in the account. When you add more money, you can charge more
to your card.
If you have poor credit, no credit, or if you are underage, prepaid debit cards
allow you to enjoy credit card purchases without the hassle of a credit card
application. With these cards, it is hard to rack up high debt. The financing
charges on these cards are also very small, in some cases. However, some
prepaid debit cards charge extra fees for applications and for yearly use, so
compare offers carefully before selecting this type of card.

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According to the purpose for which the credit cards are used, they can be
classified into three main categories:
1 Credit Card:
It is a normal card whereby a holder is able to purchase without
having to pay cash immediately. This credit card is built around revolving
credit principle. Generally, a limit is set to the amount of money a cardholder
can spend a month using the card. At the end of every month, the holder has
to pay a parentage of outstanding. Interest is charged for the outstanding
amount which varies from 30 to 36 per cent per annum. An average
consumer prefers this type of card for his personal purchase, as he is able to
defer payment over several months.
2 Charge Card:
A charge card is intended to serve as a convenient means of payment
for goods purchased at Member Establishments rather than a credit facility.
Instead of paying cash or cheque every time the credit card holder makes a
purchase, this facility gives a consolidated bill for a specified period, usually
one month. Bills are payable in full on presentation. There are no interest
charges and no preset spending limits either. The charge card is useful
during business trips and for entertainment expenses which are usually borne
by the company. Andhra Bank card, BOB cards, Can card, Diners Club card
etc. belong to this category.

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3 In- Store Card:

Retailers or companies issue the in-store cards. These cards have
currency only at the issuers outlets for purchasing products of the issuer
company. Payments can be on monthly or extended credit basis. For
extended credit facility interest is charged. In India, Five Star Hotels, resorts
and big hotels normally issue such cards.

2.5NEW TYPES OF CREDIT CARDS AFTER LPG

1 Corporate Credit Cards:
Corporate cards are issued to private and public limited companies
and public sector units. Depending upon the requirements of each company,
operative Add-on cards will be issued to persons authorised by the company,
i.e., directors, and secretary of the company. The name of the company will
be embossed on Add-on cards along with the name of the Add-on
cardholder. The main card is only a dummy card number in the name of the
company for the purpose of billing all the charges of the Add-on cards. The
transactions made by Add-on cardholders are billed to the main card and
debits are made to the Companys Account.

2 Business Cards:
A business card is similar to a corporate card. It is meant for the use of
proprietary concerns, firms, firms of Chartered Accountants etc. This card
helps to avail of certain facilities for reimbursement and makes their
business trips convenient. An overall ceiling fixed for this card is also based
on the statues of the firm.
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3 Smart Cards:
It is a new generation card. Embedded in the smart card a microchip
will store a monetary value. When a transaction is made using the card, the
value is debited and the balance comes down automatically. Once the
monetary value comes down to nil, the balance is to be restored all over
again for the card to become operational. The primary feature of smart card
is security. The card also recognises different voices and compares with the
recorded original voice. It is used for making purchases without necessarily
requiring the authorisation of Personal Identification Number as in a debit
card. Smart card is an electronic purse which attempts to prove to be a
panacea for all problems associated with traditional currency. In India, the
Dena Bank launched the Smart Card in Mumbai.

4 Debit Cards:
Credit cards have proliferated during the last couple of years in all
countries and have become an acceptable alternative to paper currency. The
developed country like USA has moved a step further. Debit card, an
electronic product has become more and more popular in these countries.
The debit card programme requires the customer to open an account with
the bank which is not generally required in case of a credit card. This system
requires a terminal known as the Point of Sale Terminal at every point of
purchase. The customer, on making the purchase, inserts the card which has
a magnetic strip at the back, into the slot of the machine, while the merchant
enters the value of the transaction. The customer meanwhile, keys in the
Personal Identification Number which is known only to the cardholder and
the bank.
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5. ATM Card:
An ATM (Automatic Teller machine) card is useful to a cardholder as
it helps him to withdraw cash from banks even when they are closed.
Inserting the card in the ATM installed at various bank locations can do this.

PARTIES INVOLVED IN CREDIT CARD BUSINESS

There are three parties to a credit card the cardholder - the issuer and
the member establishments.
1. Issuer: The banks or other card issuing organisations.
2. Cardholders:

Individuals, corporate bodies and non-individual and non-

corporate bodies such as firms.

3. Member Establishments: Shops and service organisations enlisted by
credit card issuer who accept credit cards. The member establishments may
be a business enterprise dealing in goods and services such as retail cutlets,
departmental stores, restaurants, hotels, hospitals, travel agencies, petrol
bunks, etc. Member establishments have to pay a certain percentage of
discounts on the credit card transactions to the issuer. Some organisations
charge a specified sum as service charge.

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2.6

FACILITIES OFFERED TO CREDIT CARD

HOLDERS

The various facilities offered to cardholders are described below:

1. Making purchase / availing of services at any of the member
establishments with 15 -45 days credit period.
2. Cash withdrawals at any of the branches of the issuer / member
affiliate of the issuer to meet emergent requirements.
3. Add-on facility for family members. The spouse or children are
entitled to use the card for making purchases. On behalf of add on
members, the main card holder is liable to repay the bill amount.
4. Free credit period ranging from 15 to 45 days.
5. ATM facility at selected networks is available in case of emergency.
6. Wide range of insurance facilities are available which include
personal accident insurance, cover for accidental death, baggage
insurance, purchase protection cover against risk of fire, strike, theft etc.
during transportation and concessional premium rates for personal
accident insurance and mediclaim.
7. Reward points are offered on every purchase through credit card by
the user. Generally, on purchase of every Rs.100/- one reward point is
allotted. These points can be redeemed later at various member
establishments

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2.7

BENEFITS OF CREDIT CARD

Credit cards confer a number of advantages on cardholders, issuers

and member establishments. The benefits of credit cards to various parties

are given below
A Card Holders
1 Credit cards are simple to operate and easy to carry. The holders are
relieved from the risk of carrying cash or cheque book with them.
2 A card is a convenient method of payment for goods and services.
The holders have the option to purchase goods and services and pay
conveniently at a later date in manageable installments compatible
with their household budgets.
3 Owing to revolving nature of credit, the customer can take advantage
of it as and when he pleases within the overall limit.
4 Cash can be obtained at any branch of the issuer. The ATM facility is
extended to cardholders who need not stand in queues and spend
time unnecessarily at banks. By just inserting a card into an ATM, the
holder can withdraw crisp new notes at any time of day or night.
5 Overdraft facility is given to cardholders who are entitled to spend
more than their actual limit. The amount of overdraft depends on the
holders past credit rating.
6 The purchasing power of the cardholders increases to the extent of
credit limit given in the card. If wisely used by consumers, credit
27

cards can provide them extra money interest free. All that one has to
do is to settle the bill in time.
7 Credit cards provide a certain degree of prestige to the holder. The
status which one gets is not only because of his membership in a
credit card organization but because the card a once makes him great
in a part of wider phenomenon.
B. Issuers
1 Credit cards offer high profit for the banks. They get commission or
discount, usually 2.5 per cent, on sale through credit cards. An
interest charge of 1.5 per cent is made on all outstanding. Thus, a
single transaction through credit card, assuming the customer does
not repay within the stipulated period will fetch income of 5 per cent
to the bank which works out as much as 60 per cent per annum;
miles ahead of the prime lending rate of many banks. As more and
more take advantage of the credit facility the credit card service
becomes more profitable.
2 Where the card is issued to non-account holders, it may help to get
new customers.
3 A credit card system helps control bank cost as it reduces the number
of cheques issued by the customers.
C. Member Establishment

28

1 The merchant has guarantee of payment and his account is credited

immediately on submitting the charge slip into his bank. No bad debt
arises in credit card transactions.
2 A good cash flow is established because of the speedy settlement of
bills by banks.
3 The acceptance of card in lieu of cash reduces security risk.
4 Member establishments are able to offer credit facility to their
customers without setting up their own credit arrangements.
5 Moe and more people accept the practical advantage of credit cards
and turn to suppliers who accept the cards in settlement. This helps
increase the volume of business to member establishments.

2.8

DEMERITS OF CREDIT CARD

The credit card is not risk-free and all players associated with it have

to face an element of risk associated with it.

A. Card Holders
1 The cardholders are burdened with service charge, annual fee,
membership fee, etc. a high rate of interest is charged for delayed
payment. Minimums of 5-10 percent on monthly purchases apart
from the additional charges are to be paid in case the consumers
postpone the payment beyond the stipulated credit period. According
to a recent survey, 65 % of cardholders are ignorant about the high
interest charged on outstanding balance.
29

2 Credit cards tempt the holders for more purchases beyond their
income and repaying capacity.

B. Issuers
1 The cost involved in the credit card business is high which include
cost of plastic card to be imported, cost of information, cost of
placing and marketing cards, cost on staff to monitor processing of
applications and to carry out credit checks on applicants etc. Unless
the number of cardholders and the volume of business are high the
credit card business will not be a profitable one.
2 The menace of frauds perpetuated by holders of bogus cards and
sometimes in collusion with the member establishments is the major
problem for the issuers.
3 The average utilisation of credit card is only 20 per cent to 30 per
cent in India. The underutilization of this facility erodes the
profitability of banks.
C. Member Establishment

30

1 The commission to be paid to the issuing banks / credit card

organisation is heavy.
Some banks make delay in payment due to lack of adequate system and
trained personnel which affect the cash flow of the member
establishments

31

2.9

FUTURE OF CREDIT CARD INDUSTRY IN INDIA

India has came out of self-binding shackles to look "young" again and the
enthusiasm shared by the young work force of the country is driving the
economy like never-before. In the present day world, no one wants to be
bothered by the presence of huge cash in his or her wallet and the Indians
are no exceptions. The unprecedented growth in the number of credit
card users has stimulated the Indian economy by a significant extent. The
arrival of malls, multiplexes, online shopping stores and shopping
complexes have contributed to the growth of the use of plastic cards.
It will not be wrong to say that such a scenario in context of the Indian
market is not driven by style statement and is driven more by needs. The
benefits of plastic money have offered unmatched ways to create an
equilibrium and offer an amicable solution when it comes to purchases
and the inability to possess or carry cash. The modern day Indian
customers find it more easy to make physical payment (credit card
payments) rather than carrying too much cash. The introduction of credit
card facilities to pay for mobile, electricity, movie tickets and other
related transactions have also contributed to the growth of plastic money
in the country.
In context of the Indian market, the leading credit card service providers
are ICICI, HDFC, HSBC and Standard Chartered to name a few. These
financial institutions have tried their hands on ensuring value-addition
while offering customer-friendly credit card deals. The Best credit cards
in India are usually meant for specific user group such as women,
students and small business owners. These cards are offered to the
32

prospective customers with appealing deals. Statistics have clearly

revealed that the number of credit card holders in India are close to 22
million as on January, 2007. It has been also revealed that the increasing
consumerism in the country has led to a two-fold increase in the number
of credit card transactions from FY 2003-04 to 2005-06. The trends were
as favorable as ever in the financial years, FY 2006-07 and 2007-08 and
the same is likely to continue in the coming financial years.
With high and industry-favorable figures as above, there is no doubt that
the rise in number of credit card providers and users have come of age.
With these positively-influencing trends expected to continue in the near
and far-future, the writing is on the wall. The credit card industry is likely
to soar more than any industry segment. To add to that, easy and
continuous payments' structures with each passing day and with every
Bank poised to expand its network, the Indian credit card user
community is the biggest beneficiary. The intensifying competition
prevalent in the present day Indian credit card market has further fuelled
the usage of credit cards in the country like never-before. In an aim to
overpower the peers and to sustain and prosper themselves, the Banks
and financial institutions have started cutting down the interest rates and
offering lucrative deals.
There are 1 billion card holders world over. These cards have a turnover of $
1500 million. There are around three million credit card holders in India.
Over 68,000 establishments in the country accept credit card. The credit card
market is worth about Rs. 1,500 crores. The credit card industry is growing
at an average rate of 35 per cent per year. Despite the impressive pattern of
growth, India as a market is in a fairly nascent stage with credit card
33

penetration amounting to just 15 % of the customers. Compared to other

countries in the region, Indias card holders-base is relatively small. With the
economic growth gradually out-pacing population growth and with a large
number of affluent middle classes, the potential market that India holds is
immense. It is estimated that in the next ten years India will have a credit
card population second to USA. According to few top-banking professionals,
the credit card business will grow by over 100 % every year for the next five
years. To realize the potential in the credit card market the following
suggestions are made:
1 Reduce the membership and annual subscription fees.
2 Encourage member establishments to accept credit cards for routine
items also.
3 Make the features of cards convenient to middle class people.
4 Enhance the cash withdrawal limits.
5 80 % of the cardholders are in metropolitan areas. So, workout
strategies to popularise the credit card among people in semi urban
and rural areas.

34

2.10 KEYS TO USE CREDIT CARD SAFELY:

Financial experts suggest that any credit card user can take a few basic steps
to stay safe when using credit cards:

1. Consider before setting credit limits: If you are the victim of fraud
and you have a very high limit, you may get a very daunting bill. Even
if you can prove that you have been the victim of fraud, the process
takes some time and you do not want to have a balance of several
thousand dollars for several months until the mess is cleared up.
2. Use secure credit cards: Credit card companies take fraud and other
risks very seriously - these crimes affect the companies' profits. Call
your card company today and ask about their safety features. Not only
will it put your mind at ease, but you will learn about the specific
services you can add to your card to make your card more secure.
3. Signing credit cards: You should always sign your cards as soon as
you get them and activate your cards promptly and correctly. This will
help ensure that you are the person who can use your cards.
4. Online usage: When using credit cards online, always share your
credit card information with reputable companies only. Never use
your credit card information on a web site that does not use encryption
technology. If you have any doubts about an online retailer, contact
them using their contact information and arrange for an alternate form
of payment. If the retailer does not have current contact information,
35

that is a give-away that it is a company you probably don't want to do

business with.
5. Always get a receipt when making a purchase with your card:
Once a month, compare your receipts with your bill so that no
mistakes sneak into your card.
6. Change of address: When you move, notify your card companies in
advance so that you are the only person to receive your credit card
billing information.
7. Be careful with your card information and numbers: Do not share
your account number or other credit card information with just anyone
and do not leave the information where others can see it.
8. Deal with stolen credit cards promptly: If your card is stolen or lost,
call the credit card company immediately and make sure that no one
can make additional charges to your credit card.
9. In a very secure place, keep a list of your credit card numbers and
credit card company phone numbers: If your card is stolen, you can
use this information to stop the card from being used.
10.Practice safe online account management: Most banks today allow
you to use internet banking, which allows you to check your accounts
frequently. Use online banking to make sure that your account is not
being charged unduly.

36

2.11 Distinguish between credit card and debit card:

1. The main difference is the way the card works and where the money
comes from. Debit cards can be used as either a debit card or credit card.
2. Credit cards can only be used as a credit card. Debit cards do not carry
a line of credit. The purchases made with a debit card cannot exceed the
amount of money a person has in their bank account. This is the main
difference between a credit and debit card.

3. Another major difference between credit and debit cards is the risk
involved. Because they are attached to a bank account, losing a debit card
is very risky. A person does not need a pin number to use a debit card and
therefore can easily drain a persons bank account, causing extreme
problems.
4. With a credit card the only problem is proving that someone else used
the card. With a debit card the persons has to figure out how to get their
money back and if any checks bounced they are responsible for those as
well.
5. Credit card is pay later concept. Debit card is paying now concept.
6. No specific account balance is required while using the credit card for
purchases. At the time of Debit card the person should have sufficient
account balance to have purchases for him or her.

37

2.12 WORKING OF CREDIT CARD

A credit card is a plastic card with specific security and other features that is
issued by a bank to its customer to enable the latter to use it as a payment
medium. The card also entitles the cardholder to certain credit limits/funds
such that a payment can be made even if the customers account does not
have adequate balance. Thus, a credit card is both an instrument of payment
and a source of credit. Let us see how it works.
Suppose one purchases grocery and pays the retailers bill by means of a
credit card. The retailer swipes the card and gives a credit slip which the
buyer has to sign. Clearly, the buyer has not paid cash to the retailer. All
that has happened is that the bill is charged to the buyers credit card account
with the bank is charged with the amount of grocery purchased. But how
does the retailer get his money? The answer is that the charge that the buyer
incurred in buying grocery is acquired by the retailers bank.

It will

provide the retailer with the amount of transaction made by the buyer, less
commission. This bank, called the acquiring bank, in turn will submit the
charges to the bank (which issued the credit card) called the issuing bank
through the clearing mechanism maintained by the network sponsors like
Visa or Master Card. In turn, the issuing bank will send the bill (say, once a
month) to the buyer/person to whom the card was issued detailing all the
transactions made by him/her with the credit card. The moment the buyer
pays the due amount to the card issuing bank, the whole transaction cycle is
completed.

38

Chapter 3. CREDIT CARD FRAUDS

3.1 INTRODUCTION
It is an unfortunate fact that many businesses will encounter a customer who
presents a credit card or a credit card number that is not rightfully theirs.
Credit Card Fraud is a reality and is increasing in the retail market
environment, exposing merchants to potential losses that could be damaging
to their business. At NAB, our aim is to assist merchants to minimise fraud
through the use of sophisticated fraud detection tools and pro-active
merchant education. Please make the time for you and your staff to review
this Credit Card Fraud Protection booklet and the attached DVD. The more
you know about the potential risks, the more youll be able to protect your
business against chargebacks and fraud.
It is important to be aware of how accepting a fraudulent transaction can
affect your business.Some forms of payment carry an increased risk that
you, as the merchant could be liable for transactions when the cardholder
disputes them.
High-risk transactions
Card Not Present
Card number is manually keyed in
No authorization obtained
Card is not swiped through EFTPOS terminal

39

 Fall back transaction

Lower risk transactions
Card Present
Card is swiped through EFTPOS terminal
Imprint of card obtained with signature and authorisation
Veried by Visa/MasterCard Securecode Transaction
High chargeback levels and/or the acceptance of excessive fraud could
attract penalties from the Card Schemes (Visa or MasterCard) and in some
cases, this could even result in the termination of your merchant services by
NAB.
Credit Card Fraud is one of the biggest threats to business establishments
today. However, to combat the fraud effectively, it is important to first
understand the mechanisms of executing a fraud. Credit card fraudsters
employ a large number of modus operandi to commit fraud. In simple
terms, Credit Card Fraud is defined as:
When an individual uses another individuals credit card for personal
reasons while the owner of the card and the card issuer are not aware of the
fact that the card is being used. Further, the individual using the card has no
connection with the cardholder or issuer, and has no intention of either
contacting the owner of the card or making repayments for the purchases
made.

40

An act of criminal deception (mislead with intent) by use of unauthorized

account and/or personal information Illegal or unauthorized use of account
for personal gain Misrepresentation of account information to obtain goods
and/or services.
Contrary to popular belief, merchants are far more at risk from credit card
fraud than the cardholders. While consumers may face trouble trying to get a
fraudulent charge reversed, merchants lose the cost of the product sold, pay
chargeback fees, and fear from the risk of having their merchant account
closed.
3.2 FRAUD TECHNIQUES
As indicated above, there are many ways in which fraudsters execute a credit
card fraud. As technology changes, so do the technology of fraudsters, and
thus the way in which they go about carrying out fraudulent activities.
Frauds can be broadly classified into three categories, i.e., traditional card
related frauds, merchant related frauds and internet frauds. The different
types of methods for committing credit card frauds are described below:
3.1 Type of credit card frauds

41

By Researcher
1.

Counterfeit credit card

2.

Lost or Stolen Cards

3.

No-Card Fraud

4.

Non-Receipt Fraud

5.

Identity Theft Fraud

The percentage that each type of credit card fraud represents is described

1.

Counterfeit credit card: Makes up for 37% of all funds lost through
credit card frauds. To make fake cards, criminals use the newest technology
to skim information contained on magnetic stripes of cards and other
security features such as holograms.

2.

Lost or Stolen Cards: Cards stolen from either cardholders or lost by

them account for 23% of all card frauds. Often, cards are stolen from the
workplace, gym, and unattended vehicles.

3.

No-Card Fraud: Comprises 10% of all the losses and happens

without the physical card been in hand. This can happen by giving your
credit card information on the phone to shady or fraudulent telemarketers
and deceptive Internet sites that are promoting the sales of their non-existent
goods and services.

4.

Non-Receipt Fraud: Is responsible for 7% of all losses. It occurs

when new or replaced cards mailed by your card company are stolen during
the process of being mailed. However, this type of fraud is on the decline
with the card-activation process that most companies use. In 1992, nonreceipt fraud represented 16 % of the losses.
42

5.

Identity-Theft Fraud: Accounts for 4% of all losses, and occurs

when criminals apply for a card using someone else identity and
information.
o

Credit cards are responsible for $2.5 trillion in transactions a

year at more than 24 million locations in 200 countries and territories.

It is estimated that there are 10,000 payment transactions every

second around the world.

Card fraud costs the U.S. an $8.6 billion annually and the bulk
of that loss falls on the card issuers.

3.3 Card Related Frauds

Application Fraud
This type of fraud occurs when a person falsifies an application to
acquire a credit card. Application fraud can be committed in three ways:
Assumed identity, where an individual illegally obtains personal information
of another individual and opens accounts in his or her name, using partially
legitimate information. Financial fraud, where an individual provides false
information about his or her financial status to acquire credit. Not-received
items (NRIs) also called postal intercepts occur when a card is stolen from
the postal service before it reaches its owners destination.

43

LOST/ STOLEN Cards

A card is lost/stolen when a legitimate account holder receives a card
and loses it or someone steals the card for criminal purposes. This type of
fraud is in essence the easiest way for a fraudster to get hold of other
individual's credit cards without investment in technology. It is also perhaps
the hardest form of traditional credit card fraud to tackle.
Account Takeover
This type of fraud occurs when a fraudster illegally obtains a valid
customers personal information. The fraudster takes control of (takeover) a
legitimate account by either providing the customers account number or the
card number. The fraudster then contacts the card issuer, masquerading as
the genuine cardholder, to ask that mail be redirected to a new address. The
fraudster reports card lost and asks for a replacement to be sent.
Fake and Counterfeit Cards
The creation of counterfeit cards, together with lost / stolen cards pose
highest threat in credit card frauds. Fraudsters are constantly finding new
and more innovative ways to create counterfeit cards. Some of the
techniques used for creating false and counterfeit cards are listed below:
1. Erasing the magnetic strip: A fraudster can tamper an existing card
that has been acquired illegally by erasing the metallic strip with a
powerful electro-magnet. The fraudster then tampers with the details
on the card so that they match the details of a valid card, which they
may have attained, e.g., from a stolen till roll. When the fraudster
44

begins to use the card, the cashier will swipe the card through the
terminal several times, before realizing that the metallic strip does not
work. The cashier will then proceed to manually input the card details
into the terminal. This form of fraud has high risk because the cashier
will be looking at the card closely to read the numbers. Doctored
cards are, as with many of the traditional methods of credit card fraud,
becoming an outdated method of illicit accumulation of either funds
or goods.
2. Creating a fake card: A fraudster can create a fake card from scratch
using sophisticated machines. This is the most common type of fraud
though fake cards require a lot of effort and skill to produce. Modern
cards have many security features all designed to make it difficult for
fraudsters to make good quality forgeries. Holograms have been
introduced in almost all credit cards and are very difficult to forge
effectively. Embossing holograms onto the card itself is another
problem for card forgers.
3. Altering card details: A fraudster can alter cards by either reembossing them by applying heat and pressure to the information
originally embossed on the card by a legitimate card manufacturer or
by re-encoding them using computer software that encodes the
magnetic stripe data on the card.
4. Skimming: Most cases of counterfeit fraud involve skimming, a
process where genuine data on a cards magnetic stripe is
electronically copied onto another. Skimming is fast emerging as the
most popular form of credit card fraud. Employees/cashiers of
business establishments have been found to carry pocket skimming
devices, a battery-operated electronic magnetic stripe reader, with
which they swipe customer's cards to get hold of customers card
45

details. The fraudster does this whilst the customer is waiting for the
transaction to be validated through the card terminal. Skimming takes
place unknown to the cardholder and is thus very difficult, if not
impossible to trace. In other cases, the details obtained by skimming
are used to carry out fraudulent card-not-present transactions by
fraudsters. Often, the cardholder is unaware of the fraud until a
statement arrives showing purchases they did not make.
5. White plastic: A white plastic is a card-size piece of plastic of any
colour that a fraudster creates and encodes with legitimate magnetic
stripe data for illegal transactions. This card looks like a hotel room
key but contains legitimate magnetic stripe data that fraudsters can use
at POS terminals that do not require card validation or verification
(for example, petrol pumps and ATMs).

3.4

Merchant Related Frauds

Merchant related frauds are initiated either by owners of the merchant

establishment or their employees. The types of frauds initiated by merchants
are described below:
Merchant Collusion
This type of fraud occurs when merchant owners and/or their employees
conspire to commit fraud using their customers (cardholder) accounts
and/or personal information. Merchant owners and/or their employees pass
on the information about cardholders to fraudsters.

Triangulation
46

The fraudster in this type of fraud operates from a web site. Goods are
offered at heavily discounted rates and are also shipped before payment. The
fraudulent site appears to be a legitimate auction or a traditional sales site.
The customer while placing orders online provides information such as
name, address and valid credit card details to the site. Once fraudsters
receive these details, they order goods from a legitimate site using stolen
credit card details. The fraudster then goes on to purchase other goods using
the credit card numbers of the customer. This process is designed to cause a
great deal of initial confusion, and the fraudulent internet company in this
manner can operate long enough to accumulate vast amount of goods
purchased with stolen credit card numbers.

3.5

Internet Related Frauds

The Internet has provided an ideal ground for fraudsters to commit credit
card fraud in an easy manner. Fraudsters have recently begun to operate on a
truly transnationallevel. With the expansion of trans-border or 'global' social,
economic and political spaces, the internet has become a New World market,
capturing consumers from most countries around the world. The most
commonly used techniques in internet fraud are described below:
1. Site Cloning: Site cloning is where fraudsters clone an entire site or just
the pages from which you place your order. Customers have no reason to
believe they are not dealing with the company that they wished to purchase
goods or services from because the pages that they are viewing are identical
to those of the real site. The cloned or spoofed site will receive these details
and send the customer a receipt of the transaction via email just as the real

47

company would. The consumer suspects nothing, whilst the fraudsters have
all the details they need to commit credit card fraud.
2. False Merchant Sites: These sites often offer the customer an extremely
cheap service. The site requests a customers complete credit card details
such as name and address in return for access to the content of the site. Most
of these sites claim to be free, but require a valid credit card number to
verify an individuals age. These sites are set up to accumulate as many
credit card numbers as possible. The sites themselves never charge
individuals for the services they provide. The sites are usually part of a
larger criminal network that either uses the details it collects to raise
revenues or sells valid credit card details to small fraudsters.
3. Credit Card Generators: Credit card number generators are computer
programs that generate valid credit card numbers and expiry dates. These
generators work by generating lists of credit card account numbers from a
single account number. The software works by using the mathematical Luhn
algorithm that card issuers use to generate other valid card number
combinations. The generators allow users to illegally generate as many
numbers as the user desires, in the form of any of the credit card formats,
whether it be American Express, Visa or MasterCard.

48

3.6

Impact Of Credit Card Frauds

Unfortunately, occurrences of credit card frauds have only shown an upward

trend so far. The fraudulent activity on a card affects everybody, i.e., the
cardholder, the merchant, the acquirer as well as the issuer. This section
analyses the impact that credit card frauds have on all the players involved in
transacting business through credit cards.

3.7

Impact Of Frauds On Cardholder.

It's interesting to note that cardholders are the least impacted party due

to fraud in credit card transactions as consumer liability is limited for credit

card transactions by the legislation prevailing in most countries. This is true
for both card-present as well as card- not-present scenarios. Many banks
even have their own standards that limit the consumer's liability to a greater
extent. They also have a cardholder protection policy in place that covers for
most losses of the cardholder. The cardholder has to just report suspicious
charges to the issuing bank, which in turn investigates the issue with the
acquirer and merchant, and processes chargeback for the disputed amount.

3.8

Impact Of Frauds On Merchants

Merchants are the most affected party in a credit card fraud,

particularly more in the card-not-present transactions, as they have to accept

full liability for losses due to fraud. Whenever a legitimate cardholder
disputes a credit card charge, the card-issuing bank will send a chargeback to
the merchant (through the acquirer), reversing the credit for the transaction.

49

Therefore, the merchant will have to completely absorb the cost of the
fraudulent transaction. In fact, this cost consists of several components,
which could add up to a significant amount. The cost of a fraudulent
transaction consists of:
1. Cost of goods sold:
Since it is unlikely that the merchandise will be recovered in a case of
fraud, the merchant will have to write off the value of goods involved in a
fraudulent transaction. The impact of this loss will be highest for low-margin
merchants.
2. Shipping cost:
More relevant in a card-not-present scenario. Since the shipping cost is
usually bundled in the value of the order, the merchant will also need to
absorb the cost of shipping for goods sold in a fraudulent transaction.
Furthermore, fraudsters typically request high-priority shipping for their
orders to enable rapid completion of the fraud, resulting in high shipping
costs.
3. Card association fees:
Visa and MasterCard have put in place fairly strict programs that
penalize merchants generating excessive chargebacks. Typically, if a
merchant exceeds established chargeback rates for any three-month period
(e.g. 1% of all transactions or 2.5% of the total dollar volume), the merchant
could be penalized with a fee for every chargeback. In extreme cases, the
merchants contract to accept cards could be terminated.

50

4. Merchant bank fees:

In addition to the penalties charged by card associations, the merchant
has to pay an additional processing fee to the acquiring bank for every
chargeback.
5. Administrative cost:
Every transaction that generates a chargeback requires significant
administrative costs for the merchant. On average, each chargeback requires
one to two hours to process. This is because processing a chargeback
requires the merchant to receive and research the claim, contact the
consumer, and respond to the acquiring bank or issuer with adequate
documentation.
6. Loss of Reputation:
Maintaining reputation and goodwill is very important for merchants as
excessive chargebacks and fraud monitoring could both drive cardholders
away from transacting business with a merchant.

51

3.9

Impact Of Frauds On Bank

Based on the scheme rules defined by both MasterCard and Visa, it is

sometimes possible that the Issuer/Acquirer bears the costs of fraud. Even in
cases when the Issuer/Acquirer is not bearing the direct cost of the fraud,
there are some indirect costs that will finally be borne by them. Like in the
case of chargebacks issued to the merchant, there are administrative and
manpower costs that the bank has to incur.
The issuers and acquirers also have to make huge investments in
preventing frauds by deploying sophisticated IT systems for detection of
fraudulent transactions.

52

Chapter 4. PREVENTION ON CREDIT CARDS

4.1 Credit Card Fraud Awareness
All credit cards issued are designed with special security features to help
deter counterfeiting and fraud. A fraudulent credit card transaction could
involve an invalid account number, or the unauthorized use of a valid
account number. One of the common types of fraud loss is due to
unauthorized use of a lost or stolen credit card. Fraudulent transactions
normally occur within hours of loss or theft. In most cases, the victim has
not yet reported his/her card as missing or stolen. Procedures have been
established by the various card associations to help you detect fraudulent
cards and take appropriate action when necessary. In addition, card security
features have been designed to facilitate the detection process. The
information in this brochure is provided to help you protect your business
against fraud losses.
Here are the steps you can take to help prevent skimming:
Inspect your POS equipment regularly including serial numbers,
wires and cables. If any equipment looks unfamiliar, appears altered,
or is missing, notify TD Merchant Services immediately.
Check ceilings, walls or shelves near PIN pads for holes that could
conceal a small camera.
Install your debit terminal so that customers have enough room to
comfortably shield the PIN pad when entering their PIN number. The
most common way of stealing a cardholders PIN is by shoulder
surfing looking over the cardholders shoulder.

53

Make sure that any security cameras on your premises dont capture

customers entering a PIN.

Never enter a PIN for a customer, even if asked to do so.
Remember to give the customer a copy of the transaction receipt
(their signature is not necessary) and return the card to them.
Allow the customer to hold the PIN pad until the transaction is
complete.
Keep all transaction records on file (for the length of time specified
in your processing service agreement), along with employee shift
schedules and supplier information.

4.2 Security Features of a VisaCard and MasterCard Card

A. The Account Number
All Visa account numbers have 16 digits and begin with a 4.
You should check that the numbers are clean and clear, and that all
the numbers are the same size and regularly spaced. If the numbers
appear fuzzy, the card may have been re-embossed.
B. Bank Identification Number
The first four digits of the account number are the Bank
Identification Number (BIN) and are repeated below the embossed
numbers in smaller type. You should check that the four numbers
below match the first four embossed numbers above. If they do not,
the card has been modified or is counterfeit.
C. Visa Brand Mark
The Visa Brand Mark appears in the bottom right corner or the
top right or left corner of the card. It is horizontal on most cards,
54

though it may be vertical on Chip cards. If you place the card under
an ultraviolet light, you should be able to see a letter V over the
Visa.
D. Chip
An embedded microchip that stores information in a secure,
encrypted format makes it more difficult for unauthorized users to
copy or access the information on the card.
E. Signature Panel
The signature panel, which may look like this or be custom
designed, must appear on the back of the card. If you put the card
under an ultraviolet light, you should see the word VISA repeated
on the panel.
F. Mini Dove Hologram
The mini dove hologram appears on the back of the card, either
below or to the left or right of the signature panel on non-Chip cards,
and below the signature panel on Chip cards.
G. Magnetic Stripe
Make sure the magnetic stripe is smooth and straight, and does
not show any signs of tampering.
H. Card Verification Value 2 (CVV2)
Check for the three-digit CVV2 code, which will be reverse
indent-printed either on the signature panel itself or in a white box to
the right of the signature panel.
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4.3 Card-not-present fraud

What is card-not-present fraud?
Card-not-present fraud refers to fraudulent transactions that occur
without the use of an actual card. Typically, it occurs in situations where
customers provide only a credit card number, such as in online, telephone or
mail-order transactions. Because the card is never presented to you, you
have no way of checking its validity using the security features outlined on
pages 710. Card-not-present fraud is the fastest-growing type of fraud in
Canada. It is popular with criminals because it allows them to commit fraud
without the risks involved in going into a store and attempting to make a
purchase with a counterfeit or altered card.
What are Visa and MasterCard doing to help prevent card-notpresent fraud?
To help you protect yourself from card-not-present fraud, Visa has
developed the Verified by Visa* Program, the Address Verification Service
(AVS) and added the Card Verification Value 2 (CVV2) to all cards.
MasterCard has developed the SecureCode Program and the Address
Verification Service (AVS) and added the Card Verification Code 2 (CVC2)
to all cards.
What are the Verified by Visa and Secure Code Programs?
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Verified by Visa and MasterCard SecureCode1 use a password system

to add a new level of security to online Visa card and MasterCard card
transactions. A cardholder creates a password, which they enter whenever
they make a purchase at the website of a merchant who participates in
Verified by Visa and SecureCode. This helps ensure that the person making
the purchase is the actual cardholder and not just someone who has the
account number of a card. Your customers are aware of the growth in online
credit card fraud, and, when they see that your website participates in
Verified by Visa and SecureCode, it can help make them feel secure about
purchasing through your website. As well, if you participate in the Verified
by Visa or SecureCode programs, you can receive greater protection from
fraud-related chargebacks.
What are the Card Verification Value 2 (CVV2) and Card
Verification Code 2 (CVC2)?
CVV2 and CVC2 are credit card security features that help you
ensure that the person making an online, telephone or mail-order purchase
from you is actually a legitimate cardholder. The CVV2 and CVC2 are
three-digit security codes that appear on or to the right of the signature panel
on the back of Visa and MasterCard cards. (See the card visuals on pages 8
and 10 for examples of the CVV2 and CVC2.)
How does the CVV2 and CVC2 protect you against fraud?
Whenever you take a card-not-present order online, by phone or by
mail make sure you request this three-digit number. The Visa and
MasterCard system provides a real-time check to ensure that the CVV2 or
CVC2 you have been given is the one properly associated with the account
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number provided by the customer. By supplying the CVV2 or CVC2, the

customer shows that they are actually in possession of the card. If the
customer has only the account number or the account number and expiry
date, it may indicate that the transaction is fraudulent.

What is the Address Verification Service (AVS)?

This service verifies a cardholders billing address information and
provides a results code to the merchant that is separate from the
authorization response code. As a merchant, you can then decide whether to
continue with the transaction based on the results code.
4.4 Hacking
As businesses come to depend more and more on technology, criminals look
for new ways to exploit technology for their own purposes. Todays techsavvy criminals can hack into your computer system to gain access to
sensitive information about you, your business and your customers.
How does Visa and MasterCard help protect your business
against hackers?
The Visa Account Information Security (AIS) and MasterCard Site
Data Protection (SDP) Programs are global programs that help make both
the virtual and the physical portions of your business more secure. AIS and
SDP provide you with an easy-to-use toolkit designed to help you protect
cardholder account and transaction data against unauthorized access by
hackers. The AIS and SDP Programs incorporate a self-assessment
questionnaire that lets you evaluate how well your business is protected.
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 What else are Visa and MasterCard doing?

Visa and MasterCard have aligned with a data security standards
program offered by other payment organizations to create a Payment Card
Industry (PCI) set of data security standards. This alignment of standards is
designed to increase the security of card information and further protect
cardholders and merchants against fraud. It also simplifies things for
merchants like you, by establishing one set of security standards for you to
implement.
How can Visa and MasterCard help ensure your business is
secure?
To assess how secure your business is against fraud, you can visit
www.visa.ca/securewithvisa.

Additionally,

visit

www.visa.ca/ais

and

www.mastercard.com/ca/merchant to confirm your business complies with

the Payment Card Industry Data Security Standards (PCI DSS).
How can you safeguard your customers information?
Any documents containing credit card account numbers should be
stored and destroyed in a secure manner to safeguard your customers
information.
Are there specific steps you should take with regard to your
employees?
Your business is only as secure as your employees make it. To help
protect account data, give your employees access to it only on a need-toknow basis. Whenever an employee leaves, immediately revoke their access
to your network and your premises. To help your employees protect your
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business against fraud, train them in how to recognize suspicious practices

and establish a system that lets them report these occurrences to you. With
these standards and practices in place, you should have a more secure
business that protects both you and your customers against fraud.

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4.5 Tips To Customers

1. Keep It Secure
Keep your card, your pin and your account information in secure locations.
Use a pin number you can remember without writing it down. Record the
credit card account, expiration date, security code and toll-free phone
number on the back tucked safely in a fireproof lock box (retail: about $25)
or a safe.
Sign the back of your credit cards and write "See ID," which some
merchants will honor. Only type in your credit card number into secure
websites (https rather than http) when making online purchases.
2. Check your Credit Card Statement Weekly
Access your credit card statements online through your bank or credit card
provider. Create a user name that is not the name on your card (most credit
card companies allow this online), and use a secure password containing
both lowercase and uppercase letters as well as numbers and symbols. Log
on weekly to check your balance and verify that current credit card
purchases are yours. Call your credit card issuer immediately if you see any
erroneous charges.
3. Don't Leave Receipts Behind
Minimize the chances of leaving a breadcrumb trail of your financial
transactions, including where you eat and shop, by always taking your paper

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receipts with you. This can be useful if your card is ever misused by people
who have access to add gratuities to your credit cards bills.

4. Use Credit Cards Wisely

At gas pumps, rather than use a credit card at the gas pump,
where skimming could occur, use a low-limit gas-only credit card or key
swipe at the gas pump and pay it off your balance monthly to avoid interest
charges.Never give out your credit card number or social security number to
any incoming caller over the phone. If the caller claims to be from your bank
or credit card company, end the call and call your financial institution
directly instead.
5. Extra Protection: Alerts
Sign up for any free alerts that let you know of any credit card activity that is
out of the ordinary. Some credit card issuers may charge a nominal fee for
this service.
6. Report Lost Cards Immediately
It doesn't take long for someone to rack up charges at a restaurant or at a gas
pump using your lost credit or debit card. Report a lost or stolen card as soon
as you notice it. Legally, you are protected against the charges incurred after
a reported theft. Federal law allows for a $50 maximum liability.
7. Reduce Papers, Destroy Before Tossing

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Consider receiving credit card statements online only rather than paper
statements, if you have no secure way to store paper statements or to destroy
them. Use a paper shredder or burn old statements, to diminish the chances
of someone rifling through your paper recycling or trash to find your
financial account information

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