Twenty years ago, if you wanted to open a savings account with a bank, it was a night mare: The bank manager would watch you with suspicion and will even sometimes tell you that you need to come the next day as his quota for the day was over! Even to take your own money from your own account, in your own banks branch where you held the account, you had to reach during the banking hours, and if you are one minute late, the clerk would say, "sorry come again next day"! If you are travelling and you are in urgent need of money, you need to take your cheque book with you and find the nearest branch of the bank where you held the account, and wait for their mercy to get the money at the earliest. Taking a loan from the bank was unimaginable as you needed to prove, among a long list of requirements that you were financially so sound that you were not in need of a loan! For you, the bank meant nothing but a place where you could deposit your money and withdraw it at specified times, without being fearful of being stolen or lost.
Cut the shot and come to present day: Bank executives come to your home at your convenient time to open your accounts or do your loan documentation; personal loans are being offered to you over phone and are being credited into your account and your acceptance is denoted by your withdrawal of the loan amount credited into your account, you can withdraw any amounts even at midnight from an ATM, account details can be monitored and funds can be transferred either from your computer or mobile, and your bank has become a one stop shop for all your financial needs. Even you can keep all your money in bank and purchase things from shops swiping debit cards or credit cards in shops, and sometimes purchasing things or obtaining doesn't require even leaving your place- you can get the services and make payments online using your online banking account or debit or credit cards.
The banking scenario has undergone a sea change from what it had been twenty or thirty years ago and most of the changes has been attributed to technological innovations. In this module, we would be examining these innovations that created the metaphor-"new generation banking" as distinguished from traditional banking and the effect of these changes in banking law and practice.
What is new generation banking?
Nobody knows who gave the name "new generation" to technology driven banking. Presumably of Indian origin, the nearest reason for such a name appears to be the banking sector reforms that evolved as a consequence of liberalisation drive of the 1990's.
Traditionally banking is defined as accepting deposits of money for the purpose of lending or investment. S 5(b) of Banking Regulation Act, 1949 defines banking as "the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdraw able by cheque, draft, order or otherwise" For centuries the banking operations centered on these three functions, and banks were generally unwilling to venture into new fields. Though Section 6 of the Banking Regulation Act provides for a number of activities apart from the lending and investment functions, as follows the banking continued to be traditionally very slow and rich oriented.:
Borrowing, raising or taking up of money
Agency functions
Loan syndication
Participation in any issue of securities and lending money of the same
Guarantee and Indemnity business.
Management of Property owned by it or coming to it in satisfaction of any of its claims or as security for debt
Undertaking and executing trusts
Administration of estates
Employee benefit trust or organisations
Buildings or works necessary for company
Incidental things necessary for the main business of the company
Any other form of business which the Central Government may, by notification in the Official Gazette, specify as a form of business in which it is lawful for a banking company to engage.
The technological advancement, brought the banks into the centre place of the society, and the banking industry started thinking about "under banked sectors". When some private sector banks started making products to attract masses to banking and to make banking an attractive activity, the tradition bound bankers scorned them off as "new generation banks". The liberalisation drive in India that started in 1991 gave a new impetus to the new generation banking. The success of the private sector banks forced the public sector bankers also to think seriously about following the model. Though use of the innovations in technology for banking became the main indicator of new generation banking, it also involves other customer centric activities and efforts towards integration and globalisation of banking industry.
Credit Cards, E Banking, Mobile Banking, Door step banking etc. have become the symbols of new generation banking, though generally all the innovations in the banking that entered Indian market as a result of liberalisation and implementation of Narasimham Committee Report suggesting opening up of banking sector for competition could be termed as products of new generation banking. Some innovative treasury practices like use of derivatives as a hedging tool have also been included as part of the discussion.
Cards
Various Type of Cards:
Credit Card: Provides customers with access to line of credit
Charge Card: allows the customers to defer the cost of purchase till the end of payment cycle.
Debit Card: allows customer to use the balance in his savings/current account for purchases
ATM Card: provides facility of cash withdrawal from ATM(Automated Teller Machines)
Smart Card: plastic cards containing embedded microchip, enabling storage of large amount of encrypted information and can carry multiple applications from various industries.
Credit Card:
A credit card is a plastic card with specific security and other features which is issued by a bank to its customer to enable the latter to use it as a payment medium. [1] Reserve Bank of India defines credit card as a plastic card, assigned to a card holder, usually with a credit limit, that can be used to purchase goods and services on credit or obtain cash advances.
A credit card is both an instrument of payment and a source of credit. It allows card holders to pay for purchases made over a period of time and to carry a balance from one billing cycle to the next. Normally credit card purchases have a free credit period, which is like an interest-holiday which enables the card holder to pay for the purchases without incurring any interest or finance charges. But once the payment falls due, cardholders may pay the entire amount due and save on the interest that would otherwise be charged. Alternatively, they have the option of paying any amount, as long as it is higher than the minimum amount due, and carrying forward the balance.
History of Credit Cards:
According to encyclopedia Britannica, the use of credit cards originated in the United States during the 1920s, when individual firms, such as oil companies and hotel chains, began issuing them to customers." However, references to credit cards have been made as far back as 1890 in Europe. Early credit cards involved sales directly between the merchant offering the credit and credit card, and that merchant's customer. Around 1938, companies started to accept each other's cards. Today, credit cards allow you to make purchases with countless third parties.
The inventor of the first bank issued credit card was John Biggins of the Flatbush National Bank of Brooklyn in New York. In 1946, Biggins invented the "Charge-It" program between bank customers and local merchants. Merchants could deposit sales slips into the bank and the bank billed the customer who used the card.
In 1950, the Diners Club issued their credit card in the United States. The Diners Club credit card was invented by Diners' Club founder Frank McNamara and it was intended to pay restaurant bills. A customer could eat without cash at any restaurant that would accept Diners' Club credit cards. Diners' Club would pay the restaurant and the credit card holder would repay Diners' Club. The Diners Club card was at first technically a charge card rather than a credit card since the customer had to repay the entire amount when billed by Diners Club.
American Express issued their first credit card in 1958. Bank of America issued the BankAmericard (now Visa) bank credit card later in 1958.Credit Card was first introduced in India by Standard Chartered Bank in 1993.In simple words, credit card is a medium by which the issuing bank disburses loans to its customers. When the bank issues a credit card to a customer, it actually provides a pre approved loan to the customer. When the customer uses the credit card in a shop or ATM, the bank disburses the loan, and pays the amount directly to the merchant. The only difference between a credit card and a normal loan is that under a normal loan the interest start accruing from the day the loan is disbursed, whereas under the credit card there is usually a moratorium period and if the amount due under credit card facility is repaid in full on or before the date fixed for payment, it does not incur any interest. However if the repayment does not happen till the payment due date, the amount lend under the credit card facility incurs a higher than normal interest rate. The customer has also got an option to pay a small fraction of the total amount due, called "minimum amount", to keep the loan facility moving, in which case the bank will let the customer roll or revolve the loan facility, in other words, to keep on using the credit card to purchase goods or withdraw cash, till the credit level reaches the pre approved limit. The banks earn a fee on almost every transaction made by the credit card. The Credit card can be used as an alternative of money and in case of some cards it can be used even to withdraw money from ATM's.
Credit Card: How it works:
If one has to purchase any merchandise using the credit card, the cardholder (customer), after purchasing the items, presents his card to the merchant (retailer). The merchant swipes the card on a machine, and gives a credit slip to the cardholder for cardholder's signature. The machine transmits the card details to the acquiring bank, which is the merchant's bank, which compares the details with the issuing bank (customer's bank) and approves the transaction. Upon approval from the issuing bank, the amount of the transaction is transferred by the issuing bank to the acquiring bank and the acquiring bank credits the amount to the merchant's account, after deducting its commission, if any, on the transaction. The clearing network, maintained by network sponsors like Visa, Maestro or Master Card facilitates the seamless transfer of funds between banks. The credit slip is generated only subsequent this process. The credit slip signed by the customer evidences his acceptance of the transaction, and the merchant has to submit the signed charge slips to its bank periodically to confirm the transactions. Once the amount is sent across to the acquiring bank, the issuing bank would make a debit entry regarding the transaction in the cardholder's account maintained by the issuing bank. Periodically the issuing bank will send a bill to the cardholder detailing all the transactions made by him/her with the credit card, specifying the time period within which the amount has to be paid. Once the cardholder pays the amount specified within the bill, the transaction cycle is completed.
Credit Card: Parties:
The Card holder(Customer)
The Issuing Company(Bank)
Retailer(Merchant at Point of Sale or Merchant)
Clearing Network
Acquiring Bank
Credit Card types:
General Purpose cards: Accepted by credit card associations like VISA and Master Card and accepted by most merchants. Most of cards issued in India are of this type. Issuers generally make other classifications like Platinum, Gold, Silver etc to denote the limits and facilities available on each card and the income eligibility criteria. Some banks issue add on or supplementary cards, whose credit limit rests on another card held by the same customer. Supplimentary/add on cards are usually issued to family members of the customer who have no independent income. Some banks also issue corporate credit cards for use of employees of its corporate customers.
Private Label Cards: Accepted only in the institution which issues the card(eg: A card that can be used to make purchases only in a particular chain of departmental stores.)
Credit Card: Benefits:
Credit Cards are beneficial to the card holders, banks, merchants and network sponsors:
Benefits to Card Holders:
Convenience to use: Credit Cards offer hassle free shopping, and avoids the need to carry cash for every purchase.
Security: Lost card, if reported can be blocked and this misuse of the amount in the credit card can be avoided to a large extent compared to cash. This is however subject to the liability policy of the issuing bank which may differ from bank to bank.
Emergency Protection: The card will help the user to get either money or services in emergency even where no bank branch is available in the vicinity.
Universal Acceptance: Most Cards are accepted in many institutions worldwide. Visa cards for example are acceptable in more than 20 million merchant locations worldwide. Further most bank ATM's worldwide accept credit cards. A personal cheque will not be accepted in a similar manner.
Simplified Recordkeeping: Credit Card bill gives you a record of all transactions in a month and hence keeping track of your expenses is made easier. Consolidated statements given by many banks either half yearly or yearly is additional benefit.
Consumer Protection: In case the products are not satisfactory, the customer can demand charge back and this will be supported by the card issuer, if the product does not confirm to the warranty. Since the merchant needs support of the issuer bank, chances are high that they accede to demands of bank, rather than of individual customers, and hence protection level of customer is high when using credit cards.
Value Added Benefits: Many credit card companies offer charge back, rebates, cash back offers etc, which one may not get when paying cash to purchase merchandise.
Flexibility: Since credit Card users need not carry money with them for every purchase, the card offers them the flexibility to make immediate purchases, eg where the stores offer an on the spot discount for some items.
Easier Budgeting: It is easier to make a big purchase and pay it off at once convenience.
Use in Email, Phone or Internet Purchases: For online purchases mostly credit cards are the only acceptable mode of payment.(In many cases even debit cards are not acceptable).
Saves space in the purse: Cards take only limited space compared to paper money or metallic coins.
Benefits to Retailer:
Attracting more customers by offering multiple options of payment
Safeguard against fake notes, bounced payments etc.
People tend to purchase more using credit cards, since there is no restriction in carrying cash when using credit cards.
Benefits to Banks/Network Sponsor: Fee charged by the acquiring bank from the retailer is split between acquiring bank, issuing bank and network sponsor and due to huge volumes though the amount charged from individual card holder is very small, all the three parties earn a very huge amount out of the transactions. Specific advantages to these three parties are given below:
Acquiring Bank
Earns a commission on purchases by mediating with the retailer
Gives a platform to broaden its customer relationship with retailer
Issuing Bank
Earns an annual fee from the customer for maintaining the card services
Generates revenue from every transaction made by the card holder.
Gets a chance to cross sell its other products to card customers there by making more profit.
Interest/Service charges levied on balance outstanding in a credit card is higher than average rate of interest charged for any other product of the bank.
Network Sponsor:
Earns membership fees from banks for giving them access to network services.
Earns a percentage of commission earned by acquiring bank for providing clearing services.
Earns fee from Issuing Banker for issuing warning lists etc for blacklisting customers.
Credit Card: Disadvantages: The credit card is disadvantageous to cardholder in more than one ways as follows:
Incentive for extra spending even though the spender has no money with him is the biggest disadvantage of credit cards.
More prone to fraud than money.
If payment is not made in time, it is more likely that you end up paying more money than actually due for the goods/services.
Damage your credit rating if the payments are not made in time.
Credit Card-Legal Framework:
In India, most of the Public Sector Banks like SBI, Bank of Baroda etc who have ventured into credit card business have floated a subsidiary non banking finance company(NBFC)'s like SBICards Pvt Ltd, BoB Cards etc to undertake credit card business. However private sector banks like ICICI Bank, HDFC Bank, Standard Chartered Bank etc. have been issuing their own credit cards. Legally Credit card transactions are in fact a compendium of three or four contracts joining the parties to the contract:
The main contracts involved in the credit card transactions are:
Between issuing bank and the network owner (Visa/Maestro/MasterCard)-covers conditions subject to which the issuing bank can allow the card to be used in the network.
Between the network owner and acquiring bank: covers conditions subject to which the acquiring bank can accept the charge slip and the present transactions in the network.
Between the cardholder (customer) and the issuing bank- covers conditions subject to which the card holder can use the card.
Between the acquiring bank and the merchant establishments: covers conditions subject to which the merchant authorisation process is carried out, and merchants account is credited.
Salient features of Credit Card Contracts:
Generally Credit Card contracts are not signed by the parties. Most banks have a statement in the credit card application form mentioning that by signing the application form the customer has accepted the card agreement. The Card Member Terms and Conditions which is send across to the customer along with the credit card will detail the conditions.
Clauses in the agreement between the Issuing Bank and the Network sponsors are not revealed to the customers.
Credit Card Regulation in USA:
In USA, the card was popularized by travelling salesmen, and soon started getting to the attention of regulators. By the mid-'70s, the U.S. Congress begin regulating the credit card industry by banning such practices as the mass mailing of active credit cards to those who had not requested them. However, not all regulations have been as consumer friendly. In 1996, the U.S. Supreme Court in Smiley vs. Citibank lifted restrictions on the amount of late penalty fees a credit card company could charge. Deregulation has also allowed very high interest rates to be charged.
In 2009 US Senate has passed a Statute called Credit Card Accountability Responsibility and Disclosure Act of 2009(Credit Card Act, 2009) to bolster consumer protection and prohibit certain unethical practices of credit card issuing companies. The salient features of the statute are:
Advance notice to rate of interest and other changes in terms of contract
Limits on increase in interest rates, fees and finance charges on outstanding balances
No change in rules regarding repayment of outstanding balance, which are detrimental to interest of borrower.
Prohibition of penalties for on-time payments.
Clarification of rules on charging of interest, penalty and fees by credit card companies.
Disclosures regarding minimum payment time, renewal of credit card,
The credit card agreements have to be posted in internet and an electronic copy to be given to Federal Reserve Board, in addition to making available individual credit card agreements to the customers through an internet platform.
Preventive measures for deceptive marketing of credit reports.
Prohibition of issuance of credit card to under aged customers without parental approval and to college students other than through certain specified schemes
.Federal Reserve Board vested with authority to study and report on various aspects of credit cards inter alia including Consumer Credit plans and regulations every 2 years and to come up with suggestions.
The Act took effect on August 22, 2010.
Card Member Terms and Conditions, which form the contract between the issuing bank and the customer is not issued for a particular value and hence not stamped under the Relevant Stamp Act of the state from where it is issued.
Card Member terms and Conditions will cover the following aspects:
Card Member terms and conditions does not cover the following aspects:
Though in USA, there are specific laws, governing the credit card operations (see box), in India there are no specific statutory provisions and the credit card operations, being a banking operation is covered by RBI guidelines.
RBI has been issuing notifications and Master Circulars governing the credit card operations in India. Apart from this the general law of the country, have applications in credit card Further the Indian Contract Act deal with the legal aspects of the contract governing the credit card operations between parties and the Consumer Protection Act,1986 as well as the Monopolistic and Restrictive Trade Practices Act, deal with the consumer angle of credit card operations.
The RBI Master Circular No. DBOD.No.FSD.BC. 16 / 24.01.011/ 2010-11 dated 1st July 2010 is perhaps the most exhaustive guidelines covering the credit card operations in India. The salient features of the circular are:
Fair Practices Code: It mandates that each bank issuing credit card should have a well documented policy and a fair practices code for credit card operations. The Fair Practice Code of each bank should contain at least the conditions stipulated in the Code of Bank's Commitment to Customers"(Code), 2006 issued by the Banking Codes and Standards Board of India(BCSBI).
Issuance of credit card:
Card to be issued only after independent credit risk assessment-No cards to students or people with no independent financial means other than add on cards.
In case a credit card application is rejected bank should convey in writing the reasons for rejection of credit card application.
Credit worthiness of the customer has to be assessed on the basis of all card held by him
Card issuing banks would be responsible for KYC norms.
Terms and conditions to be highlighted to the customer at all stages especially Most Important Terms and Conditions should be separately highlighted.
Interest Rates:
The Bank is not supposed to charge interest rates only in reference to Base Lending Rate and in case of differential rates there should be transparency in charging such rates and should pubicize through website and other means the method of calculating interest rate for various customers.
Card issuers should ensure that there is no delay in dispatching bills and customer has sufficient number of days on receipt of bill to make payment.
Card issuers should quote Annualised Percentage Rates(APR) separately for retail purchase and cash withdrawal and the same should be publicized with examples for easy understanding of card holders.
Banks should take efforts to educate the customer on the effects of making payment of the "minimum amount due" only.
Except service tax or other charges levied by government card issuers not to collect any other charges not indicated to the customer at the time of issuance of the card without his consent.
Terms and conditions of payment of credit card dues, should be so stipulated as to ensure that there is no negative amortization.
Changes in charges should take effect only after giving notice of at least one month.
If any card holder wants to surrender any card on account of changes in the charge structure he should be allowed to do so without any extra charges.
There should be transparency in issuing charges free of cost during first year.
Billing: It is the duty of card issuing bank to ensure that bills are correct. In case the customer protests any bill, the issuer should send the customer the documentary proof of usage of the card within 60 days with a spirit of amicably settling the disputes.
Use of Direct Selling Agents(DSA)/Direct Marketing Agents(DMA)/other agents:
Banks to be careful when they appoint DSA/DMA/other agents in dealing with other aspects of credit card operation, and should prescribe a code of conduct for the DSA/DMA/other agents and should ensure that the agents adhere to the code.
Card Issuer should make random checks and mystery shopping to ensure proper conduct from agents particularly in the aspects included in these guidelines like soliciting customers, hours for calling, privacy of customer information, conveying the correct terms and conditions of the product on offer, etc.
Protection of Customer Rights
Customer's rights in relation to credit card operations primarily relate to personal privacy, clarity relating to rights and obligations, preservation of customer records, maintaining confidentiality of customer information and fair practices in debt collection.
The card issuing bank/NBFC would be responsible as the principal for all acts of omission or commission of their agents (DSAs / DMAs and recovery agents).
Right to privacy
No Unsolicited cards to be issued to customers. If a bank bills a customer on an unsolicited card, the charges should be reversed on demand and penalty amounting to twice the reversed charges to be paid to customer without demur. The customer could also approach Banking Ombudsman claiming compensation for loss of time, expenses incurred, harassment and mental anguish.
Loss of unsolicited cards will be responsibility of issuer and person named in the card cannot be held responsible.
Written consent of applicant to be required for issuing credit cards.
Unsolicited loans and other credit facilities should not be offered to credit card customers.Banks/NBFC's to pay penalty for extending unsolicited credit facilities in addition to withdrawing the same.
No unsolicited upgradation of credit cards/enhancement of credit limits. Prior consent of customer is must for all variations in credit card terms and conditions.
Do Not Call Registry to be maintained banks maintaining phone numbers of customers who do not wish to be called and to give wide publicity for the same.
The numbers cleared by the card issuing bank/NBFC for calling should only be accessed. The bank/NBFC would be held responsible if a Do Not Call Number (DNCN) is called on by its DSAs / DMAs or Call Centre/s.
The card issuing bank/NBFC should ensure that the Do Not Call Registry (DNCR) numbers are not passed on to any unauthorised person/s or misused in any manner.
Banks/NBFCs/ their agents should not resort to invasion of privacy viz., persistently bothering the card holders at odd hours, violation of "do not call" code etc.
The guidelines issued by Department of Telecommunications should be strictly complied with.
Customer confidentiality:
Customer information should not be shared with any outside agency except with informed customer consent and any consent should be obtained after giving full information about the disclosures. Sole responsibility for the correctness or otherwise of the data so disclosed will be with the card issuers.
Even for sharing information relating to credit history/repayment record of the card holder to credit information company, the bank should explicitly bring to the notice of the customer that such information is being provided in terms of Credit Information Companies(Regulation) Act, 2005.Banks should strictly adhere to procedures laid down by their respective boards, including issuing sufficient notice to the card holder about intention to report him as a defaulter.
The disclosure to the DSAs / recovery agents should also be limited to the extent that will enable them to discharge their duties. Personal information provided by the card holder but not required for recovery purposes should not be released by the card issuing bank/NBFC. The card issuing bank /NBFCs should ensure that the DSAs / DMAs do not transfer or misuse any customer information during marketing of credit card products.
Fair Practices in debt collection:
Banks to adhere to Fair Practice Code for Lenders regarding debt collection.
All letters issued by recovery agents must contain the name and address of a responsible senior officer of the card issuing bank whom the customer can contact at his location.
Banks /NBFCs / their agents not to resort to intimidation or harassment of any kind, -verbal or physical, against any person in their debt collection efforts, including acts intended to humiliate publicly or intrude the privacy of the credit card holders' family members, referees and friends, making threatening and anonymous calls or making false and misleading representations.
Recovery agents should be employed strictly complying with the guidelines of RBI (in respect of engagement of recovery agents (circular No. DBOD.No.Leg.BC.75 /09.07.005/2007-08 dated April 24, 2008).
Insurance cover to cardholders
Where banks provide any insurance cover to their credit card holders, in tie-up with insurance companies, the banks may consider obtaining in writing from the credit card holders the details of nominee/s for the insurance cover in respect of accidental death and disablement benefits and may also ensure that the insurance company records these details. Banks may also consider providing the card holders the details of contact persons for insurance claims.
Redressal of Grievances
60 (sixty) days may be given to the customers for preferring their complaints / grievances.
The card issuing bank /NBFC should constitute Grievance Redressal machinery within the bank/NBFC with proper instructions to call center personnel and an escalation matrix with a defined time frame for resolution of grievances.
A customer, whose complaint is to satisfactorily resolved by the card issuer bank within 30 days, can approach Banking Ombudsman for redressal. The bank/NBFC will be liable to compensate the complainant for loss ot time etc for fault of bank.
Internal control and monitoring systems
Standing Committee on Customer Service in each bank/NBFC should review on a monthly basis the credit card operations including reports of defaulters to the CIBIL, credit card related complaints and take measures to improve the services and ensure the orderly growth in the credit card operation and put up detailed quarterly analysis of credit card related complaints to their Top Management. Card issuing banks should have in place a suitable monitoring mechanism to randomly check the genuineness of merchant transactions.
Fraud Control
Banks/NBFCs to set up adequate internal control systems to combat frauds.
to put in place with effect from August 01, 2009
A system of providing for additional authentication/ validation based on information not visible on the cards for all on-line card not present transactions except IVR transactions.
A system of "Online Alerts" to the cardholder for all 'card not present' transactions of the value of Rs.5,000/- and above
to block a lost card immediately on being informed by the customer and formalities, if any, including lodging of FIR can follow within a reasonable period.
To consider introducing, at the option of the customers, an insurance cover to take care of the liabilities arising out of lost cards.
Right to impose penalty
Reserve Bank of India to have the right to impose any penalty on a bank/NBFC under the provisions of the Banking Regulation Act, 1949/the Reserve Bank of India Act, 1934, respectively for violation of any of these guidelines.
Credit Card Frauds:
Being a physical product which has simplified monetary transactions, the credit cards are prone to frauds. It is estimated that annually almost 7% of the total credit card transactions are fraudulent. UK Home office has reported that in 2008 plastic card fraud alone cost nearly 610 million GBP. The main types of credit card frauds are:
Theft: Simple theft, where the card and pin is stolen from the place it is kept. This can happen mostly when the card and PIN number are kept in one place. To avoid such thefts, it is usually advised not to keep the card and the PIN number at the same place. Sometimes stolen cards are used to make internet purchases or self serve payment kiosks. Though the card companies have a system of blocking the lost cards, but in most cases the thief would make heavy usage on the card within 1-2 hours of the theft, and the cardholder will come to know about the theft and take actions to block the card only by that time.
Compromised account: Such types of frauds are often done by taking away the credit card details either by a phishing attack, or by hacking into the computers, where credit card data are stored. The card data are then used, either to make purchases in a process called Card Not Present Transactions, which technically means transactions where credit cards are not physically presented, and where the merchants will have no means to verify the correctness of the data. In such cases, merchants may take additional precautions like sending the details only to credit card address, but even in such cases, the fraudsters have intercepted the documents by standing in the porch etc of the card holder.
Identity theft:
Application fraud: In this type of fraud, the fraudster will falsify an application to acquire a credit card. This can be split into assumed identity or identity theft, where one person pretends to be another one, and makes transactions, and financial fraud, where the card would be genuine, but the same is stolen from the postal service before it reaches the Card Holder. As a result of this type of fraud, also called intercept fraud, the card holder will not know that he has a card account till he receives a huge bill on the credit card..
Skimming: This is the process where the information stored in the magnetic strip on the back of the credit card, either using a special card reader in the merchant establishments or in the ATM's,.and then the data is used to make credit cards, to be used in some foreign countries to make purchases. The card holder would not be able to trace to the original purchaser in most such cases.
Carding: Carding is a process where the thief uses some random credit card numbers in a website or a computer programme which has real time processing. Usually these purchases will not be of significant amount. If the credit card is accepted the thief knows that the card is still good. Earlier the fraudsters used specialized programmers called "Card data generators" to produces a sequence of credit card numbers which would then be tested by this process to check whether they are susceptible to fraud. Now a day, with the requirement of entering 3-4 digit card security code or cards expiration date and hence this sort of carding is now no longer viable.
BIN attack: In this technique, the fraudster uses the principle of card generation. The credit card numbers are generated in a particular series called BIN series. If a fraudster gets hold of the BIN series, the fraudster who gets hold of one BIN number can generate valid card numbers by changing the last 4 digits of the card. Using a generator. This used to be an earlier technique, but has fallen out of use, since most card issuers have started using random numbers for card creation.
Fraudulent charge back schemes: This is supposed to be fraud on the merchants rather than card holders. Here the customer would make internet purchases and after getting the product in hand would claim a charge back, without sending back the products.
Cash machine fraud: Skimming is also a type of cash machine fraud, but apart from this there are some other types of fraud also. First one is a deceptive tactic, where the fraudster would tamper with the machine so that the card when inserted will get stuck inside the machine. Then the fraudster who will be waiting nearby will come to the assistance of the user, and then on the pretext of helping the cardholder would make him key the pin number. When the card is not returned, he will advise you to report the matter in the nearest bank branch. When the customer leaves, the fraudster will disengage the device, retrieve the card and use the same with the PIN number already obtained to defraud the money from the cardholders account. In another technique known as shoulder surfing, the criminal after watching your PIN number when you enter it, steal your card to withdraw money.
Safety measures:
CVV Number: This is a 3-4 digit number usually printed in the back of the card itself, which helps to protect against skimming attacks.
4-6 digit authorisation: Many card issuers allow the card holders to create a personal password to be created by the card holder to be used for internet transactions. This will help to avoid use of stolen credit cards over internet.
Mobile Authentication: Some credit cards also come with mobile authentication, where the card holder will have to authenticate the transaction using a number that comes to registered phone number of the card holders
Random number sequencing: Many card companies use random number sequencing where the card holders will have to enter the random alphabets or numbers printed in the card while making online transactions.
Credit Card Recovery:
Credit Card is a loan product and is not backed by any security. Hence it becomes an unsecured debt and recovery of the amount due could be done only as an unsecured debt. A civil suit or a criminal prosecution for cheating and criminal breach of trust, depending upon the circumstances of the case, are therefore the only legal options left with the credit card companies. While the long delay in getting a decree is a spoiler in civil suit, the criminal prosecution will only result in physical punishment to the defaulter with no scope for recovery of the lost amount. If the customer has other accounts with the bank, the bank may take recourse of Section 171 of Contract Act and exercise its general lien, and may even set off the amount due from the customer against other amounts available with the bank, but such a recourse is not available to subsidiaries of banks which operate the credit card business. If the card holder has issued any cheque which when presented bounces, the bank may file a petition under s 138 of Negotiable Instruments Act. But cases where bank holds a cheque of the defaulting credit card customer is very rare. With the introduction of Credit Information Bureaus, the credit card defaults could be reported to such credit information bureaus, which hampers further credit worthiness of the customer and this has is currently the best credit card recovery tool in India. In several cases, (see Standard Chartered Bank v. Yogesh Sharma [2] ), the Indian Courts have come strongly against the strong arm tactics of the credit card recovery agencies, and have directed the police to file FIR in cases where allegations of harassment of credit card companies are reported. RBI has also directed the banks to ensure that the recovery agents they employ should be strictly controlled and the banks would be responsible for the actions of such recovery agents they employ. Hence recovery by credit card agencies have become a difficult task and the banks can recover such debts only through protracted and prolonged legal process.
