Card-Based Electronic Payments
There is a growing array of card-based electronic payment systems available for retail use. Historically, these payments have been linked to a payee's or payer's existing account relationship with a financial institution. Card-based electronic payments can be defined in three ways, depending on the timing of the payment:
- "Pay Later" payments occur after receiving the goods or services and typically refer to credit payments. A credit card enables a consumer to access a credit line account at a financial institution.
- "Pay Now" payments occur when the goods or services are received and generally are associated with debit payments. Debit card payments are related to an existing transaction account at a financial institution.
- "Pay Before" refers to payments for goods or services with prepaid or stored-value cards, which are loaded with buying power before the purchase of goods or services occurs. The account associated with the pre-paid debit card may be the liability of a financial institution.
Both credit and signature-based debit card transactions are typically processed in batch mode at the POS, and settlement is delayed until the batches are processed at the end of the day. PIN-based debit card transactions, although processed in real time at the POS, typically settle at the end of the day using the ACH. Merchants often prefer that customers use PIN-based debit cards due to the lower costs associated with these transactions over the costs for signature-based credit and debit cards. With PIN-based transactions, the consumer must apply the pre-established PIN to validate the transaction. Each of these types of card payments is described below.
In the United States, almost all cards are magnetic-strip-based, while in Europe and Asia, consumer account information is often stored on a computer chip embedded in the card. These computer-chip-based systems have more security features than the magnetic strip systems; therefore, more financial institutions and merchants in the U.S. are adopting chip processing infrastructure. Consumers have welcomed recent initiatives with chip-based contactless cards so, the growth in these chip-based-cards is expected to continue.
In general, credit cards have revolving credit arrangements that allow consumers to make purchases and be billed later. Most credit card accounts allow the consumer to carry a balance from one billing cycle to the next and make a minimum payment in each billing cycle (e.g., two to three percent of their total balance) rather than requiring payment of the full balance.
A charge card is a specific kind of credit card that has a short-term, fixed-period credit arrangement. The balance on a charge card account is payable in full when the statement is received and cannot be rolled over from one billing cycle to the next. This arrangement exposes the issuing institution to less credit risk than open-ended accounts.
Financial institutions are important participants in various credit card systems. They issue and distribute cards, clear and settle the associated payments, and act as, or sponsor, merchant acquirers. "Merchant acquirer" is a broad term used to describe a number of industry participants including third-party service providers, independent sales organizations (ISOs), and other agents. The operating regulations of the major payment card networks require these nonbank entities to be sponsored by a member financial institution (acquiring bank) and to register with the payment network. There is an increasing concentration of both credit card issuers and processors within the marketplace as larger issuers are bringing processing functions in-house. Some large institutions have exited the credit card issuance and processing businesses due to lack of economies of scale.
This booklet groups credit or charge cards in three categories: general-purpose credit cards, co-branded/affinity cards, and private label (store) cards.
NACHA Rule and Product Changes
General Purpose Credit Cards