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  1. Analysis
December 16, 2020

Store cards in the UK: some issues of transparency

By Evie Rusman

Card-based payments are grabbing a growing share of retail payments. Mohamed Dabo reports on the method that represents nearly 80% of retail sales in developed economies

The proliferation of payment cards—that is, debit, credit, and prepaid cards—has dramatically changed the way we shop and merchants sell goods and services.

In many places, some merchants have started to accept only card payments for safety and convenience reasons.

The increased usage of cards has increased the value of payment networks, such as Visa Inc., MasterCard Worldwide, Discover Financial Services, and others.

This is because, as more consumers and merchants adopt payment cards, providers of these products are benefiting from economies of scale and scope.

Debit, credit, and prepaid cards are three forms of payment cards

Debit cards allow consumers to access funds at their banks to pay merchants. These are sometimes referred to as “pay now” cards because funds are generally debited from the cardholder’s account within a day or two of a purchase.

Credit cards allow consumers to access lines of credit at their banks when making payments and can be thought of as “pay later” cards because consumers pay the balance at a future date.

Prepaid cards can be referred to as “pay before” cards because they allow users to pay merchants with funds transferred in advance to a prepaid account.

Stored value cards, such as gift and payroll cards, are a special type of debit card that do not access a specific bank account but are prefunded at the time of issuance. Some stored value cards can be “reloaded”, where funds can be added to the available balance extending their usability.

The participants in a typical card transaction

The cardholder presents a card for payment to a merchant. The merchant captures the transaction information and sends it to its merchant acquirer, typically a bank, for authorisation.

The merchant acquirer queries the issuing bank for authorisation for the transaction via the appropriate card network which it then returns to the merchant. If the transaction is denied, the payment is cancelled. If the transaction is approved, the payment is completed.

The merchant then sends the final transaction information to the merchant acquirer, either at the time of transaction or more typically in bulk at the end of the day. The merchant acquirer presents the transaction to the issuing bank, again using the appropriate network.

Each card network settles the net amount of the day’s card transactions between all of its member banks, typically through a separate batch payment system such as the ACH in the US The issuing bank charges the card holder’s account and the acquirer credits the merchant’s account net of any transaction fees.

Dispute resolution

Cardholders can typically dispute charges assessed to their accounts for anywhere from 60 to 120 days after the original transaction. These disputes may result in a charge-back to the merchant unless the merchant can provide proof of the original transaction, e.g. a signed transaction receipt in the case of credit cards.

Debit card transactions can be signature based in which case they are processed through the merchant’s normal credit card networks and the cardholder signs a receipt at the time of the transaction.

Alternatively, debit cards can be PIN-based in which case they are processed through an EFT or ATM network and the customer enters a personal identification number, or PIN, at the time of the initial transaction.

There are a number of variations on standard card payments, including procurement cards, single use cards and virtual or ghost cards.

Each of these is an attempt to improve the security of the basic transaction, but all use the same clearing channels as regular debit and credit cards.

Regulatory scrutiny

Some industry observers have suggested that the high profitability of payment card providers has increased scrutiny by public authorities in many jurisdictions.

Several US merchants have filed lawsuits against Mastercard and Visa regarding the setting of interchange fees. Interchange fees are generally paid by the merchant’s bank to the cardholder’s bank.


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