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All About Plastic Cards
by Vinod K. Shah*
Cite as : (2003) PL WebJour 3
Banking industry is now proliferated with various types of cards. These plastic cards have been used for several functions. In India now cards are used for identification in organizations, for ATM operations, credit cards, charge cards, petronet cards etc. Cards are now used as a key for unlocking or opening hotel rooms and they are being given to the customers. Now among all cards, ATM cards and credit cards are prominent touching our day-to-day life. Other card-holders will be able to customize their single card into "lifestyle cards" containing a banking credit card, retail loyalty scheme, electronic purse, telephone credit card and TV pay-per-view applications of their choice. So far in India, we have not reached usage point as prevalent in USA or UK, but in India it is now used to check into a hotel, buying of goods and services, buying rail/air tickets, consumer durable, making payment of utilities like telephones, electricity etc. According to Visa International, the number of debit cards issued in India has zoomed from around 4 lakhs in April 2000 to 160 lakhs in December 2001. In the same period, the number of credit cards issued rose from 4.3 million to around 6 million. What makes the growth of debit cards more impressive is that credit cards have been around for more than 15 years. Debit cards were introduced just 2 years back. In USA credit cards can be used in a casino on slot machines. In all these transactions ultimately electronic fund transfer (debit or credit) is displacing the cheque. Cards are used as a delivery vehicle of credit to the consumer of financial services.
There are various types of cards — like credit cards, debit cards, ATM cards etc. Essential features of credit card transactions are as follows: (1) There is an underlying contractual scheme, which predates the individual contracts of sale. The suppliers under the scheme have agreed to accept the card in payment of the price of goods purchased; the purchasers are entitled to use the credit cards to commit the credit card company to pay the suppliers. (2) The scheme rests on two separate contracts. The first is contract between the credit card company and the seller; the seller agrees to accept payment by the use of the card from anyone holding the card and the credit card company agrees to pay the supplier the price of goods supplied less a discount. The second contract is between the card company and the user of the card; the card-holder is provided with a card, which enables him to pay the price by its use and in return agrees to pay full price to the card company. (3) It is designed for use in over-the-counter sales i.e. sales where the only connection between counter sales i.e. sales where the only connection between the particular seller and the particular buyer is one sale. (4) The actual sale and purchase of the commodity is subject of third bilateral contract between buyer and seller. Tendering and acceptance of the credit card in payment is made on the assumption that the legal consequences will be regulated by a separate contractual obligation between the seller and the credit company and buyer and the credit card company. (5) The card does not carry address of the card-holder and the supplier will have no record of his address. The seller cannot trace the buyer without assistance of the credit card company. This succinct version was stated by Sir Nicholas Browne-Wilkinson, V.C. in Charge Card Services Ltd., Re1 There is no material distinction between credit cards and charge cards though in operation some variations do occur. Likewise debit cards are used for purchases which automatically provide immediate payment to the merchant through a point-of-sale (POS) system debiting the customer's account. The customer is not required to draw cheque or carry cash for the purpose. POS systems provide computerised methods of verifying cheques and credit availability and debiting or crediting customer accounts online.
Usual terms for the users
While terms and conditions are not fully given or detailed in the application form, the card applicant agrees to abide by them and can ask for the full details later. In the event of add-on member, he agrees to pay for his own usage add-on or supplementary member charges. In the event of the card being for international usage, the card-holder is to abide by the foreign exchange regulation of the country. The card-holder also agrees to allow verification of the information and also to allow the card-issuing company to use the personal information for their purposes.
Mechanics
Every card carries magnetic code and embedded secret deciphering information in microprocessor. When the card-holder tenders the card for payment, it is processed online and the supplier of service (the seller) is authorized to go ahead with the transaction or not. In authorization process questions like whether sale exceeds the merchant's floor limit, credit card is in validity period etc. are attended online and confirmed. If all things are in order, the merchant gets authorization approval code. Where there is no online processing facilities, the list of the cards not to be dealt with is supplied to the seller and it is normally updated at regular interval. This is called "hot listing" of cards for non-payment or some other irregularities committed by the card-holder. At times the cards are listed for non-service because they have been reported lost, stolen or misplaced. In this regard we have to consider the role played by VISA, MASTER, DINER and other such systems and the banks and other card-issuing institutions.
The card-holder receives monthly statement of the usage and is expected to pay the same within the time stipulated. The bill normally has tear-off portion, which can be attached with the cheque of payment and dropped at the bank or drop boxes provided. Many card-holders authorize banks to raise demand on their bank and get reimbursed in ECS (electronic clearing scheme). Late payment results in service charges ranging between 2% to 4 or 5%. It is a service charge per month and not the "interest" per month. In the event of default, next month service charge is levied on the balance amount. It is in the best interest of the card-holder to pay the bill within the stipulated date. The biggest problem with accepting a card is in term "chargeback". A chargeback occurs when a customer disputes a charge on the bill, often due to unreceived goods or disappointment in quality. Rules about chargeback are stringent but some people use it as a convenient tool for defrauding internet businesses. In offline business, credit card companies don't assume liability for chargeback because card and card-holders are present.
For the purpose of cash withdrawal by ATM card or credit card, the card-holder is required to use his personal identification number (PIN). So it is better to understand PIN's use and implication. Where the customer uses an ATM or EFTPOS card together with his PIN, the correct PIN entered by the customer is his mandate for debiting his account. But if the PIN is typed in by an unauthorized person? A forged or unauthorized signature on the cheque does not represent the customer's mandate and the same rule probably applies by analogy in the case of the unauthorized use of PIN. The burden of proof becomes an important issue when a customer alleges that he did not use or authorize the use of his PIN to withdraw or transfer funds. Firstly the bank must prove that it acted on the customer's mandate and ATM machine was not at fault and there was no technical breakdown. Then the burden shifts to the customer that he definitely did not use his card and PIN and a third party has not gained access to the card or the PIN. In most cases the customer is and would be unable to discharge this burden. There are express contractual terms of the contract between card-issuing bank and its customer to reverse that burden.
Credit and debit card liability rules
Credit and debit cards came into common use in the United States in the late 1950s, and were introduced in UK by Barclays Bank in 1966. Their use expanded very rapidly in India. Card transactions do not involve cheques, with the result that sections of the Negotiable Instruments Act (forged endorsement or payment in due course) do not apply. Card issuers (mostly banks) are therefore free to apply different rules from those governing the risk of forgery of cheques, and the rules embodied in the terms and conditions on which they issue credit and debit cards are indeed different. Although banks' terms vary in their details, the general rule is that the customer is responsible for:
— all transactions carried out by the use of the card with the customer's authority; and
— for all other (i.e. fraudulent) transactions carried out by the use of the card, up to a limit of Rs 1000. This limited liability for fraudulent transactions ceases when the customer informs the bank that the card has been lost or stolen.
By comparison with the case of cheque forgery, this regime transfers to the customer a limited part of the risk of fraudulent use of the customer's card. Such use of the card depends on physical possession of the card, however, and the customer can reduce the risk by taking good care of the card and by promptly reporting its loss. Taking care of articles like cards or keys is largely a matter of common sense. Where the card-holder is present at the transaction, and where the merchant has not been plainly careless in accepting a non-conforming signature, and has complied with limits on the amount of an individual transaction and other applicable rules, the bank normally carries the risk. Merchants therefore have an incentive to take appropriate care in accepting card transactions, but are guaranteed payment by the bank if proper care has been taken, just as if they had accepted a cheque with a cheque guarantee card (and with the advantage that much higher amounts can be covered). This analysis deliberately ignores the role of banks acting as card transaction acquirers, who function as financial intermediaries between the merchant and the card-issuing bank, because in considering where risk falls as between customer, merchant and the banking system, it is immaterial which component of the banking system is involved.
Banks and other institutions avail franchise from the payment system to conduct credit card business. For such a franchise the institution pay a small fee to them and in turn avail their services as indicated above. Credit cards now a days allow certain limited amount of cash from ATM and some banks provide phone banking also. All these operations are possible and linked to the card and pin number allotted to the card-holder. It is in this context the facilities, benefits and advantage of the credit card and ATM are considered with reference to the legal framework within which it operates. Credit card or for that matter other cards are a method of payment from transactions completed whether personally or over the internet. Payment is made in performance of obligation arising out of a contract concluded. In UK, payment for goods by credit card constitute absolute payment and discharges the debtor but a payment lost in the process of transfer does not ordinarily discharge the debt. The position is similar in India also.
Watchword/Precaution
Several websites ask for credit card number and validity period. It is prudent not to give card number online unless the latest security protocols are in place and you know and trust the company. Do not trust a site just because it claims to be secured. Instead ask for an alternate method of payment. Do not pay fees upfront to get a credit card. Reputed card issuers do not ask for money upfront, unless you are applying for a secured card. The US Secret Service believes that a half a billion dollars may be lost annually by consumers who have credit card numbers stolen from online databases. Bulletin boards and other online services are frequent targets for hackers who want to access large databases of credit card information.
- (1988) 3 All ER 702, 705 (CA)
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