Advantages and Disadvantages of Payment Cards

Payment Cards - Businesspeople often use the term payment card as a general term to describe all types of plastic cards that consumers (and some businesses) use to make purchases. The main categories of payment cards are credit cards, debit cards, and charge cards

A credit card, such as a Visa or a MasterCard, has a spending limit based on the user’s credit history; a user can pay off the entire credit card balance or pay a minimum amount each billing period. Credit card issuers charge interest on any unpaid balance. Many consumers already have credit cards, or are at least familiar with how they work.

A debit card looks like a credit card, but it works quite differently. Instead of charging purchases against a credit line, a debit card removes the amount of the sale from the card-holder’s bank account and transfers it to the seller’s bank account. 

Debit cards are issued by the card-holder’s bank and usually carry the name of a major credit card issuer, such as Visa or MasterCard, by agreement between the issuing bank and the credit card issuer. By branding their debit cards (with the Visa or MasterCard name), banks ensure that their debit cards will be accepted by merchants who recognize the credit card brand names.

A charge card, offered by companies such as American Express, carries no spending limit, and the entire amount charged to the card is due at the end of the billing period. Charge cards do not involve lines of credit and do not accumulate interest charges. 

(Note: In addition to its charge card products, American Express also offers credit cards, which do have credit limits and which do accumulate interest on unpaid balances.) In the United States, many retailers, such as department stores and oil companies that own gas stations, issue their own charge cards.

Many consumers have concerns about providing their payment card numbers to vendors online, especially when the vendor is unknown to them. To address this concern, several payment card companies now offer cards with disposable numbers. 

These cards, sometimes called single-use cards, give consumers a unique card number that is valid for one transaction only. This prevents an unscrupulous vendor from using the card number to complete unauthorized transactions on the consumer’s account or selling the card number to others.

Advantages and Disadvantages:
Payment cards have several features that make them an attractive and popular choice with both consumers and merchants in online and offline transactions. For merchants, payment cards provide fraud protection.

When a merchant accepts payment cards for online payment or for orders placed over the telephone, the merchant can authenticate and authorize purchases using a payment card processing network. For U.S. consumers, payment cards are advantageous because the Consumer Credit Protection Act limits the cardholder’s liability to $50 if the card is used fraudulently. Once the cardholder notifies the card’s issuer of the card theft, the cardholder’s liability ends.

Perhaps the greatest advantage of using payment cards is their worldwide acceptance. Payment cards can be used anywhere in the world, and the currency conversion, if needed, is handled by the card issuer. For online transactions, payment cards are particularly advantageous. 

When a consumer reaches the electronic checkout, he or she enters the payment card number and his or her shipping and billing information in the appropriate fields to complete the transaction. The consumer does not need any special hardware or software to complete the transaction.

Payment cards have one significant disadvantage for merchants when compared to cash. Payment card service companies charge merchants per-transaction fees and monthly processing fees. These fees can add up, but merchants view them as a cost of doing business. 

Any merchant that does not accept payment cards for purchases risks losing a significant portion of sales to other merchants that do accept payment cards. The consumer pays no direct transaction-based fees for using payment cards, but the prices of goods and services are slightly higher than they would be in an environment free of payment cards. Most consumers also pay an annual fee for credit cards and charge cards. This annual fee is much less common on debit cards.

Payment cards provide built-in security for merchants because merchants have a higher assurance that they will be paid through the companies that issue payment cards than through the sometimes slow direct invoicing process.

To process payment card transactions, a merchant must first set up a merchant account. The series of steps in a payment card transaction is usually transparent to the consumer. Several groups and individuals are involved: the merchant, the merchant’s bank, the customer, the customer’s bank, and the company that issued the customer’s payment card. 

All of these entities must work together for customer charges to be credited to merchant accounts (and vice versa when a customer receives a payment card credit for returned goods).

Source: Electronic Commerce

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