"How Do Credit Cards Work?" Contents 2 Editorial 3 5 What Is a Credit Card? 6 Benefits of a Credit Card 7 Who Pays What? 8 9 How Does a Credit Card Work? 9 14 What You've Always Wanted to Know 9 10 Credit Limit Credit Checks Data Protection Dynamic Currency Conversion 11 12 Dynamic Spending Monitoring Unauthorized Debits Foreign Currencies Cancellation Periods Subsequent Debits PINs 13 14 Balance of Purchase Price Insurance Complaints Procedure Debt Late Payment Payment/Installment Options Additional Benefits 15 16 Security 17 Swisscard 18 Flowchart for a Credit Card Transaction 18 Publishing Details
Page 2 Editorial Bridging the Gap Comfort and security, financial flexibility and service: today's credit cards give you all this and a lot more besides. The Swiss credit card market is changing fast. The choice of products is growing all the time, and the different credit cards available are being tailored ever more closely to the varying needs of cardholders. These days, the challenge for consumers lies in finding the right credit card product. We hope this publication helps you with that process. Swisscard is the only company in Switzerland to offer the three credit card brands of American Express, MasterCard, and Visa. In total, Swisscard's credit card offer spans 30 different products. These range from simple credit cards with no annual fee through to credit cards that offer extensive additional services for customers with more complex needs. This means we are in a position to provide comprehensive information regarding the functions and possible uses of modern credit cards. This document explains how cash-free payments work, illustrating the processes and services involved, and explaining the relevant specialist terminology. We sincerely hope it will give you all the information you need when it comes to making an informed decision about your credit card requirements. Marcel Bührer CEO, Swisscard AECS AG Media Office Swisscard AECS AG, P.O. Box 18, CH-8810 Horgen Tel. (+41)-044 266 67 67, Fax (+41)-044 266 67 00 E-mail: medienstelle.info@swisscard.ch
Page 3 What Is a Credit Card? Credit cards enable you to buy goods and services without the use of cash, and to pay for them at a later date possibly in installments in the form of a single monthly statement. This is conditional on the retailer being linked to a credit card network (e.g. American Express, MasterCard, or Visa). The card serves to identify the cardholder (by name and signature, or by PIN number) and to assign the corresponding payments within the card organization (through a credit card number). The varied needs of customers call for different card products. The various products on the card market therefore differ from one another considerably, and also come with other benefits depending on the customer's wishes. Credit and Charge Cards The holder of a credit card can pay on a cash-free basis and make cash withdrawals at any time, throughout the world, from all the card issuer's contracting partners subject to a predefined credit limit. Payment is made at a later date, possibly in installments meaning the cardholder is granted credit. The biggest credit card systems are MasterCard and Visa. The charge card does not offer a credit or installment facility, nor does it provide this via a linked bank account. Charge cards are premium products which come without a preset spending limit. People still refer to them as "credit cards" because they provide credit until the due date unlike when you pay by cash. The best-known charge card systems are American Express and Diners Club. From No-Frills to Premium No-frills cards have only limited additional functions, if at all, and in terms of pricing are especially attractive. Some even come without an annual fee. Leading no-frills cards include the Coop SUPERCARDplus and M-Budget MasterCard. These contrast with premium products, which in addition to their function as payment method offer numerous additional benefits such as lifestyle offers, insurance, various services, and bonus programs. The pioneer in this area is American Express with its Centurion and Platinum cards. In each case, prices, product features and additional benefits are defined by Swisscard and the other card issuers. That means cards bearing the same brand name may have very different profiles around the world, depending on the individual country in which they are issued. So Visa is not necessarily the same wherever you go.
Page 4 Private and Company Cards Private cards are aimed at people who use their card to pay for their private spending. Different credit cards offering a range of service packages are available to meet differing customer requirements. Company cards are special products aimed at businesses that give cards to employees who travel in connection with their work. They come with specific additional functions, especially in relation to management information and the controlling of expenses. Company cards come in the form of either business cards or corporate cards. While business cards are designed mainly for small and medium-sized enterprises (SMEs), corporate cards are aimed at large, multinational companies, where they are also used as expense management systems. Principal or Additional Cards Principal cardholders have the option of applying for additional cards: Depending on the card product, one or more persons can take advantage of this. Additional cards give you the same benefits as the principal card: For instance, the additional card can also be used to collect points for bonus programs and each card comes with its own card number (for cash withdrawals using the holder's own PIN code). Additional cards are offered at specially reduced prices, or even for no extra charge. Spending on both the principal and additional card is usually combined in one monthly statement, which is sent to the principal cardholder. The principal cardholder is generally responsible for making payments. Members Only Co-branding cards are issued by the card provider in cooperation with another firm or association and therefore carry its logo too. In most cases the cards offer additional benefits and savings, but are tied to special conditions such as client relationships or association memberships (e.g. Miles & More).
Page 5 Non-Credit Cards A debit card is often confused with a credit card. This is a payment card where each transaction is deducted immediately from the bank account concerned. This means the card is linked directly to the cardholder's account. The most commonly used debit cards are Maestro and PostCard. Another payment method is the value card. This contains a chip that can be loaded with a sum of money prior to payment. This function allows cash-free payment for goods and services costing smaller amounts. CASH (additional function on debit card) is well-known throughout Switzerland. In-house company value cards are used to pay parking charges in a company's own garage, for instance. Companies are increasingly offering bonus programs as a customer loyalty tool. Participants collect points from their respective program partners via their bonus card when they buy goods or services. They can have their points redeemed by the program provider at a later date in return for various goods and services. These cards are not a method of payment. Some companies issue a customer card. This can only be used for paying for goods and services from that specific company and any partners, and in some cases offers bonus functions. Leading customer cards include AVIAmat (gas station card) and Media Markt Shopping Card.
Page 6 Benefits of a Credit Card for Cardholders: - Cash-free payments and cash withdrawals worldwide - No need to obtain foreign currency or change it back - Interest gains due to billing delay - Use of credit facility through payment by installment (not charge cards) - Monitor/manage your spending through monthly statements - Guaranteed reservations and special terms available depending on product (rental car, hotels, etc.) - Insurance cover and travel assistance (not no-frills cards) - Limited or no personal liability in the event of theft or misuse, provided due care has been taken. - Replacement in event of loss, usually within 48 hours - Special benefits through bonus programs - 24/7 customer service support and emergency cash available for Merchants: - Guaranteed payment - An end to the effort and interest costs involved in collecting payments - Less cash in the till = lower overheads + reduced security risks - Greater customer satisfaction thanks to the convenience and security of paying by card - Access to additional customer segments - Greater volume of spontaneous and additional sales - Secure, convenient solution for distance selling (mail order, internet) - Participation in regional or international campaigns and marketing programs
Page 7 Who Pays What? The cardholder pays an annual fee in advance. This also covers administrative and IT costs, services, insurance risk, and the financing of bonus programs. High-spending customers often have their card fees (partially) waived (automatically or via bonus points). No annual fee is charged for credit card types which have virtually no additional benefits and where card issuers and co-branding companies agree special partnerships. A further function of credit cards is to enable cash withdrawals from ATMs. Due to the related costs of this, an additional fee is normally charged for cash withdrawals. Merchants pay the acquirer a fee on all credit card transactions. This also covers the administrative and IT costs as well as the cost of authorization, cash management, special discounts, and payment guarantee. It is the acquirers or card issuers who bear the risk in the event of credit card fraud and insolvency (or the cardholder's unwillingness to pay). Fees are generally sales related, and vary by annual turnover and industry profile.
Page 8 How Does a Credit Card Work? 5. Card issuer bills holder for the transaction Cardholder 6. Card holder pays total amount 1. Transaction Merchant 8. Acquirer compensates merchant less commission 2. Merchant transmits transaction physically or electronically to acquirer Card Issuer 7. Card issuer compensates acquirer less interchange Acquirer Transaction authorised Authorisation 3. Acquirer 4. Network transmits transaction to issuer Credit Card Network transmits transaction to network Information flow Financial flow Cardholders Cardholders are people who have signed a contract with the card issuer, and have received a card in their name. Merchants Merchants (also known as participating businesses or business partners) are businesses which have signed a contract with an acquirer (see below), and which accept the cards of the brand concerned as a payment method at their outlets. Cardholders are made aware of this by till or shopfront logos. Acquirers As the merchant's contracting bank, acquirers link the merchant to an international card network by contract and are responsible for providing customer service to merchants. The leading acquirers in Switzerland are Swisscard AECS AG (American Express), Aduno (Visa, MasterCard) and Telekurs Multipay (MasterCard, Visa).
Page 9 Card Issuers Card issuers issue the credit cards of a specific brand. Card issuers normally have a national license to issue the cards of a specific brand. Major card issuers in Switzerland include Credit Suisse AG/Swisscard AECS AG, Cornèr Bank, UBS and Viseca. Credit Card Network Worldwide credit card networks ensure transactions are transmitted by the acquirer to the relevant card issuers. The card issuer's transaction payment to the acquirer is also paid through the credit card network. What You've Always Wanted to Know Credit Limit The card issuer decides the monthly amount available for card transactions, based on the cardholder's needs and risk capacity. Note that amounts which have not actually been spent but have been "reserved" by a participating business (e.g. a hotel or rental car reservation) may also be charged but not debited. If all outstanding amounts have been paid, the credit limit is reset to zero each month. This does not apply to charge cards, which do not generally have a predefined spending limit. Credit Checks Before issuing a card, the card issuer will check the applicant's ability to pay. This is to avoid credit risk and excessive borrowing, and is also in the interests of protecting consumers, other cardholders and the company. The applicant provides the information required on the card application and authorizes additional checks to be made (e.g. with the Central Office for Credit Information (ZEK)). An average of 20 to 30 percent of card applications are refused. In the case of applications for credit cards with an installment option, card organizations have, since 2003, been required by law to check the applicant's credit rating by submitting inquiries to the Consumer Credit Information Office (IKO).
Page 10 Data Protection The Federal Law on Data Protection governs the handling of credit cardholders' personal data. It states in particular that personal data may be used only where necessary in relation to the service concerned or if the person has given their express consent. The accounting provisions contained in the Swiss Code of Obligations require that all transaction data be archived for at least 10 years. Cardholders should also be aware that each payment they make will by its very nature involve a "data trail." Dynamic Currency Conversion For some time now, merchants have been offering Swiss credit card customers the option of paying directly in Swiss francs for transactions when making transactions abroad. This is known as dynamic currency conversion (DCC), and is offered by both MasterCard and Visa. American Express does not currently provide this service. With DCC, the merchant automatically converts each purchase amount into the customer's own credit card currency right at the point of sale. In addition to the purchase price (in local and Swiss currency), the sales slip usually shows the applicable exchange rate. DCC is an optional service provided by merchants. Customers can themselves decide whether to make use of this service. The customer response noted by Swiss credit card issuers shows that in most cases DDC is a more expensive option than paying in local currency.
Page 11 Dynamic Spending Monitoring Some card issuers offer customers the option of viewing their spending and the bonus points they have earned on the internet. Internet access means cardholders can directly view the current status of their card account and the individual credit card transactions including payment details. This online service provides transparency for the cardholder and additional flexibility in terms of control over spending. Electronic account access is protected by a personal password obtained from the card issuer. Unauthorized Debits (Chargeback) In the event of unauthorized debits, complaints should be notified to the card issuer within 30 days of the statement date. Depending on the processing of the inquiry, a provisional credit is made immediately following receipt of the complaint or a reimbursement may be made once inquiries have been completed. Foreign Currencies The various card issuers have different methods of converting foreign currency transactions: either a specific card rate is set, or an additional percentage-based handling fee is charged on the rates provided by financial service providers (e.g. a bank's current foreign exchange sell price or the rate of the international credit card network). Generally speaking, credit card rates lie between the foreign exchange sell price (which is designed only for major transactions in the banking industry, and is adjusted several times daily) and the banknote buy/sell rates (for withdrawing cash at bank counters). It is important to note that conversion takes place on the day on which the acquirer receives the merchant's transaction slip rather than on the date of the purchase. In the case of non-electronic bookings of credit card transactions (using a manual card imprinter) there may be several days' delay and in very rare instances even several weeks' delay between the actual transaction and the card issuer receiving the slip. This will depend on how quickly the merchant passes these transactions on for processing. People who regularly have a high volume of transactions in a foreign currency and who have an account in the relevant currency can avoid the exchange rate risk and conversion costs by using a credit card that is denominated in the currency in question. These products are also offered by Swiss credit card issuers (e.g. for Euros, US dollars).
Page 12 Cancellation Period Cardholders may cancel their card at any time, whereby they lose the annual fee they have paid in advance. Without stating their reasons, the card organizations may also cancel the agreement at any time, block the card, and request that it be returned. However, they are then obliged to pay back the annual fee on a pro-rata basis. Subsequent Debits In principle, cardholders are only obliged to pay if they have personally signed the relevant debit slip or have authorized the transaction by PIN. Distance selling, such as mail order and internet, are an exception. In some cases, however, such as hotels and car rental, merchants have the right to make additional subsequent debits without a fresh signature. This may occur where customers forget to pay their minibar bill or return their rental car with an empty tank. Car rental agreements include this addition as standard. By signing the car rental agreement, customers grant permission for this procedure to occur. PIN Code Having a PIN (personal identification number) lets credit cardholders obtain cash round the clock from automated teller machines. In some instances, entry of a PIN replaces the signing of a debit slip (e.g. at gas stations). This secret code number may be obtained from the card issuer. We recommend that customers change their original PIN immediately. For security reasons, the PIN should not include easily identifiable number combinations, such as date of birth. Prevention As part of their efforts to combat fraud, card issuers may contact the cardholder in the event of unusual transactions. These calls are not a reflection of the customer's credit status; they are a way of ensuring that the card is still in the right hands. Customers wanting to be sure that they are actually speaking to the card organization in these cases can phone the Call Center back (toll-free hotline number on back of the card) and ask to speak to the relevant person again.
Page 13 The card organization may place a security code on the card in the system if it fails to reach the customer in person. This means that the next time a purchase is made the term "referral," "call issuer" or a similar comment will appear on the merchant's card terminal. The merchant will then put the customer in touch with the card organization. Sometimes especially abroad poorly informed or impatient retailers will attempt to refuse the card and simply claim it doesn't work or is invalid. Balance of Purchase Price Insurance Balance of purchase price insurance protects cardholders using the installment option. In financial emergencies, the insurance policy helps them meet their monthly commitments and protects the amounts they owe on credit cards. Questions and Complaints Questions or complaints in connection with a credit card statement should generally be addressed to the card issuer, the address of which is usually given on the statement or on the website. Grievances about goods or services (quality defects, delivery delays, etc.) should generally be registered directly with the merchant or service provider even if the goods or services were paid for by card. To ensure the customer does not go into payment arrears, the credit card bill must nevertheless be paid on time. The card issuer has no way of investigating and assessing the initial transaction. Fraudulent activities or dubious practices should be reported, however, because in the event of frequent complaints the acquirers may contact the merchants and even terminate their business relationship. Indebtedness The Consumer Credit Act (KKG), which governs the credit card industry, protects the cardholder from taking on excessive debt. Moreover, the credit card business is a volume business. The average cost of a single credit loss is as much as the annual profit on 200 customers. Card issuers therefore have no interest in their customers taking on unmanageable debt, and also regularly monitor credit risks during the customer relationship. Late Payment Cardholders who do not settle their outstanding credit card bill within the payment period will go into payment arrears. They will be charged late-payment interest on the outstanding amount and a processing fee until the account is settled.
Page 14 Payment/Installment Options Credit card statements are mailed monthly, and must be paid within the normal payment period using the payment slip or by direct debit. By signing a special credit agreement, holders of credit cards can take advantage of the installment facility and therefore benefit from greater financial flexibility. Customers using this installment option need only pay a minimum of 5 10 percent or CHF 50 of the respective statement amount. Interest is charged on the amount outstanding. For customers, the installment facility is more attractive than a consumer loan (flexible repayment, sometimes a lower level of interest). Please note that the starting point for the calculation of payment periods, credit limits, credit interest rates, etc., is generally the date printed on the statement, which does not necessarily have to correspond to the end of the calendar month. Additional Benefits Cardholders can enjoy various additional benefits such as lifestyle services, travel and shopping insurance, bonus programs, and attractive offers for hotel accommodations and car rentals. Individual credit cards come with different offers designed to meet the specific needs of cardholders. In all cases, they are governed by the General Terms and Conditions and any insurance policies and regulations.
Page 15 Security Credit cards are an exceptionally safe method of payment. Nowadays no-one would consider going on vacation with their pockets full of money, in constant worry about being stranded abroad penniless. With a credit card you will not be liable for any losses provided you have exercised due care. This is always explained in the latest general terms and conditions, and may vary from card issuer to issuer. Duty to Exercise Due Care - Where possible, do not leave the card out of sight for any length of time - In the event of loss or theft, immediately ask for the card to be blocked - You should never write down the PIN and carry it with you, or leave it lying around for anyone to see, or give it to a third person - Systematically check your monthly statements and report any inaccuracies immediately - Sign any new card you receive immediately, and cut your old card in two Basically, you should always treat your card in the same way as you do cash. Liability Provided cardholders exercise due care, they will not be liable for any losses that arise due to misuse. In principle, the card issuer has a duty to prove or at least substantiate claims of a violation of the requirement to exercise due care. Even in the case of doubt, therefore, the cardholder is not responsible for losses. Depending on the card issuer, only a deductible will be charged. In the case of several losses relating to the same customer, the card issuer may consider terminating the relationship.
Page 16 Is the Internet Safe? Providing the appropriate care is taken, using a credit card on the internet basically involves no more risk than using it in the "real world." Seven tips for safer online shopping: 1. Trustworthy traders: Only purchase from suppliers you are familiar with, and which offer a closed data loop (denoted by padlock symbol on the web page). Reputable traders always publish their contact address on the net. 2. Study the delivery conditions: Check delivery times, your right to exchange, or any monthly charges. 3. Use encryption: Use the encryption techniques, such as VbV (Verified by Visa), that are offered on the internet. 4. Do not divulge too much information: Do not provide unnecessary details, either about your card or about yourself. Never give out your PIN on the internet and never give out your card number simply for information purposes. 5. Avoid special offers: Be wary of cheap internet "deals" that are too good to be true. 6. Record transactions: The supplier's homepage address, general terms and conditions, order form and order confirmation should be printed out and kept for about three months. Keep a note of the date and time of the order on the printouts. 7. Check your statements: Always check card statements carefully. If anything is unclear, contact the card organization immediately. What Card Issuers do to Improve Credit Card Security Card issuers take preventative action against card misuse and invest on an ongoing basis in ways to minimize the incidence of fraud. This includes the training of merchants and staff, early warning systems of the international credit card companies, and equipping cards with additional security features such as a hologram or chip. With the help of various security measures, card issuers ensure that credit cards are and will remain the safest way to pay.
Page 17 Swisscard Swisscard was set up in 1998 as a joint venture between American Express and Credit Suisse AG. On behalf of Credit Suisse AG, Swisscard is the only financial services provider in Switzerland to offer three world-leading credit card brands from a single source: American Express, MasterCard, and Visa. In Switzerland, Swisscard is responsible for product management, marketing and sales, customer service, acquisition, card processing, as well as development and servicing of customer loyalty programs for credit cards. Swisscard is the market leader in the premium sector and among co-branding cards. Flowchart for a Credit Card Transaction Flowchart for a Credit Card Transaction Example shows an electronic transaction by a Swiss member using the American Express card in New York and Membership Rewards bonus program.
Page 18 Publishing Details This document is available in electronic form at www.swisscard.ch. Published by: Swisscard AECS AG, Horgen Designed/Edited by: Farner Consulting AG Swisscard AECS AG, 2012