How a credit card works when you shop??

Priya: I want to buy a Sony digital camera costing Rs.20,000, but I don?t have any cash right now.

Raj: Why don?t you use your ICICI Bank credit card? Never heard them say ? Hum Hain Na ??

Priya: I am quite skeptic about using these cards. I pay using the card, get a bill after 30 days and pay after another 20 days. This is a maximum of 50 days interest free loan. Why does any bank do it?

If I borrow Rs.20,000 on personal loan at 11%.
Interest to be paid for 50 days = Rs. 20,000 * 11% * (50/365) = Rs. 301.40.

Here the bank is giving me a loan without interest when I use the credit card. Something is wrong somewhere!

Raj: Well? let me tell you how it works when you use your card to pay for the camera.

  • You present your ICICI Bank credit card ? a VISA card.
  • Sony World swipes your card on a machine provided by Citibank. Lets call Citibank ? the acquirer bank and the process of Sony World swiping the card on that machine ? requesting authorization .
  • Citibank communicates with the card issuer ? ICICI Bank through VISA Network to check if the card is valid and has the required credit limit.
  • ICICI Bank reviews and approves / declines which is communicated back to Sony World.
  • You sign a receipt called Sales Draft given by Citibank. This is the obligation on your part to pay the money to ICICI Bank. Data on this receipt can be captured electronically and transmitted.

At the end of day or at the end of some period Sony World chooses:

  • Sony World submits the receipt you signed to Citibank who pays Sony World the money. Sony World pays Citibank a fee called Merchant Discount . Let us say this is 6% of the sale value = 6% * 20,000 = Rs. 1200
  • Citibank sends the receipt electronically to a Visa data center which in turn sends it to ICICI Bank.
  • ICICI Bank transfers the money to a settlement bank which in turn transfers the funds to Citibank.
  • Citibank pays ICICI Bank an Interchange Fee of 4% of the;
    • sale value = 4% * 20,000 = Rs. 800
  • 20 to 50 days later ICICI Bank gets the money from you ? and you don?t pay the interest!!

Priya: Interesting! So Sony World pays more than the interest that I should have paid for the loan that I take. I, as a cardholder have the following benefits

  1. Convenience of not having to carry cash.
  2. Credit availability ? free of interest.

However what benefits does Sony World get for paying so much money?
Isn’t it more profitable for them to take cash?
They can save as much as Rs.1200.

Raj: Certainly. Some retail outlets offer you discounts if you pay by cash, don’t they?

However when you don?t count the money that you are spending, you tend to buy more! Cards encourage this ?
called impulse purchase .

If you did not have access to credit, you would not have bought the camera this month ? or may be not any time soon either. By accepting cards, the merchant is actually extending you credit at the risk of the card issuer. He pays money to the banks to carry that risk.

Priya: So ICICI Bank uses this money to pay back to us when they announce 5% cash back. They insist that the Sales draft that I sign at the retailer should also be from ICICI Bank. This means they are saving on the Interchange Fee and also pay me a part of the Merchant Discount that they get.

Raj: Exactly! If you have noticed, ICICI Bank gives you the cash back in the next credit card statement. They keep the ?cash back? money for a maximum of 60 days before passing on a part to you. This accrues them interest too.

Say if ICICI Bank earns an interest of 6% per annum for the cash they carry ?

they get Rs.1000 * 6% * (60/365) = Rs. 10

That is not huge, but money nevertheless. And when you consider that almost everyone in this city shops with a credit card these days, it is a big sum.

Priya: And that also explains why banks tie up with petrol pumps? like ICICI Bank has tied up with HPCL and I could re-fuel there without having to pay the fuel surcharge of 2.5%. The card issuer and the acquiring bank is the same and that saves interchange fees.

Raj: Good! You seem to have figured out how it all works! Let me summarize:

[All the numbers used to explain concepts in this article must be treated only as an example. Merchant Discounts may vary from bank to bank. Interchange Fee is regulated by VISA and MasterCard]

Living with zero cash

Exactly on 25th January all my liquid cash has exhausted. This is because;

  • Of under performance during the month of December and kudos to X’Mas & New Year.
  • New Year bash expenditure.
  • Pongal holidays drained some liquidity as i watched two movies for pongal & i drove a lot.
  • As per my new year resolution i brought a iPod shuffle.
  • Brought some Golf Gears.
  • Saarang IIT cultural had suck some money.

All the above mentioned reasons were addition to my weekend parties, traveling & movie watch. You all can wonder how i managed to live for last one week??

Courtesy to credit cards. I’ve been traveling places without a single rupee and still enjoying to the core… Living without money and passing time is one of the best experiences i’ve ever come across.

ICICI Credit Card Issue Settled

Finally ICICI Bank Credit Card Irony which started 4 years got settled. Starting with poor customer service to disturbance from collection agents to rejection of loan request getting rejected to settling of dues without (which arose because of irresponsible act of an ICICI employee for presenting Cheque late where in late payment charges were attached to me) to attaching  lien on my account and taking funds for second time. Finally went to nodal officer and got my funds back and cleared my name from CIBIL.

This is the confirmation I received from ICICI Nodal office.

Dear Mr. Nataraj,

We refer to your e-mail of August 7, 2009 addressed to Nodal Officer regarding your ICICI Bank Credit Card account number 4477 xxxx xxxx 4003.

We have zeroised your Credit Card account number 4477 xxxx xxxx 4003. As on August 26, 2009 there is no out standing on your Credit Card account.

We have made necessary changes in the Credit Information Bureau India Limited (CIBIL) report from ” written of ” to ” settled “.

Attempts were made to contact you on your mobile number 09841430004. However, there was no response.

We request you to  kindly click on the link below to share your experience. 

Please click on  to tell us.

Office Of Head Service Quality

Let me take this opportunity to thank Mr.Venkateshara & the Nodal office team for getting the issue sorted.