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Effective Payment System Essay

A wide variety of payment options is enjoyed by very many people in this twenty first century. They include money orders, personal checks, cashier’s check, credit card and debit card. This paper is dealing with credit cards as a payment system and its effectiveness. Technological advancement has played a big role in the effectiveness of credit cards as a payment system. As E-commerce blooms, there is a dire need for payment system that is effective. Internet is becoming a market place of services and goods and this needs payment system that is secure.

This paper has recommendation on mechanisms that need to be incorporated as part of the scheme to combat problems emanating from the use of credit cards such as fraud. 2. 0 Introduction Since the twentieth century, there has been high interest in relation to payment schemes and electronic commerce over the internet. There are very many payment systems that are being invented day after day. Many people have proposed payment of internet transactions. There are other payment systems that are still being developed.

Credit cards are widely used all over the world. They are very common in the developed nations. This has been influenced by technological advancement therein. Credit

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cards are highly effective especially in this twenty first century. (Abrazhevich, 2002) 3. 0 Background Scholars assert that credit card usage has increased in the recent years. It is widely used among young people all over the world especially in developed nations. Surveys carried out in colleges in United Kingdom show that college students widely use credit cards.

Many Companies are known to target the younger generation in their marketing strategies. This does not mean that credit cards are only used by young people. This facility is also widely used by old people as a payment system. According to surveys carried out in the year 2001 in United Kingdom, teenagers are also using credit cards as a payment system too. This is because eighteen year olds are eligible for a credit card without their parents consent or regardless of employment status. (Milunovich, 2002) Credit cards actually help consumers to have an easy way to track their expenses.

This is because companies that offer credit cards normally send to the consumer detailed notices showing what products and services were purchased during a certain period of time. This is very essential in monitoring ones personal expenditures. Credit cards since the twentieth century are worldwide accepted. They involve limit in repayment agreement and credit limits. In nations like United Kingdom, France and United States there is normally the limiting of the amount which card holder is held liable because of fraudulent transactions that result from the consumer losing his or her credit card.

In case a credit card is stolen, the card issuers in most cases refund part of the charges or sometimes all that they got from things not purchased. Research shows that such refunds are normally at the expense of the merchant who sold the goods. This is very common if the merchant can’t actually claim the card sight. This means that merchants stand a chance of losing money if they never requested for the person’s ID. 4. 0 Advantages of credit cards A credit card as a means payment system has got various advantages both to the users and also to the issuers. 4.

1 Free insurance When an airline ticket is bought using credit card, the purchaser gets free travel insurance. People using credit cards have to check what is normally on offer during the period they are purchasing in order to make use of such offers. Credit cards also provide platinum cardholder various benefits. They include up to ? 1,000,000 in travel accident insurance, various emergency and travel assistance services, car rental discounts and auto rental insurance. All these provisions are very important in making life of card users cheaper and easier. (Bernstein, 1998)

4. 2 Later payments This is an aspect of credit cards that makes it widely used by many people all over the world. For instance if a card owner pays full balance at the month end, then this means that he or she will have gained some ‘free’ money for approximately two to three months. This actually depends on the type of company offering the credit card and the policies therein. It also depends on when the purchase was made and the customer’s grace period. (Milunovich, 2002) This is very advantageous especially when one wants to purchase a very expensive item.

This can be a new refrigerator, laptop, double bed or a new sofa. This is because one can time his or her purchases so that they can get a maximum amount of grace in between the period when it is purchased and when the bill is actually settled with the company issuing the credit card. This when well calculated can be very advantageous to the person using the credit card. (Hanagandi, 1996) An analysis on the use of credit cards shows that this strategy works quite well. This is if the credit card user strategises by putting all the purchases on one credit card.

In this case the debit balance can then be moved to another credit card that has lower interest on balance. This is normally advantageous if the credit card offers zero percent interest on balances for a specific period. This period is usually between six to twelve months. (Rivest, 2004) 4. 3 Loss protection This is quite applicable to many card users and it is a common occurrence. For instance if a person goes shopping with ? 600 to use it in purchasing goods then the money is lost on the way to the stores, this can be quite inconveniencing.

On the other hand if a person has some little cash plus a credit card and loses them then it is not inconveniencing as the former situation. This is because such a person can just communicate to the company that issued the credit card. In such a case the issuing Company will always cancel the card and the card user can issue him another one as soon as possible. This is normally within a period of one week. For this reason credit cards actually help protection loss of money and that is why they are effective payment system.

This actually depends on the issuing Company’s policies and laws but what is illustrated above is what actually happens to most of them. In case the stolen credit card is used before the person reports it to the company, his liability in this case is a token amount or zero. There are also cases where the card number is stolen but the card user still posses it. In such a case the card user’s liability is zero as stated by majority of card issuers. (Rubin, 2001) 4. 4 Cash not allowed With globalization, many businesses are incorporating the use of credit cards.

Many companies nowadays do not accept cash payments because of great risks involved. Many companies such as Car rentals or hotel bookings don’t accept cash payment but credit cards only. This can be quite inconveniencing if one does not have credit card. There are also some businesses that need the purchaser to have a credit card as a deposit even if he or she settles the bill in cash. (Shyamasundar, 2004) 4. 5 Protection of purchase It is very advantageous to use credit card in purchasing goods. This is because there are instances when a person can purchase faulty goods using credit card.

Such goods are normally a hundred percent insured for one or two Months. This insurance according to analysis shows that in most cases it covers loss. For instance if a card user purchases goods using credit card and actually losses them n his or her way home, the insurance company normally covers this loss. (Hanagandi, 1996) 4. 6 No need of cash Credit cards are quite advantageous especially to the users. This is because they actually eliminate the need to carry around cash. Common knowledge tells us that cash is quite bulky to carry around.

In this case credit cards are very light and can be carried to any place is visiting. They are very convenience in the sense that they are quite light to carry around. One does not necessarily need a purse to carry a credit card but they easily fit in pockets. For this reason credit cards are very effective payment system that should be used by all despite their social status. Credit cards are quite effective because it plays a big role. Have you ever been out on the streets then you get something you have desired to purchase. Probably when you are out for shopping you never come across it.

I mean the right colour size and even quality of merchandise. In case you come across it by chance and you are without a credit card, it simply means that you cannot purchase it. In case you have a credit card it simply follows that you can purchase the item. That is why is why it is quite advantageous to use credit cards as a payment system. (Carow, 1999) 4. 7 Travel advantages This is also one of the advantages of using credit cards. For instance if a person decided to travel from United Kingdom to Australia then need he needs to change

Sterling pounds to Dollars. In case this is done at a local bank then such a person is likely to get very bad exchange rates. This also can include various commissions charged for exchanging the currency. This can be different in case such a person has a credit card. This is because when credit cards are taken along on holiday, the rate is far much better than when cash is used. Research shows that many nations’ tourist resorts, cities and travel agents accept all the major credit cards. This move has actually been enhanced through globalization.

In case a credit is carried along on a holiday, it normally wins against debit card. This is because of its ability to have better protection safeguards. It is normally wise for travellers to keep each receipt of every purchase made. This can be diligently checked against the card statement issued by the Company. Many credit card companies nowadays offer customers the ability to manage their accounts online. 4. 8 Incentives Research carried out in many developed nations including United Kingdom and United States shows that credit cards are widely used due to their various advantages.

Research findings show that many credit cards actually offer loyalty schemes. They normally point towards reward systems. The loyalty schemes include air miles incentives etc. In case a person often uses credit card and has a good record of paying off the balance, he or she is normally better placed min this case. This is because with the right reward scheme one can accumulate very good savings which can be used for future purchases of goods and services. They include purchases on air flights within and also outside the country. (Dorronsoro, 1997) 4. 9 Cheaper

Credit cards are far much cheaper than short term loans. This is because such loans will call out for higher instalments. It is therefore far much cheaper to purchase goods using credit card than to obtain a short term loan to purchase the same. Credit cards also offer a high degree of loan flexibility. This means that a credit card user can pay the whole debt or just pay a minimum amount. Another advantage in line with this is that many credit cards offer a free period whereby interest is not charged. There are also no redemption penalties for an early loan repayment.

For this reason credit cards are an effective payment system. (Wigand, 1995) Credit cards are also convenient to use because they allow people to order for purchases by mail or even by phone. This actually saves the time and energy that could otherwise be wasted travelling to stores to buy goods desired. 5. 0 Disadvantages of credit cards As elaborated above credit cards are very convenient but research shows that when they are not well managed they can cause various problems. These include the following; 5. 1 Unpaid balances

When individuals spend more than they can actually afford every month, they always end up having to pay for increased interest rates every month. It is quite easy for an individual to forget purchases that he or she made with the credit card. Such a person can end up getting surprised at the end of the month on seeing the number of purchases signed up. Many companies charge high interest rate on any unpaid balance. If such an individual continues to pay only the minimum amount then the unpaid balance can actually become too much for him to handle. (Carow, 1999) 5. 2 Fraud

There are two types of credit card fraud. They include external card fraud and inner card fraud. In inner card fraud the cash is defrauded. It involves collusion between cardholders and merchants. This is where they use false transactions to defraud banks. External involves using counterfeit credit cards to acquire cash in disguised forms. This is one of the problems that are quite common all over the world. This actually involves credit card theft. Someone can steal another person’s credit card and use it to make purchases. This is a problem that is increasing day by day as technology advances in the society.

It is not just the possession of ones physical card by thieves that they can make fraudulent purchases but many criminals can actually obtain credit card numbers through dubious means. (Ghosh, 1994) This means that a person may not know that someone has used his or her credit card until he gets the monthly statement showing the goods purchased. Research shows tat while this payment system is quite convenient, it has high interest rates especially when a person stays with unpaid balance for a long period of time. This implies that card user can easily get into a financial debt.

This issue of credit card theft is a real threat as criminals devise more devious methods of obtaining people’s credit card numbers. 5. 3 Confusticated There is a jargon that is normally used to describe the different types of rates charged for credit cards. This is in relation to the different transactions available in this payment system. Research shows that many credit card companies in developed nations have to show an honesty box on advertisements they make. 5. 4 Interest charges Many credit card companies charge extremely high interest fees on credit cards. This is one of the biggest disadvantages of using credit cards.

According to surveys carried out in United States, many credit companies therein charge twenty percent on purchases that are not fully paid by the end of every month. These charges are used by credit card companies to help in their day to day running of the business. 5. 5 Temptation to Overspend Credit cards are not the best for people who are spend thrifts. This payment system can actually tempt individuals to overspend because they actually don’t have to pay for the purchases there and then. It is possible for an individual to spend more than what he or she has in account.

The purchases can go up to maximum of credit card limit. An individual just signing a document when purchasing doesn’t always feel like one is actually spending money. This makes many credit card users to overspend compared to when they use cash as a payment system. (Markus, 2003) 5. 6 Technical issue The entire process of creation of credit cards and processing is very technical. It involves very many systems put together like the electronic point sale terminal and the transaction terminal. There are the wireless LAN and POS systems which are also included.

This makes the process of fraud detection in use of credit card to be a very technical issue. There is high necessary diagnostic quality that is a major obstacle for using neural network training techniques. 6. 0 Convenience, risk and cost of payment Surveys were carried out in relation attitudes that users have in relation to payment systems. This is in relation to security, convertibility of funds and ease of use. Investigations on consumer preferences on cash, debit cards and credit cards showed that convenience played a big percentage in credit card usage.

The results show that payment decisions made by customers depended on privacy, security, convenience and low cost. Results show that credit cards have more protection than money order, cashier’s check and cash. This is because purchasers normally have the right to withhold payment in case the goods are of poor quality. They can also withhold payment if the goods are damaged. In the modern society, convenience is a factor of great importance. In internet commerce, shopping convenience is also important. The reason as to why credit cards are more convenient is that they can be processed electronically.

This is unlike money orders which have to be mailed after being obtained from issuer. In the case of the seller, payments are collected automatically through electronic means. This is very effective for sellers with high selling volume. (Leong, 2003) 7. 0 Types of credit cards and their advantages There bare various types of credit cards that are widely used in the market today. They include secured credit cards and prepaid credit cards. 7. 1 Prepaid credit cards In this type the card holder spends deposited money prior to the actual deposit. The money is normally deposited by an employer, a parent or a guardian.

It is normally branded MasterCard or Visa. Due to market demand, credit Companies decided to offer prepaid credit cards. These types of cards have higher interest costs and APR fees. This card is normally purchased and then loaded with any amount of money that the card holder desires. (Rivest, 2004) The card I then used to purchase various items desired by the bearer. This type of credit card has got its own advantages. One of them being that a person does not have to come with a minimum of $500 before opening an account. When using this card one is not charged when no money is borrowed.

This is unlike secured cards which charge credit card user even if the card has not been used to purchase any item. Many companies offering this type of credit cards normally targets the youth who normally shop online without their parents consent on the transaction. (Ghosh, 1994) 7. 2 Secured credit card This type of credit card is normally secured by a deposit account which is normally owned by the person who holds the card. The cardholder normally has to deposit a certain amount of credit desired. This is between 100% and 200%. For instance if the cardholder deposits $ 1000, he can access credit ranging from $ 500 to $ 1000.

There are instances when users of credit cards offer incentives especially on their card portfolios that are secured. This means that the required credit limits will more than the required deposit. This can go as low as ten percent of the credit limit. The institution offering credit cards normally holds the deposits in savings account. This is offered by credit card issuers after noticing that it reduces delinquencies. This is because it shows customers that he can lose in case he fails to pay up the balance owed after using credit cards. (Lee, 1996) In this facility the card user has to make payments on a regular basis.

This has to be done just like when one uses regular credit card. The cost of purchases that is paid to merchants out of deposit can be recovered by the card issuer in case the person issued defaults on payment. This secured credit card is quite advantages because it can help rebuild credit history that is quite positive. This is very advantageous for individuals who have had a negative credit history or who don’t have any credit history at all. The deposit in this case acts as security and is normally kept by the credit card issuer just in case the consumer defaults.

This does not mean that deposit is debited in case a consumer misses to pay one or even two payments. When the account is closed, the deposit can be used as an offset. This is normally implemented when a customer requests or when there is delinquency that is so severe like for one hundred and fifty days to one hundred and eighty days. If there is less than one hundred and fifty days delinquency on an account it can just accrue fees and interest. (Lee, 1996) This in most cases results in a balance that is more than that on credit limit on the credit card.

This means that the debt can actually exceed the deposit left by the card holder. This is an option for people with poor credit history or those that do not have any credit history at all. This is a venture that helps such individuals to rebuild their credit. These types of cards normally have a logo of MasterCard or Visa on them. The amount of charges for this type of credit cards exceeds that which is charged on ordinary credit cards that are not secured. Research shows that these secured credit cards are less expensive than secured credit cards. (Parhonyi, 2004) 8. 0 Recommendation

• More research and inventions should be done in line with development of models to easily detect credit card fraud as fast as possible. • More research should be done by issuer companies on the use of credit cards with a view to containing cases of theft. This should be done in relation to credit card numbers which criminals use to make purchases. Financial security is anything a customer of a financial institution will get worried of especially with the use of such electronic devices. This will make many people to use credit cards because potential customers actually fear fraud cases with this payment system.

• The jargon used by credit card companies need to be simplified so that people can get to understand the terms clearly. • The current rate charged by the financial institutions to have access to a credit card is so high that majority of potential users are locked out. I recommend that policies be put in place to ensure that banks allow low income earners to use it by lowering the costs. • Credit card use can be of important use if it made applicable to all types of purchases and transactions which are at the moment not utilizing it.

• Banks are currently dealing with the problem of fraud cases through routine checks to detect any fraudulent applications. There is scrutiny of application forms including the handwriting. • There is the scrutiny of account behaviour by banks and this helps determine fraud cases. • Softwares have been installed such as FDS TM which helps in detection of fraud cases on use of credit cards. This involves the scoring function of FDS every day. This occurs after every transaction has been posted. 9. 0 Conclusion and future work

Electronic commerce has grown very fast since the last decade. Research shows that micro payments have had positive impacts on this growth. Credit cards have proven to be an effective payment system in this sector. This payment system has various advantages in this twenty first century. One of the major advantages of credit cards is its convenience of use comparing with other payment schemes like money order. This payment system eliminates the need to carry around cash which is more risky especially when it is large sums of money.

This also involves protection of purchase unlike when cash is used. Loss protection and travel are part of the many advantages of credit cards. This does not mean that this facility is perfect. Fraud is one of the disadvantages of using credit cards. This includes both the internal and external fraud. Further research and innovations should be carried out by credit card issuing companies such that the issue of fraud cases is contained. 10. 0 References: Abrazhevich, D. (2002): Electronic Payment Systems: Issues of User Acceptance; Working paper Altman, E.

(1994): Corporate distress diagnosis comparisons using linear discriminant analysis and neural networks. Journal of Banking and Finance, 18(3), 505–529 Bakos, J. (1991): A Strategic Analysis of Electronic Marketplaces; MIS Quarterly; p. 295-310 Benjamin, R. (1990): Electronic Data Interchange: How much Competitive Advantage? Longe Range Planning (23); 1, 29-40 Bernstein R. (1998): The Future of Money Management in America; Key issues facing the Mutual Fund Industry Carow, K. (1999): Debit, credit, or cash: Survey evidence on gasoline purchases; Journal of Economics and Business, 51, pp. 409-421

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