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Money  and Banking(MGT411)

Announcement of Discussion Board


This is to inform that a
 Discussion Board will be opened under the link of GDB according to the following schedule:

Opening Date and Time: Oct 23, 2012 At 12:00 AM (Mid-Night)

Closing Date and Time:    Oct 25, 2012 At 11:59 PM (Mid-Night)

Topic/Area for Discussion:
                                                         "Other Forms of Payments.    

 

Learning objectives: To understand the hidden costs associated with the use of credit card and its relationship with the core principles of money and banking.

 

Learning outcomes: It will enhance the ability of the students to understand the logic behind the operations of credit cards and the hidden cost associated with the use of these credit cards. It will also enable the student to understand that how the various costs associated with the use of these credit cards are related to the core principles of money and banking.

 

The Case:

Suppose you go to the market and purchase some goods using your credit card issued by your bank. Definitely the bank is providing you this facility in return for some profit. Keeping in view the core principles of money and banking, please explain, who is paying the extra money to the bank for providing this facility: you, merchant or both, and why? Support your answer with logical reasons.

 

Important Instructions:

 

1. Your discussion must be based on logical facts and should not exceed 80 words.

2. The GDB will remain open for 3 working days.

3. Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.

4. Obnoxious or ignoble answer should be strictly avoided.

5. Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of GDB is over.




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Replies to This Discussion

 The cardholder is paying the extra money to the bank for providing this facility. In Bank credit-card system the bank credits the account of the merchant as sales slips are received this means merchants are paid quickly and assembles charges to be billed to the cardholder at the end of the billing period. The cardholder, in turn, pays the bank either the entire balance or in monthly installments with interest sometimes called carrying charges. 

U r right Arsh

    • Umair SidWhen you use a credit card, you borrow money from the issuer, who then pays the merchant. At the end of the month, the issuer sends you a statement listing your charges, and you repay the money you borrowed plus any interest. If you pay off the entire amount each month by the due date, you pay no interest.

  • Umair Sid
    • OR....................................................................... ............................... In the case of credit card dealing if a merchant gives a credit card slip to the credit card company or bank for processing, a percentage of each purchase—usually 1.5% to 5% of the purchase amount—is deducted. This "merchant discount fee" helps pay for the bank's services and for the credit card system. By charging extra for credit card use, the merchant passes the discount fee on to customers.

      When you do an offline transaction and simply sign a charge slip, the retailer has to pay a small percentage of your total purchase – perhaps 2%. This fee goes to the bank that issued your debit (or credit) card as an interchange fee so we can say that Of course, somebody has to pay the 2% interchange fee. Retailers don’t pass it on to you as a transaction cost. However, it has to come from somewhere – they have to build it into the price of the products and services you buy.

�� It is a promise by a bank to lend the cardholder money with which to make purchases.

�� When the card is used to buy merchandise the seller receives payment immediately

�� The money that is used for payment does not belong to the buyer(Me)

�� Rather, the bank makes the payment, creating a loan that the I ll must repay.

�� So, they do not represent money; rather, they represent access to someone else’s money

the actual question is that 

who is paying the extra money to the bank for providing this facility: you, merchant or both, and why? Support your answer with logical reasons.

and we write on it . So any body give the real answer to the question.

The credit card is a promise by bank to lend the cardholder money with which to make purchases and the bank makes the payment, creating a loan that the buyer must repay. In this regard the buyer pays extra money to the bank. As the buyer has a specific credit limit he pays the credit card charges and the charges on each transaction. The merchant has the facility of receiving the payment immediately in his bank account so he is not paying extra money than the buyer.


According to my knowledge the bank is providing a fascility to its customers in the form of credit cards.  Credit cards are very safe mode of payment. The cardholder will give the extra payment in the form of interest of every transaction because the most benefit is going to the cardholder. The shopkeeper or retailer is not responsible for the transaction through credit cards because they needs only the payment of his goods. It is on the will of customers that either they pay in the form of cash or through credit cards. Also when a customer pays the payment of credit card late then the due date then he pays extra amount with the real payment. 




Note: Dont copy paste the solution

Solution:

When you do an offline transaction and simply sign a charge slip, the retailer has to pay a small percentage of your total purchase – perhaps 2%. This fee goes to the bank that issued your debit (or credit) card as an interchange fee.

What about online transactions? Retailers can get those done for a lot less. They might only pay 10 cents or so per transaction.

As you might imagine, 2% of every purchase adds up to a lot of money. The banks andcredit card companies would love for you to choose credit because they get 2% of every dollar you spend. Retailers, on the other hand, beg to differ. They’d prefer that you choose debit so that they don’t have to pay a hefty interchange fee.

In order to maximize revenue, banks give you an incentive to choose credit (or a penalty for choosing debit, depending on how you look at it). They may charge you a fee for online transactions – usually in the ballpark of one to two dollars. Once you discover these fees, you’re more likely to choose credit next time. In addition, they may offer rewards (such as airline miles or entry into a sweepstakes) each time you choose credit.

Of course, somebody has to pay the 2% interchange fee. Retailers don’t pass it on to you as a transaction cost. However, it has to come from somewhere – they have to build it into the price of the products and services you buy.



The cardholder is paying the extra money to the bank for providing this facility. In Bank credit-card system the bank credits the account of the merchant as sales slips are received this means merchants are paid quickly and assembles charges to be billed to the cardholder at the end of the billing period. The cardholder, in turn, pays the bank either the entire balance or in monthly installments with interest sometimes called carrying charges.

finely anyone give the relevant answer thanxxx

AN EXAMPLE FOR CREDIT CARD CONCEPT.
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]
HOPE DAT HELPS A LITTLE

ok gud v helpful

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