Debit, Credit, Charge Cards in the United Kingdom - Essay Example

? Debit, Credit, Charge Cards – A Legal Analysis Introduction Credit card market in UK is a mature market which is still growing at a faster pace. Asof date, credit cards in UK are issued by more than 60 financial institutions and at the close of the 2002, total expenditure through credit cards had totalled ?101 billion mark, which is a 246% increase as compared to 1995 figures. There were about 61 million Master / Visa cards and about 59 million assorted debit cards in UK. Further ,UK’s credit card market is governed by five major banks namely Royal Bank of Scotland , Barclays , LloydsTSB, MBNA and HBOS who jointly issues about 75% of the cards in the UK. There exists a cutthroat competition that prevails in the credit card market in UK as there is a high level of card literacy among British consumers and this has resulted in the expansion of the market, with the number of cards and card transactions are showing a double-growth in recent periods in spite of global economic recession. Further, spending through credit cards in UK witnessed a dramatic increase and rose to ? 41 billion in 1995 from just ?10 billion in 1985 and then up to ? 101 billion in 2002.1 This research essay will analyse in detail about credit cards, debit cards, cheque cards, charge cards, etc. and the legal nature of the above cards and how they differ from each other and precaution to be undertaken by consumers while dealing with each type of cards in an exhaustive manner. Credit Cards Credit cards are issued based on the bank’s customer’s credit history, his total wealth and his income level. The credit limit starts from a few hundred pounds to many thousands pounds. The client employs these cards to buy products and enjoy services or to get cash from the card service provider. The customer is expected to pay off his debt within the payment period and in case of any default, interest will accrue. Credit cards have some limitations as it could not be used for very large or very small payments. For small payments, credit cards cannot be used as it would not justify the cost of usage for the same. The credit cards will always have a security limit and due to security issues, these credit cards have a limit and cannot be used for large business transactions2. Secured Credit Cards Under collateralised or secured credit cards, the quantum of credit is decided by the quantum of liquid collateral one able to give and despite of one’s past bad credit history, credit cards are issued to applicants. Thus, secured credit cards are issued to those with bad credit history, people with no credit history or individuals who do not qualify for traditional credit cards. To be eligible for this, a customer has to make a deposit usually for a ?500 or more for one year or 18 months by way of certificate of deposit with the issuing banker which holds it as a security. Then, the customer has the credit limit to the value of the deposit and if the customer makes a default, then, the bank may use the deposit to adjust against the outstanding. Despite the fact, these cards still attract annual fees and interest charges that are equivalent or greater than those of regular credit cards3. Cheque Cards Cheque cards are identical in general appearance and in size to that of credit cards and contain analogues similar details. All major British banks and Irish banks are issuing these types of cards. Under this category, the bank issues a card that bears the name of the bank, its address, the customer’s specimen signature and his name, a special cheque card account number and the credit limit applicable. The cheque card issuing bank ensures to honour the cheques drawn by its customer in favour of third parties, provided the limit mentioned in the cheque card does not exceed the amount on each cheque. Before issuing the cheque cards, the banks should have to establish the creditworthiness of their customers4. It is being undertaken by the cheque card issuing bank that any cheque not exceeding a certain amount fixed by the bank will be honoured subject to the following terms and conditions: In the presence of the payee, the cheque must have been signed. The specimen signature on the card must correspond with the signature on the cheque. The code number shown on the cheque card must be used on the bank cheque form. Before the expiry of the date of the cheque cards, the cheque should be drawn. On the reverse of the cheque, the card number should be written. Without using cash, a cheque card facilitates the customer to purchases goods or to pay for airline tickets .Further, the cheque cards may also be utilised to withdraw cash up to specified limit in any major banks. The cheque book and cheque card should be kept separately as if both are stolen or lost, then, there is possibility for fraud5. Cheque Cards issued by banks offer a warranty to retailers that individual cheque upto specified limit would be honoured. However, the warranty offered by cheque cards does not cover the use of multiple cheques for a single transaction. In Britain, cheque cards have become quite popular despite the banks have been witnessing issues like frauds as fraudsters know that possession of cheque card and a cheque book all that is needed to obtain services and products6. Debit cards Purchases made through a debit card are not done on the credit basis but on the cash basis as it will result in a direct debit from the checking accounts or savings accounts to which the cards are linked. Further, as in the case of credit card, many banks do not demand a specific credit score for a debit card. For anyone who opens a new account in a bank, a debit card is automatically issued by the bank to such customers. Some banks are having tight regulations, which require a minimum balance and a credit check for the issue of debit card. Some other banks are issuing a debit card to their customer only after banking with them for at least for a year or six months. As compared to a credit card, debit card does not involve any interest charges, susceptible to any late fees or over-limit fees7. When one uses a debit card to make a purchase, the purchase amount will be charged directly to one’s banking account. In other words, debit card transactions do not involve any credit transactions but ends in cash transactions. Debit cards are functioning as a substitute for writing a check. A debit card may not provide a line of credit to the card holder, and debit card facilitates the card holder to avoid the probable credit issues and high costs of credit cards. A debit card does not offer some level of protections when the card is stolen or lost as in the case of credit cards. In case of credit cards, if a card is stolen or lost, the card holder is not liable for any fraudulent charges had the theft or loss of card is reported before that card is used. Even if the report is made after the card is used, the credit card holder’s liability is restricted to just $ 50 only. Unfortunately, this safeguard does not extend to the debit cards. Card holder’s liability in case of debit cards is restricted to a minimum of $ 50 up to a maximum of $ 500 depending upon the background of the loss. Most of the consumers now prefer to have debit cards as it does not involve any monthly or annual fees and does not require any minimum balance in the banking account. When one uses a debit card, one has to select either debit and enter his PIN number for PIN transactions. Instead, a consumer can select to use a credit and can sign the receipt which is known as signature transactions. As per survey conducted by MasterCard in 2004, about 70% of the card users did not understand that a debit card could be employed for signature transactions. The following are some of the advantages of signature transactions using debit cards: No Fees: For signature transactions through debit cards, banks ever charge. However, for PIN transactions, banks charge about 14%. Most of the debit cards have reward programs. When a cardholder uses a debit card through signature transactions, it will be automatically earning the reward points in contrast to PIN transactions. Signature transactions are secure as they go through MasterCard or Visa networks that offer safeguard from fraudulent usage. Instead, PIN transactions are processed through the electronic funds' transfer systems like STAR or NYCE that do not offer any liability protection8. Debit Cards with the Overdraft Facility This type of account is also known as “Cash Card Account.” For this type of debit cards, no monthly account fee is chargeable. Further, a card holder is allowed to use the card for the available balance in the account and no overdraft facility is allowed. This type of debit card is most ideal for those who do not want to have an overdraft or fall into a debt trap. Whenever a card holder uses the card, then there will be direct debit to the account of the card holder. Debit Cards with the Overdraft Facility Charging fees for the overdraft facility in debit cards is considered to be one of the most expensive aspects of debit cards. Often , banks allow the customer to spend more than what is in his account and then charge an overdraft fee for each purchase made that in excess of the balance available in the customer’s account although the customer might have purchased many products during a day. Some banks resort to debit the largest purchase first in priority so as to trigger an overdraft on that purchase and each of the smaller purchase that would not have otherwise have activated an overdraft. Some banks have overdraft or ‘bounce’ protection plans rather than paying fee for each overdraft and under this, the customer is needed to pay a high fee for the plan. In case of debit card, it is advisable not to opt for overdraft protection. This will save the image of the customer from the possible embrassement of a rejected transaction in case if the customer account is in debit. However, debit card customers should be careful to have adequate balance in their account before using their debit cards as any excess usage will result in overdraft and will end in heavy charges for the overdraft extended by the banks. Even if a customer has not opted for an overdraft facility for his debit cards, in some cases, there may be automatic debits where a customer must have given his authority for a utility company to automatically debit his account each month9. (Leonard & Reiter2011:209). Credit card v. Charge Cards Credit card facilitates a customer to purchase products or services on credit. If you pay each month, less than what you owe, then, the cardholder will be charged interest on their account balance. By using a charge card, a customer can also buy products on credit. However, unlike credit cards, when purchase bill comes for payment, the cardholder is expected to pay the whole amount immediately. In charge cards, the cardholder is not needed to pay any interest or finance charges if he pays the amount in a timely manner. However, in cases of late payment, the cardholder has to pay interest, finance charges and late fees also. Thus, most store “charge cards” are also known as “credit cards.” The main advantage of charge card is that it does not push the cardholder into a debt trap and also prevents the cardholder from overspending10. A customer by using a charge card can enjoy credit for 30 days but the outstanding balance standing in the charge card on the 30th day has to be paid on the due date. Lucrative membership rewards and premium benefits are offered by charge card companies to its customers but majority of the cardholders impose an annual membership fee as the customer is not required to pay any interest on the purchases he makes through the charge cards. Different cards leads to different legal consequence of debit credit and cheque cards payment One of the serious allegations against all cards is the identity theft. As per Garner Inc, identity theft jumped off to 79% over the one year period between June 2002 and June 2003. As per US Federal Trade Commission (FTC 2003a), about 9.9 million cardholders had fallen prey to identity theft crimes in 2002 alone. The FTC study also reported that there were losses to financial institutions and businesses to the tune of $48 billion and consumers had lost around $5 billion in losses in the year 2002 alone. As per Sangani (2003), in Canada, Master card has reported that 35% of all credit cards fraud was relating to Identity theft issues. As per research report by Quinn (2004), fraud committed through identity theft had increased by 45%. As per 2002 report by the British Home Office, identity theft was a grave issue and ever increasing problem that was costing UK in excess of ?1.3 GBP billion per annum .As per Irish Payment Services Organisation , the total losses due to identity theft amounted to € 900,000 or 9% of the aggregate fraud losses in the year 2002 alone11. How Credit cards are regulated by Consumer Credit Act 1974. If one purchases any products or services through his debit card or credit card, if things go wrong, then the cardholders have an additional protection without paying by cheque or cash. In such cases, cardholder can make a claim against the provider of credit card under the section 75 of the Consumer Credit Act. For any misrepresentation or any breach of contract, the card company is “severally and jointly” liable “under section 75 of the Consumer Credit Act. Thus, a card company is equally and jointly responsible along with trader or retailer for the products or services and a cardholder can raise his claim against the credit card company. The products or services enjoyed through the card should be at least or over ?1oo or should not be more than ?30,000. It is to be noted that a card holder need not have to pay whole amount through his card, it is enough if he has paid an advance amount or part payment or a deposit against the product or service. Further, this part payment can be as little as ?1. The key issue is the value of the product one purchase and the amount paid through the card. For instance, if you have purchased a new Chevrolet from a car dealer and paid ?3000 as advance through your credit card and the balance ?3000 through the cheque, then the cardholder would be covered for the entire amount of ? 6000 under section 75 of the Consumer Credit Act. However, this provision is applicable only to credit cards and not to charge cards (where all charges are to be paid at the close of the each month). However, in such a scenario, a debit card or charge holder can use the chargeback provision to avail all or some of the money back. Suppose if you bought a new card from a car dealer and if the services provided by such a car dealer is not at the satisfactory level, after having raised many alarms and concerns with the car dealer and having paid through your credit card and if the sum involved was not over ? 30,000, then you make a claim to your credit card company, which is liable as the car dealer for this infringement of contract. The credit card company can be held liable under the Supply of Goods and Services Act 1982 for failure to exercise reasonable care and skill and the cardholder is authorised to raise claim compensation from the card company directly. In such a case, the cardholder can obtain many quotes from other car dealers, and then he should write to the credit card company defining the issue and claiming the cost of supply of another car from another dealer and should also offer enough time to the creditor to pay for the new car. If the credit card company fails to pay the same within the stipulated time, then the cardholder can write to the card company to provide a letter of deadlock and with that, the cardholder can make a complaint to the Financial Ombudsman Service. (FOS). If the period of eight weeks has lapsed after the cardholder having submitted his claim to the credit card provider, then under such scenarios, the cardholder can make his claim directly to FOS12. In one case, FOS issued an award of ? 250 compensation to a customer for the trouble caused repeatedly and incorrectly by a firm by informing him to obtain a court order against the supplier. It is to be noted that section 75 will be applicable only if the credit has been made under a ‘pre-existing arrangement’ that includes both the credit provider and the supplier. Section 75 does not itself offer the basis for a claim against a supplier. A customer should have a lawful claim of misrepresentation or breach of contract under other laws, like the Misrepresentation Act or the Sale of Goods Act. If they have such a claim, then they can make a similar claim against the card provider for the whole amount of the claim13. Nature of Complaints 2009 2010 2011 Credit Cards 76% 68% 61% The ombudsman in UK attended about 61% of complaints which are about credit cards. Orders passed by the ombudsman in UK include instructing the business to make compensation to consumers for the inconvenience and distress undergone. In the year 2011 alone, Ombudsman gave verdict to compensate in 20,019 cases and there have been an award ranging from ? 150 to ? 500. What is Chargeback? When debit or credit card is fraudulently used, then the cardholder can use the chargeback facility which will permit him to reverse a transaction in case if the cardholder is not happy with the service or products received through the card. It is to be noted that Chargeback is not outlined in law as in the case of section 75 of the Consumer Credit Act but through the Scheme Rules which participating banks, which subscribe to it. Chargeback facility is available to debit cards and credit cards, and it is most beneficial where section 75 is not available for products which worth less than ?100. Chargeback can be employed in case of supply of defective products or deficiency in services provided, in case of non-delivery of products or where supplied products are not of as described or where the trader has stopped the trading. After the receipt of the money, if the merchant ceases to trade, in such cases also, the cardholder is entitled to chargeback facility to receive back his money. However, there is a time limit to use the chargeback facility and in case of Visa cards, there is 120 day time limit, which commences from the day the cardholder is aware of the issue. In other cases, charge back can be made from the day the product is received by the customer by making purchases through the online or through direct means14. Charge Card Services [1987]1 ch.150 The specialty of credit card or charge card is that once payment through a credit card is made, it will be an absolute payment. If a debtor has made the payment through a credit card, then he is under no obligation to make another payment to the seller or supplier for the products purchased by the cardholder. In Re Charge Card Services case15 , full price for the fuel purchased at a garage was made by a buyer through his credit card, which was issued by a third party company. Later, the credit card company defaulted payment to the garage as it went into liquidation. In this case, it was held by the Court of Appeals that payment made through the credit card was an absolute payment, and it would be not fair to anticipate the buyer to make payment twice for the fuel purchased at the garage. However, this is not the case in debit cards and cheque cards as they are only offering payment as conditional payment and if a cardholder has made payment through his debit or charge card, as per above situation, there is no creation of any debt and a debit card holder may be asked to make the payment again for the same debt. In this case, Millet J deliberated about the availability for set-off in the case of insolvency from olden days' onwards. From the start of the 20th century, the officials had demonstrated that debts whose origin and quantum were analogues as on the date of the receiving order and if any claims to damages for future infringement of contracts present as at that date were competent of proof and being competent of proof, which could be adjusted provided that they created from mutual dealings or mutual credits. The only basic need was that they must, in fact, have ended in quantified money claims by the moment the assertion to set off was made. According to Millet, under payment through a credit card, there are three types of contracts: First, there exists a contract of supply between the card holder and the supplier. Second, there exists a contract between the card company and the supplier where the card company commits to make payment for the card by making payment to the supplier of products or services on the presentation of sales vouchers. Third, there exists a contract between the account holder and the card issuing company by which the account holder promises to reimburse the card company for payments undertaken or any liability incurred to the supplier by the card issuing company due to usage of card. Thus , in a credit card transaction, there are three separate parties and three separate contracts each party being one of the parties to the existing three contracts but none of them being a privy or party to the third. The final impact of these three contracts is that a cardholder who makes a payment through his card if he has completed his contract with the supplier and henceforth, the card issuer should make the payment to the supplier. This connotes, under no circumstances, the supplier should not look back to the cardholder for payment from the cardholder but from the card company only. In this case, it was pointed out that there existed three types of contracts in conventional credit card contract transactions. Under credit card transactions, a buyer accepts to pay through his card for a product or service at an agreed price. Payment through the card does not have any condition attached upon anything that may or may not happen in the series of separate contracts between the card issuing company, the store and the buyer. There is a general notion that whenever a buyer sign a voucher, it is presumed that he has released his commitment to the supplier, and he makes the payment through his card for the products or services when he acknowledges to pay through the card- issuer16. In Re Charge Card decision, it was held to be conceptually impossible for a bank to assume charge over a client’s account with the bank. In the above case, it was held by Millet J that it was theoretically not possible for an individual to have a charge over a debt which she owes to another person as the relation between a creditor and a debtor is a genus of property at all, which is merely, a personal right to be paid. Further, it is said that there exists no res between the parties and hence, nothing to which, security interest can attach. A bank may desire to employ another’s property, such as the chose in action emanating from a client’s deposit with the bank, to fulfil any liability owned to the bank by such a customer. Thus, the bank may elect to do the same in the number of ways, including by assuming an equitable charge over deposits. There has been hot discussion for some time on the conceptual possibility of such a “charge-back” under English law. Millet J’s obiter dicta in Re Charge Card Services to the impact that the bank in such scenarios, as a debtor, could not have its creditor’s choice in action appropriated by way of equitable charges to the freeing of a debt owned by the creditor to the bank since the impact of such a charge would be a transfer to the debtor the proprietary interest in the debt. Such a transfer would make the bank as both debtor and creditor as regards to same debt, which was considered by Millet J to infringe doctrinal purity. 17 Rebuttable presumptions There exist some relationships, which are non-questionably supposed to be relationships of confidence and trusts. In such cases, the claimant has to establish the presence of such as relationship like trustee and beneficiary, cardholder and the card service provider. UK government is seriously considering to give a legal status to electronic signature. The UK government has not precisely defined what “rebuttable presumption” is but the notion is associated with evidential nature of an electronic sign which is an acceptable nature of evidence in the court. Validity of any signature is purely a legal test carried out by a court before it can consider the content of the evidence. In Goodman v. J.Eban Limited, it was held that in English law, mechanical signatures employing, typewriting, printing or using rubber stamps are legally valid. A sign can be made by a mark instead of a name as long as evidence can be offered to identify the placer of the mark and the inclination to sign and words other than the name can be treated as a sign as long as the corroboration has been given to recognise the placer of the such sign and the inclination to sign. If the intention to sign can be proved, then the words other than a name can amount to a signature. However, a signature which may be admissible may also lack adequate qualities so as to enable a recipient to foot on it. Though a signed document which is forwarded by fax would be admissible in English courts, but due to nature with which the sign can be easily lifted from one document to another, it would be regarded as unreliable for business transactions. Thus , the main intention of the UK government is to give legal authenticity to electronic signature as a “ rebuttable presumption “ of validity but also to make such electronic signatures as legally valid one in English courts and also to make evidential weight to such signatures and the functions they offer by law18 Rebuttable Presumption and Credit Cards There exists always some fear to do online shopping by consumers as there is a chance that the card number might be stolen in the process of online shopping. Further, in UK, e-signature regulations were introduced in the year 2002. E-signature offers “rebuttable presumptions” that when if the digital signature is used, then it will be construed that the cardholder had actually signed it. In case of credit cards, if some miscreants have used the card wrongly, then, given under some scenarios, the bank must re-credit their customer account with the amount wrongly debited. Thus, in case of stolen credit card, the store or the bank owes up the responsibility to pay back the amount to the cardholder. Some credit card providers impose ?50 limits which the cardholder has to pay up first. In case, there is an occurrence of fraud, then it will not be an easy task for getting one’s money back from the credit card company. However, under the provisions of Distance Selling Directive, now provisions have been made for the safeguarding of card numbers. Rebuttable Presumption and Debit Cards Unlike the credit card, when someone steals a debit a debit card and misuses the card number, then the cardholder will remain liable for the debt incurred. The main differences in rebuttable presumption both in debit card and credit card is that the user of the debit card number is assumed or presumed as the owner of the debit card but under UK statute like the Consumer Credit Act, such a presumption will not be applicable to credit card transactions. It is to be noted that under the Consumer Credit Act, a debit card is not a credit card as there is no creation of any debt under debit cards as opposed to credit cards. This is the reason why debit cards are so popular with the banks in UK and they are also vehemently advocating for digital signatures, which will try to inflict liability on the cardholder. Thus, whenever a store loses out due to fraudulent debit card usage, then the cost is probably passed on to the consumer. It is to be noted that for Visa Debit Cardholders in UK, there exists beneficial contractual provisions, which offer a greater standard of safeguard against misuse of debit cards.19 Bibliography Bidgoli Hossein. Electronic Commerce: Principles and Practices. New York: Academic Press, 2002. Chaffey & David Chaffey. Internet Marketing: Strategy, Implementation and Practice .Noida: Pearson, 2008. Edwards Burt, Credit Management Handbook. (New York: Gower Publishing Ltd, 2004. Gitman Lawrence J & Joehnk Michael D. 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Your Rights When Paying through Credit Card. Database on-line. Available from http://www.which.co.uk/consumer-rights/sale-of-goods/your-rights-when-paying-by-credit-card/consumer-credit-act-1974/ Read More