The Innovation, Advantages, and Disadvantages of Credit Cards - Essay Example

Introduction Credit has been an integral component in society and banks and other financial institutions introduced credit cards to advance credit. A credit card is a payment card that is given to accounts holders (sometimes cardholder) to pay an entity for services and goods with the promise of meeting the amounts paid and additional charges (expenses) (Blankson, Paswan & Boakye, 2012). It means that the financial institution grants a line of credit to the customer from which the customer can utilize to make payment or receive cash advance: credit cards continue to influence the financial sector. Early systems for credit card formats had been developed but were not extensively accepted by different merchants and the use of credit cards from reputable organizations such as BankAmericard and Master Charge innovated the use of credit cards. The innovation of credit cards allow many cardholders to obtain the cards and utilize the cards in paying for services and products from different merchants. Current credit cards are facing challenges because of destructive technologies and emergence of different credit based options. The essay discusses credit card innovation through highlighting the history, applications, and evaluating, and also evaluate its contribution to the field of business administration and society. Brief History The name credit card and the general application of a credit card are traced to the writings of Edward Bellamy in 1887. Charge coins and other metals were used as a form of a credit card from the late 19th century to the 1930s. The coins came in different sizes and forms and were made from different materials including steel, aluminum, and copper (Kiernan, 2015). The early charge cards, commonly used by oil companies and the Western Union that, were issued to frequent customers in 1920s to 1940s while also the Charga-Plate was introduced in 1928. The Charga-Plates were developed by Farrington Manufacturing Company and any purchase was imprinted into a section of the plate to indicate a transaction (Woolsey & Gerson, 2016). In 1934, American Airlines and the Transport Association introduced the Air Travel Card with details of the customer and the issuer of the card. The customers would be able to purchase a product or service and pay later. In the 1950s, American Express, Carte Blanche, and Diners Club were introduced based on a “general purpose” charge card that enabled customers to pay the same bill using different credit cards (Woolsey & Gerson, 2016). Since there was no specific card that enable mass payment, BankAmaricard licensees came together and developed Visa in 1976 while in 1966 the MasterCard was introduced (Kiernan, 2015). The cards were mass produced and later on mass mailed to unsolicited customers. The innovation has continued through reducing the time the transaction takes place because of computerization of the systems and linking the systems with different financial related institutions. Explanation The credit card transaction seems simple on the surface since the customer just swipes their cards and the transaction is complete. However, there are complicated processes and procedures in completing transactions (Agarwal et al., 2013). Swiping the card and signing the receipt are the first and last phases of the transaction. Between swiping and signing, numerous processes and actions are involved (Blankson, Paswan & Boakye, 2012). Even though understanding the processes of the credit card are not useful to a customer, it is important to analyses the innovative nature of the process. Numerous participants and steps take place in completing the credit card transactions. The participants of credit card transactions include the cardholder, the merchant, acquiring bank/merchant’s bank, acquiring processor/service provider, credit card network/association member, and issuing bank/credit card issuer (De Montjoye, Radaelli & Singh, 2015). These different participants play different roles in ensuring the transaction is completely effective. For example, the cardholder has to apply and use the card while the merchant is the vendor or store that sells services or goods to the cardholder (Agarwal et al., 2013). The acquiring bank is the one receiving payment authorization, which is processed through the acquiring processor that is a device that a card can be swept through (Wickramasinghe & Gurugamage, 2012). The issuing bank is the financial institution that issued the credit card to the cardholder. Apart from the participants, credit card transaction process influences the entire transaction process. The processing of credit card transactions is fulfilled through numerous platforms including mobile devices, wireless terminals, e-commerce stores and brick-and-mortar stores (Agarwal et al., 2013). The entire transaction takes place within two to three seconds but the entire process takes numerous stages (Khare, Khare & Singh, 2012). The stages include authorization, authentication, and clearing and settlement. The authorization stage is when the merchant ought to obtain approval for the payment from the bank that issues the card (Guseva & Rona-Tas, 2014; Soll, Keeney & Larrick, 2013). The authentication stage is when the issuing bank verifies the credibility and validity of the credit card through the use of numerous security systems including the use of card security codes and Address Verification Service (Soederberg, 2013). The clearing and settlement phase is when the information is indicated or posted to both the merchant’s statement and cardholder’s credit card billing statement. In the entire transactions, credit card processing fees and costs influence it usage. Some of the costs include merchant discount rate such as interchange fee, assessments and markups, and also the chargebacks (Hancock, Jorgensen & Swanson, 2013). The transaction may be faced with numerous challenges and the merchant is the entity that usually suffers because of fines and costs associated with wrong transactions (Jha, Guillen & Westland, 2012). For example, a complaint from a customer means that the merchant pays a certain fee to clear the problem or even the entire transaction can be canceled. Application The purpose of credit cards can be viewed from two perspectives but also are associated with receiving credits and loans. For example, a cardholder can use to purchase a product and pay later. For instance, a cardholder may like a product such as a television but does not have enough cash (Blankson, Paswan & Boakye, 2012). The cardholder then uses the card to make the purchase and pays the credit company later. In addition, the credit card is used in emergency situations where the cardholder has to meet immediate needs. Alternatively, the cardholder can use the credit card to receive cash. Some services and products cannot be paid through the use of credit card and the cardholder just visits an ATM and withdraws cash or even can use the card to make online purchases. Evaluation Credit cards have numerous advantages such as convenience. A cardholder is not required to access an ATM or carry cash since swiping alone is enough to complete a transaction. Any transaction done is indicated by the credited card statements meaning it is possible to monitor expenses and fulfill easily regulatory requirements such as taxation (Agarwal et al., 2013). Another advantage is the low-cost loans in that an individual can purchase today and pay later without incurring any interest. Moreover, through the low cost loans, the cutomer builds a positive credit history. Furthermore, credit card offers instant cash and numerous perks such as discounts on automobiles and frequent flier miles (Chatterji & Seamans, 2012); other benefits include purchase protection and balance surfing. These numerous benefits and advantages are crucial in ensuring cardholder transactions are effective. Apart from the numerous advantages, the use of credit cards has numerous disadvantages. The disadvantages include overuse in that the cardholders use cash that is not budgeted. High-cost fees and unexpected fees are typical with the design of the credit cards, which may increase the overall costs of usage of the card (Blankson, Paswan & Boakye, 2012). Other shortcoming of credit cards include committing our future income since credit cards allows to borrow, delay paying any changes creates a negative credit rating, and some consumer may think credit cards as extra income. Therefore, obtaining the credit card and associated benefits is easier but the long-term utilization of the card credits socioeconomic challenges to the cardholder. Conclusion In conclusion, the innovation of credit cards is traced to late 19th century when innovators started talking about the cards. Different varieties of credit cards were used before the introduction of computerization but faced challenges because not all merchants accepted the credit cards. However, the continuous innovation in the credit card sector has provided financial institutions and other sectors an effective way of making payments, which numerous merchants can accept. It has also resulted in the entire process of using a credit card reducing from many minutes to two-three sectors. To utilize effectively the credit cards, numerous participants and processes are involved with each of these entities tasked with a specific duty. Credit cards continue to be used as a form of cheap loan depending on the perspective and have improved the overall efficiency of financial transactions. References Agarwal, S., Chomsisengphet, S., Mahoney, N., & Stroebel, J. (2013). Regulating consumer financial products: Evidence from credit cards (No. w19484). National Bureau of Economic Research. Blankson, C., Paswan, A., & Boakye, K. G. (2012). College students’ consumption of credit cards. International Journal of Bank Marketing, 30(7), 567-585. Chatterji, A. K., & Seamans, R. C. (2012). Entrepreneurial finance, credit cards, and race. Journal of Financial Economics, 106(1), 182-195. De Montjoye, Y. A., Radaelli, L., & Singh, V. K. (2015). Unique in the shopping mall: On the reidentifiability of credit card metadata. Science, 347(6221), 536-539. Guseva, A., & Rona-Tas, A. (2014). 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