Credit Cards in the UAE from the Legal Perspective - Research Paper Example

? CREDITCARDS FROM THE LEGAL PERSPECTIVE (SPECIAL REFERENCE TO UAE CREDITCARDS FROM THE LEGAL PERSPECTIVE (SPECIAL REFERENCE TO UAE College Name Professor Name Subject Abstract Credit card offers not only convenience but also has substituted checks which is the traditional mode of payment for any purchases earlier. Nowadays, creditcards have become a common medium of payment. Creditcards are easy to carry, and it is safer than carrying cash. The usage of creditcards in UAE has exceeded the other neighboring nation’s usage particularly in the Middle East, South Asia and African region. . Now, UAE has become a developed market for the usage of credit card due to consumer awareness and due to introduction of innovative creditcard products. There is an allegation about the UAE card issuers that they are charging exorbitant service charges from cardholders in UAE. Further, issuing of creditcards to all the migrant workers without verifying their credit status has brought many legal issues. This research essay will look into in general about creditcards with particular emphasis to the legal issues arising out of credit card business in UAE. CREDITCARDS FROM THE LEGAL PERSPECTIVE (SPECIAL REFERENCE TO UAE) Introduction In UAE, the creditcards are regarded as an essential part of life of UAE citizens as it is being regarded in other parts of the world. Creditcards convenient have come to limelight as it is being recognised everywhere today and because of its acceptable and convenient form of payment. The right usage of credit card offers the cardholder a flexible form of credit payment and may enhance the user’s credit standing, and one may even accrue rewards awarded by creditcard issuers. Nowadays, creditcards have become a common medium of payment. Creditcards are easy to carry, and it is safer than carrying cash. Further, when the cardholder does not have adequate cash in hand, it is a nice way to settle his purchases so that he can pay for the same later at his convenience. However, a card holder may enter into a debt trap if he uses his credit card recklessly. Credit card function is of dual in nature. As a substitute for checks and cash, it can be employed as a transactional medium. Further, it can be used for credit transaction thereby substituting loan from banks or from private lenders. However, if a customer uses a credit card without any rationale, it could be devastating as quick sand. It is alleged that lenders can exploit gullible credit cardholders with the exorbitant interest rates and other penalties like delay for making payment or adding penal interest for late payment. As of today, about 68% of creditcards are being used as a transactional medium by consumers for their convenience who are likely to repay their balances on a monthly basis without any default. As per recent research study made by VISA , as compared to six years ago, there was about 50% of creditcards generated no interest at all to the issuers and whereas now, it is estimated at 60% of cards are being reported to have generated no interest. The popularity of creditcards can be attributed to the convenience in nature and also the credit facility it offers to card holders. Credit card offers not only convenience but also has substituted checks which is the traditional mode of payment for any purchases earlier. Credit card does not require to maintain adequate cash reserves to meet contemporary expenses. It is estimated that about 23% of consumer transactions are being carried over creditcards. Cardholders are permitted to carry interest-free balances for about sixty days as the cardholder is allowed to enjoy the credit not only throughout the credit cycle but also offers a grace period of 20 days after the lapse of the credit period. If a cardholder pays the balances within the credit period, he can avoid the payment of any interest on his credit purchases through his card. It is to be noted that consumers are chiefly employing credit card as an alternative for checks instead of considering it as a source of debt. There are about 125 issuers of creditcards in UAE. Card Issuers in UAE offers various facilities to their cardholders like airport lounge access, travel insurance , discounts throughout the year, free life card , free golf access, purchase protection, concierge services, tailor-made discounted Umrah & Haj services, cash back both on international and local purchases , cash withdrawals up to 100% from ATMs around the world ,roadside assistance, etc. Credit card issued by Noor Islamic Bank of UAE offers lowest interest rates and requires no salary transfer. Though, the Barclays bank charges higher interest rates for their creditcards in UAE, but it extends various amenities like accessing more than 500 deluxe airport loungers and golf facilities. Card users in Dubai prefer Citibank cards as it offers Emirates Airline miles. The main objective of this research essay is to discuss about the creditcards from legal perspective and legal issues and laws governing the creditcards in UAE more emphatically. Analysis Definition of a Creditcard As per Geoff Barnbrook (2002), a credit card is a plastic card which helps the card holder to purchase various products and services on credit or to borrow money. “History of Creditcards” The use of creditcards has become common in the 1970s, but a variety of creditcards was introduced in the whole of the 20th century. Western Union Telegraph Company in 1914 was the pioneer in offering a metal charge card to its’ best customers who needed a settlement of their dues at the end of the each month. This is the known as the first consumer credit card, and it also offered deferred payments. The dogtag-form metal plates issued by the Western Union Telegraph Company were immediately copied by other retailers, and they also followed the suit. A chain of California gas stations in 1924 issued the ever first creditcards made of cardboard, which set the phase for the wider usage of petroleum and gas creditcards. American travelers found it very convenient as it facilitated them to pay for fuel anywhere. On seeing the popularity of fuel cards, the majority of departmental stores in America in 1930s issued the metal plate-form creditcards to their customers. Big departmental stores like Bloomingdales which was later known as Gimbel’s chain and other departmental stores found that the creditcards were the main attraction to enlarge their customer’s base. Nightclubs and trendy restaurants in 1940s started to offer their own creditcards which could be employed only at the specific business places. A bank in Brooklyn in New York was first introduced the credit card in 1948, which was known as “Charge-it and had analogues’ terms of repayment as that of contemporary creditcards. But, only a customer of such a bank can have such a credit card and can only make a local purchase through that card. Franc McNamara, a prophet in 1950 introduced a card that can be used at restaurants in the whole of the New York City. The salient feature of this card is that a cardholder will receive a single statement for the food purchased at various restaurants on a monthly basis. This was later known as Diners Club credit card. 1951, Franklin National Bank first ever introduced a bank credit card for the usage at all restaurants and stores in the Long Island area. The specialty is that this card had not charged any interest or fee but collected some percentage of transaction fees from the traders. When Citigroup acquired the Franklin National Bank, this had become first ever European-American bank to issue creditcards. American Express bank entered into credit card business in the year 1958 and later it became very popular. Competing with the American Express Bank and the Diners Club, the Hilton hotel chain started to issue its own card known as Carte Blanche Credit card. BankAmericard was introduced in 1958 by Bank of America, which offered a revolving credit account, and it sent uncalled-for creditcards to the consumers in California to increase its cardholder’s base. In 1966, Bank of America entered an interchange agreement with the banks throughout the nation, and its cardholder’s base swelled to millions. In 1976, the BankAmericard was rechristened as VISA card. The Master Charge card issued by Interbank Card Association was renamed as MasterCard in 1979. (Biegelman, 2009). As of today, both Master Card and Visa are dominating the whole of the credit card market around the world. “Credit Card Usage in UAE” The usage of creditcards in UAE has exceeded the other neighboring nation’s usage particularly in the Middle East, South Asia and African region. UAE stands first among MENA nations with 31% of its cardholders swiping their cars for more than ten times during a month. Further, about US$ 30 to US$300 was the spending range through creditcards which is at 36% of the aggregate of spending through creditcards and majority of them were in excess of US$300 spending through cards. About three-fifths of UAE credit cardholders find it convinient to use cards than cash. Now, UAE has become a developed market for the usage of credit card due to consumer awareness and due to introduction of innovative credit card products. (Stensgaard 2004). As per recent research study, UAE retailers have enhanced their spending on electronics by 20%, on watches/jewellery and on home furnishing by 10% while their spending on fashion, books/music, shoes and restaurants have seen a slight downturn. About 57% of cardholders had used their cards in UAE at supermarkets. As compared to 2009 figures, there is 30% increase in spending through creditcards in UAE in 2010. Since 2009, spending through creditcards at hotels and restaurants has increased up to fifty percent. (Hujair 2010). Importance of Creditcards in the Modern Society Creditcards have become a more of convenience to buy products anywhere without issuing checks or tendering physical money, to buy products from online and makes the life more convenience and easier. Credit card is alternate to cash and offers substantial credit facility to the card holder if it is used responsibly and carefully. Credit card offers a short-term line of credit. Prudent usage of one’s credit card will increase one’s credit score. Credit card stands as a best alternative to cash as there is no fear of stealing of your cash balance when you have a credit card. (Evans & Schmalensee, 2005, p.110). “How creditcards work” If you purchase a product through the credit card, the cardholder will swipe his card at the store and also sign the bill thereby promising to pay the bill later when the card company mails its statement to his home later. However, the bill is settled to the trader by the credit card company within the couple of days on behalf of you. During every month, the credit card company will mail its statement to him narrating the items he purchased through the card and other information like the total outstanding , the unpaid balance, and the details of interest charged and what the minimum payment he has to pay and when the same has to be paid. For instance , if you swipe your credit card for $ 3000 to buy a computer which will carry an interest of 19% P.A and to pay the needed minimum balance of 2% every month or $15 every month ,it would take 36 years to pay off the whole loan to card company. But, you have to pay about $9300 as interest charges alone, which is equivalent to three times what you have bought through your card. (Green, 2000, p.11) Though, Shariah law forbids charging interests, a majority of the creditcard issuers in UAE charge around 36% per annum as fees. In February 2012, the UAE’s central bank capped the service fees at 18%. (Taylor, 2012). However, in May 2012, the Central bank of UAE decided to impose no cap on card fees though it observed that the present rate of 36% being charged by UAE issuers are too high as compared to just 24% that is being charged by six-nation Gulf Cooperation Council .(GCC) (Ghad ,2012). “Classification of Cards and their Characteristics” Revolving Credit Card -A maximum limit of credit allowed is set for a specific period, and the card holder has to pay only a minimum of just 5 to 10% of the outstanding amount at the expiry of a specific period which will carry an interest from 30 to 36%, which will be charged on the outstanding sum. Charge Card – Under this, a card holder has to pay the consolidated bill for a specific period, and it is fully payable on presentation. Under this, there is no pre-set spending limit or payment of interest. Standard Card – This is a standard card issued by a banker to its account holders with restricted privileges to the card holders. Business Card- This is issued to the business communities and usually come with higher credit limits and with more privileges as compared to standard cards. Gold Cards- This offers higher credit limits and also comes with more awards and more flexible cash withdrawal limits which are not available in standard cards. International Cards- This can be used around the globe and will be issued to business men who travel abroad frequently. (Gurusamy, 2009, p.47). “Advantages and Disadvantages of Creditcards” The following are the benefits of creditcards: Not necessary to carry cash and this will prevent the cash being lost in transit or through robbery. If the credit card is protected by insurance, then, even if the card is stolen or misused, the card holder’s interest is protected. “It offers cash less transactions.” “It facilitates purchases through online.” A cardholder is entitled to avail cash advances by using his credit card. Even in case if there is no insurance cover , if the card holder immediately reports to the card issuer about the theft , then he will not be held liable for possible misuse from his card. Credit card can be used for purchase of luxurious items, and repayment can be made over a longer installment. It allows the card holder to make a single payment for all the purchases made over a period. If a defective product is purchased, it can be returned to the seller, and the cardholder has the right to ask for a charge back. Cardholders are entitled to enjoy 25- day interest-free credit on purchases. Disadvantages; Cardholder is tempted to land in a debt trap if he abuses the credit card. When a card is lost, the cardholder has to pay a fee for the same. Credit card may tempt the cardholder to live beyond his means. If there is default in payment of monthly installement, then interest will have to be paid on the whole amount. If the credit card is misused, then, the cardholder’s credit score will be down-graded. (Swart, 2004, p.342). “Creditcards from a legal standpoint” Creditcards have the following legal perspective, namely contracts of credit (aqd al-iqrad), law of agency (aqd al-wakalah) and law of guarantee (aqd al-kafalah). “Parties to Credit Card Transaction and their Contractual Relationship” A cardholder is the consumer who wishes to buy products through the credit card. The banker or the financial institution which supplies credit card to the consumer is known as a card-issuing bank. The card-issuing bank makes a claim on the cardholder for the purchases made through the card on regular intervals. The merchant is the business firm or an individual who accepts payments against purchases by consumers through creditcard .Acquiring bank is the financial institution or bank that receives payment on behalf of merchants for the products or services. There is a direct legal relationship between a cardholder, and issuing bank as it is the latter accepts the risk of non-payment by a cardholder or if the card is used fraudulently. Duties, responsibilities and relationship between card issuer and cardholders. Relationship between the Issuer and Card Holder and their Responsibilities can be understood from the agreement entered between the creditcard issuer and the card holder. MasterCard and Visa have framed detailed procedures and rules when acquiring bank can allow charge-back against traders. A card issuer shall notify the cardholder prior to the use of the card that the cardholder will be liable for payment of some amount as unauthorized charges. When there is a dispute over the product purchased, which has been intimated to the card issuer, the cardholder can withhold payment for those products for which there is a dispute. As regards to billing errors, a cardholder has to bring the same to the notice of the card issuer within a certain period. Likewise, the card issuer has to correct the billing error which has been reported within two billing cycles. (Smith, 2003, p.8-12). In case of unauthorized usage of stolen or lost cards, altered or counterfeit cards, or when the cardholder’s number is used fraudulently, card-issuing bank will be held accountable for the loss suffered due to the above facts. (Smith, 2003, p.8-13). The liability for unauthorized usage of creditcard can be divided into two types name if there is an express provision for in the issuer-holder contract and when there is no risk-sharing provision in the issuer-holder contract. In Thomas v Central Charge Serv., Inc , it was held that a card holder who had not acknowledged in written to pay for fraudulent purchases and who had not given his consent to report when the card was lost was not liable for fraudulent charges. In Wanamaker v Megarry, it was held that card holder would be held liable for unauthorized purchases since he had failed to keep the card secure. (Wash. & Lee L. Rev, 1966, p.125). Now, the majority of the creditcard issuers make a contract provision that any loss due to unauthorized usage of card shall be to the account of cardholder unless a notice of theft or loss is given to the issuer within prescribed time, and the same view was held in Texaco, Inc v Goldstein. (Wash. & Lee L. Rev, 1966, p.126). Responsibilities of the Issuer and Card Holder towards One another Responsibilities of the Issuer and Card Holders. Rights and Liabilities of Card Issuer: The card issuer has the right to ask the cardholder to surrender his card at any time. The card agreement will have an usual condition that card issuer cannot be held accountable for the quality of the product bought or services enjoyed unless if there is any express liability imposed by any applicable law. The contract will have a condition that card issuer cannot be held accountable if the cardholder is denied credit by a merchant, or it may be restricted to such extent as permissible under the applicable law. According to the Credit Card Act of 2009 USA, the card holder , the card issuer has to inform the cardholder about any increase in rates or any other poignant changes in terms of credit offered to cardholder at least one and half month before the effective date. Card Issuer cannot levy a penalty fee for premature closing of account by a holder due to such an increase in fees provided if the cardholder payback the outstanding amounts within the time allowed by the card issuer. Now card issuer is not allowed to exercise double or three cycle billing. An issuer cannot charge the card holder over-the –limit fees because the card holder has exceeded his credit limit due to enhanced fees or interest charges. UAE Central Bank is the authority to from rules and regulations regarding the creditcards in UAE but UAE Central Bank have not placed any restriction on cardholder (expat) from leaving UAE with a credit card debt. A card issuer can make a complaint to the police and stop the cardholder to leave from UAE with creditcard debt, and guarantor will be held liable as per UAE laws if a cardholder fails to make payment against his credit card debts. The cardholder can initiate legal action against an expat who left UAE with credit dues and even issue a Red Corner Notice against such an individual provided the amount involved is in millions. For certain economic offenses including credit card debts, the treaty between the expat’s nation and UAE will allow extradition possible. (Worldlawdirect 2010). “Duties and responsibilities of the Card Issuer” A credit card can be said to be a signal to merchants that the cardholder do have a satisfactory credit rating. If a product is sold through a credit card, it is implied that merchant will be reimbursed by the card issuer. Each credit issuer should make a thorough background check before issuing any card to the applicant. In Humble Oil & Ref .Co v Waters, the court held that issuer was liable as the card issuer had recklessly issued the card on the basis of anonymous telephone call. Charge-back can emanate from cardholder’s dissatisfaction , merchant’s fraud or failure on the part of the merchant to adhere established norms where a card issuer has to bear the whole cost. Card issuer may face transaction risk due to product or service delivery or due to employee’s misconduct or error. The card issuer should avoid issuing of unsolicited cards. The card issuer should maintain customer’s confidentiality. “Duties and responsibilities of the Merchant” A merchant may refuse to accept payment through creditcards for small purchases as he has to pay 1 to 3% as charges to the credit card issuers. Merchants are having a duty to keep the customer’s data safe and any unauthorized usage or fraud may result in account cancellation by card issuer. New vendors who do not have adequate knowledge on regulations and rules for good security system often fall as prey for credit card frauds through online. The merchant should not charge any additional fees for use of cards. The merchant should compare and contrast the signature of the customer on the card and on the sales invoice. A merchant is not authorised to make cash advances to the cardholder. The merchant should not ask any personal information from the cardholder like phone number, address or other info. Card Issuer should adopt a fair practice for collection of dues from cardholders. The merchant should report to the card issuer any unusual or suspicious activity from a card holder at the earliest. Cancellation or termination of credit card by the card issuer A card issuer can cancel the credit card issued to a holder if his card remains inactive or unused for a long period mainly to minimise the risk. In such cases, there is no necessity for the issuer to notify the card holder. Inactive creditcards with high credit margins may pose a heavy risk of being misused. On the basis of a negative report from credit-reporting agency, a card issuer may cancel the card. However, as per law, a creditcard issuer should intimate the holder about the card cancellation within one month immediately after cancellation. If the issuer finds that the cardholder has not secured funds in his account, if he permits third persons to use his PIN and the card, then issuer can unilaterally terminate his card. Caution to be taken by a cardholder A cardholder should cancel all his creditcard that is not in use for the last six months as these cards are prone to be misused by fraudsters. A cardholder should cancel his stolen / lost one at the earliest and should use a different pin number for new cards issued in lieu of lost cards. Fees For each transaction, the creditcard issuer will charge the merchant some 1 to 3 % as their charges from a merchant. They also charge flat fees for each and every processed creditcard transactions which will be between 10 to 25%. The merchants in UAE have been asked to forbid claiming extra additional fees on credit-card usage. The merchants or service providers have to defer a set-up charges and payments on a monthly basis on transactions based levels to the card issuer. But, it is alleged that merchants in UAE are used to pass on to the consumers the card procession charges thereby resulting loss of millions of UAE dirham every year to the card holders. Rewards Merchants always at the losing end as regards credit card reward scheme. The card issuer passes the overheads of their reward schemes to merchants through non-qualified and mid processing fees. When a cardholder uses his rewards, then merchant is obliged to charge more to process such transaction. Thus, the enhanced fees charged will offset the cost of rewards. “Insurance coverage for Merchants” A merchant can safeguard his interest from unauthorized usage or charge backs by taking appropriate insurance cover for the same. The insurance coverage is specially designed for Card Not Present merchants to safeguard against the various risks that emanates from credit card. Conclusion The usage of creditcards in UAE has exceeded the other neighboring nation’s usage particularly in the Middle East, South Asia and African region. UAE stands first among MENA nations with 31% of its cardholders swiping their cars for more than ten times during a month. Further, about US$ 30 to US$300 was the spending range through creditcards which is at 36% of the aggregate of spending through creditcards and majority of them were in excess of US$300 spending through cards. About three-fifths of UAE credit cardholders find it convinient to use cards than cash. Now, UAE has become a developed market for the usage of credit card due to consumer awareness and due to introduction of innovative credit card products. UAE Central Bank is the authority to from rules and regulations regarding the creditcards in UAE. In May 2012, the Central bank of UAE decided to impose no cap on card fees though it observed that the present rate of 36% being charged by UAE issuers are too high as compared to just 24% that is being charged by six-nation Gulf Cooperation Council .(GCC). The UAE Central Bank should come with bold decision to introduce a cap on fees charged by the creditcard issuers in UAE, should mandate all the creditcard issuers to observe strict screening before issue of any new cards, to make creditcard related offenses as criminal offenses when cheating or fraudulent methods are used mainly to safeguard the interest of the creditcard users in UAE. References Biegelman, MT. (2009). Identity Theft Handbook: Detection, Prevention and Security New York: John Wiley & Sons. Creditcards: the Liability of the Card Holder for Unauthorized Purchases, (1966), 23 Wash. & Lee L. Rev. 125 Retrieved October 27, 2012, from http://scholarlycommons.law.wlu.edu/wlulr/vol23/iss1/11 Evans, D S & Schmalensee, R. (2005). Playing with the Plastics. New York: The MIT Press. Ghad, AA. (2012, May 31). UAE Imposes No Limit on Credit Card rates. Retrieved October 27, 2012, from http://ebookbrowse.com/4810-uae-imposes-no-limit-on-credit-card-interest-rates-pdf-d352375168 Green, M. (2000). Know About Credit Card and Fiscal Responsibility .New York: Rosen Publishing. Gurusamy. (2009). Indian Financial System. New Delhi: Tata McGraw-Hill Education Hujair (2010).UAE based card users increased their spending on electronics etc since July 2010. Retrieved October 27, 2012, from http://www.albawaba.com/retail-services/uae-based-shoppers-increasing-credit-card-usage-electronics-home-furnishing-and-jewelery Smith, BW. (2003). E-Commerce: Financial Products and Services. New York: Law Journal Press. Stensgaard, AB. (2004, November 22). UAE Leads the Way in Credit Card Usage. Retrieved October 27, 2012, from http://www.ameinfo.com/49143.html Swart, N. (2004). Personal Financial Management. Juta and Company Ltd. Taylor J. (2012, February 9). United Arab Emirates Caps Credit Card Interest at 18% Retrieved October 27, 2012, from http://www.cardratings.com/united-arab-emirates-caps-credit-card-interest-at-18-percent.html Worldlawdirect (2010, December 15). UAE Credit Debt Problem. Retrieved October 27, 2012, from http://www.worldlawdirect.com/forum/debt-collection/47071-united-arab-emirates-uae-credit-card-debt-problem.html Read More