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How the credit card works for payments in store and on-line

How the credit card works for payments in store and on-line

Published: 14 October 2020 • Reading time: 6 minutes

In Italy, as in most of the rest of the world, the most widely used payment instrument is still cash but the use of credit and debit cards is growing, also thanks to the advantages for consumers and merchants.

The first "modern" credit card, in the form of a plastic card, was created in the 1950s¹ and went from being a small experiment in an American town of just over sixty thousand inhabitants to a payment instrument used by more than one billion people.

What is a credit card and how does it work

The credit card is an electronic payment instrument, usually a standard size plastic card or in rare cases metallic, issued by an authorised company, often a bank, called an Issuer, that offers card-holders the opportunity to make payments that will be charged with different methods depending on the type of card issued.

The cards always have a monthly spending limit and may be subject to other limitations, such as limits on withdrawals from ATMs or maximum limits on on-line purchases that, in some cases, can be changed depending on the type of instrument and the agreements stipulated with the Issuer.

The functioning of the credit card in relation to payments is guaranteed by a three- or four-party scheme, which are:

  • Acquirer
    The company that manages the financial movement of the payment
  • Merchant
    The retailer that accepts the payment
  • Issuer
    The company that issues the card
  • Card-holder
    The purchaser who makes the payment

In the three-party scheme, the roles of Acquirer and Issuer are performed by the same entity.

The actors involved in card payments include the national and international circuits, that enable transactions to be processed through their communication network and thanks to the standardisation of rules and processes. The most widely recognised international ones include: American Express, Diners, JCB, Mastercard and Visa. In Italy, the most well-known national circuit - also called domestic - is PagoBANCOMAT (BANCOMAT).

How the card is used

Paying by credit card in store and on-line is extremely simple. Let's see, first of all, which data characterise the card:

16-digit number (Card PAN)

Identifies the credit card and is unique: there is no other card in the world with the same numbers.

  • Month and year of expiry (validity)
    These are the month and year up to which the card may be used for payments. When it expires, the issuing bank generally renews it and sends a new card to the customer.
  • Holder (or name on the account)
    Name and surname of the person to whom the card was issued.
  • CVV/CVV2 (Security code)
    Three-digit code on the back of the card.
  • PIN
    Four or five digit code, known only to the card-holder, needed to complete payments at Sales Points.

Payments in store exclusively require card-holders to enter their PIN, when required. It is useful to remember that the code should be entered by making sure no one else can see it.

In the case of on-line purchases, the following must instead be inserted: name and surname of the card-holder, PAN, expiry and CVV (not necessarily in this order). Moreover, it may be necessary to add a temporary code called an OTP provided by the bank, via SMS or another form (for example, through a home banking app), at the time of payment. If all data are correct, the card is valid and the credit limit has not been reached, the payment is successful and the user can proceed with other purchases or leave the site.

The distinctive elements of credit cards

Credit cards are distinguished in particular by the method of debiting of the sums paid and there are three main types:

  • Credit cards with full balance settlement
    In this case, all spending in a month is charged in a lump-sum before a certain date, indicatively by the middle of the month after the payments.
  • Instalment-based or revolving Credit Card
    Instalment-based cards enable users to defer payments by debiting monthly amounts of the expenses accumulated over time. In practice, the amount to be repaid is a percentage of the debt and can be changed according to the methods specified in the service terms.
  • Prepaid credit cards
    These cards differ from the previous ones because the payments are debited immediately not from the account to which they are linked, as with the previous cards, but directly from the card topped up previously by the card-holder. For this reason, they can be considered debit cards rather than credit cards.

Cards that offer deferred repayment methods increasingly allow holders to also choose to make a single payment, offering greater flexibility to the card-holder who can decide whether and how to make the repayments.

Prepaid cards called 'carta-conto' (account card) or card with IBAN are becoming increasingly more widely used: unlike "traditional" cards, these cards have an integrated account, which enables holders to carry out many of the most common banking transactions. The most widely recognised ones in Italy include HYPE, a company in our group which we have already discussed in our article dedicated to mobile payments.

There is still one key element that differentiates the cards, namely the confirmation of transactions. Originally, a credit card payment in store was "confirmed" by its card-holder through a signature written on the receipt issued by the POS, a method replaced with the advent of the credit card with PIN, which is inserted by the purchaser at the time of payment; however, if the card is contactless, no form of authentication is required for purchases of up to € 25.

How much do credit card payments cost

Credit cards involve costs for the merchants that accept them at their Sales Points or on Ecommerce sites and, in certain cases, also for the holders that use them.

For credit cards with full balance settlement and revolving cards, purchasers may have to pay an annual fee, which is often removed based on a minimum spend with the card in the same period. For prepaid cards, the following may apply: a one-off issue cost, top-up fees and perhaps additional costs for specific transactions (e.g. bill payment). In addition, the use of "premium" prepaid cards is increasingly more frequent, allowing holders to request a free standard version and then upgrade to additional services by paying an additional monthly fee.

On-line retailers incur commissions on transactions and payment gateway costs in the case of Ecommerce sites, while for physical stores, the costs connected to the POS are the terminal fee and, also in this case, commissions, typically a percentage of the transaction amount.

The “traditional” offers now available on the market are augmented, however, by the Fee-based POS Easy which, with a unique offering on the Italian market, eliminates percentage commissions on annual transaction amounts of up to € 30,000 based on payment of a fee of € 15 or € 20 chosen by the user at the time of the POS request based on the amount collected by the terminal during the year. In addition, this offer enjoys a tax credit of 30% provided by the POS bonus established by the Italian Government for all merchants with a turnover not exceeding € 400,000 in the tax year prior to the reference year.


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