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Financial services refer to services provided by the finance industry. The finance industry encompasses
a broad range of organizations that deal with the management of money. Among these organizations
are banks, credit card companies, insurance companies, consumer finance companies, stock
brokerages, investment funds and some government sponsored enterprises. As of 2004, the financial
services industry represented 20% of the market capitalization of the S&P 500 in the United States.[1]
Contents
[hide]
1 History of financial services
o 1.1 In the United States
2 Banks
o 2.1 Banking services
o 2.2 Other types of bank services
3 Foreign exchange services
4 Investment services
5 Insurance
6 Other financial services
7 Financial crime
o 7.1 UK
8 Market share
9 See also
10 References
[edit]History of financial services
[edit]In the United States
The term "financial services" became more prevalent in the United States partly as a result of the Gramm-
Leach-Bliley Act of the late 1990s, which enabled different types of companies operating in the U.S.
financial services industry at that time to merge.[2] Companies usually have two distinct approaches to this
new type of business. One approach would be a bank which simply buys an insurance company or
an investment bank, keeps the original brands of the acquired firm, and adds the acquisition to its holding
company simply to diversify itsearnings. Outside the U.S. (e.g., in Japan), non-financial services
companies are permitted within the holding company. In this scenario, each company still looks
independent, and has its own customers, etc. In the other style, a bank would simply create its own
brokerage division or insurance division and attempt to sell those products to its own existing customers,
with incentives for combining all things with one company.
[edit]Banks
Main article: Bank
A "commercial bank" is what is commonly referred to as simply a "bank". The term "commercial" is used
to distinguish it from an "investment bank," a type of financial services entity which, instead of lending
money directly to a business, helps businesses raise money from other firms in the form of bonds (debt)
or stock (equity).
[edit]Banking services
The primary operations of banks include:
Keeping money safe while also allowing withdrawals when needed
Issuance of checkbooks so that bills can be paid and other kinds of payments can be delivered by
post
Provide personal loans, commercial loans, and mortgage loans (typically loans to purchase a
home, property or business)
Issuance of credit cards and processing of credit card transactions and billing
Issuance of debit cards for use as a substitute for checks
Allow financial transactions at branches or by using Automatic Teller Machines (ATMs)
Provide wire transfers of funds and Electronic fund transfers between banks
Facilitation of standing orders and direct debits, so payments for bills can be made automatically
Provide overdraft agreements for the temporary advancement of the Bank's own money to meet
monthly spending commitments of a customer in their current account.
Provide Charge card advances of the Bank's own money for customers wishing to settle credit
advances monthly.
Provide a check guaranteed by the Bank itself and prepaid by the customer, such as a cashier's
check or certified check.
Notary service for financial and other documents
[edit]Other types of bank services
Private banking - Private banks provide banking services exclusively to high net worth individuals.
Many financial services firms require a person or family to have a certain minimum net worth to
qualify for private banking services.[3] Private banks often provide more personal services, such as
wealth management and tax planning, than normal retail banks.[4]
Capital market bank - bank that underwrite debt and equity, assist company deals (advisory
services, underwriting and advisory fees), and restructure debt into structured financeproducts.
Bank cards - include both credit cards and debit cards. Bank Of America is the largest issuer of
bank cards.[citation needed]
Credit card machine services and networks - Companies which provide credit card machine and
payment networks call themselves "merchant card providers".
[edit]Foreign exchange services
Foreign exchange services are provided by many banks around the world. Foreign exchange services
include:
Currency Exchange - where clients can purchase and sell foreign currency banknotes.
Foreign Currency Banking - banking transactions are done in foreign currency.
Wire transfer - where clients can send funds to international banks abroad.
[edit]Investment services
Asset management - the term usually given to describe companies which run collective
investment funds. Also refers to services provided by others, generally registered with the Securities
and Exchange Commission as Registered Investment Advisors.
Hedge fund management - Hedge funds often employ the services of "prime brokerage" divisions
at major investment banks to execute their trades.
Custody services - the safe-keeping and processing of the world's securities trades and servicing
the associated portfolios. Assets under custody in the world are approximately $100 trillion.[5]
[edit]Insurance
Main article: Insurance
Insurance brokerage - Insurance brokers shop for insurance (generally corporate property and
casualty insurance) on behalf of customers. Recently a number of websites have been created to
give consumers basic price comparisons for services such as insurance, causing controversy within
the industry.[6]
Insurance underwriting - Personal lines insurance underwriters actually underwrite insurance for
individuals, a service still offered primarily through agents, insurance brokers, andstock brokers.
Underwriters may also offer similar commercial lines of coverage for businesses. Activities include
insurance and annuities, life insurance, retirement insurance, health insurance, and property &
casualty insurance.
Reinsurance - Reinsurance is insurance sold to insurers themselves, to protect them from
catastrophic losses.
[edit]Other financial services
Intermediation or advisory services - These services involve stock brokers (private client services)
and discount brokers. Stock brokers assist investors in buying or selling shares. Primarily internet-
based companies are often referred to as discount brokerages, although many now have branch
offices to assist clients. These brokerages primarily target individual investors. Full service and
private client firms primarily assist and execute trades for clients with large amounts of capital to
invest, such as large companies, wealthy individuals, and investment management funds.
Conglomerates - A financial services conglomerate is a financial services firm that is active in
more than one sector of the financial services market e.g. life insurance, general insurance, health
insurance, asset management, retail banking, wholesale banking, investment banking, etc. A key
rationale for the existence of such businesses is the existence of diversification benefits that are
present when different types of businesses are aggregated i.e. bad things don't always happen at the
same time. As a consequence, economic capitalfor a conglomerate is usually substantially less
than economic capital is for the sum of its parts.
Debt resolution is a consumer service that assists individuals that have too much debt to pay off
as requested, but do not want to file bankruptcy and wish to payoff their debts owed. This debt can be
accrued in various ways including but not limited to personal loans, credit cards or in some cases
merchant accounts. There are many services/companies that can assist with this. These can
include debt consolidation, debt settlement and refinancing.
[edit]Financial crime
[edit]UK
Fraud within the financial industry costs the UK an estimated £14bn a year and it is believed a further
£25bn is laundered by British institutions.[7]
[edit]Market share
[edit]See also
Book: Finance
Wikipedia Books are collections of articles that can
be downloaded or ordered in print.
Accounting scandals
Alternative financial services
BFSI
Cyberspace Law and Policy Centre
European Financial Services Roundtable
Financial analyst
Financial data vendors
Financial markets
Financial transaction tax
Financialization
Government sponsored enterprise
Institutional customers
International Monetary Fund
Investment management
List of banks
List of investment banks
Misleading financial analysis
Thomson Financial League Tables
History of financial services
[edit]In the United States
The term "financial services" became more prevalent in the United States partly as a result of the Gramm-
Leach-Bliley Act of the late 1990s, which enabled different types of companies operating in the U.S.
financial services industry at that time to merge.[2] Companies usually have two distinct approaches to this
new type of business. One approach would be a bank which simply buys an insurance company or
an investment bank, keeps the original brands of the acquired firm, and adds the acquisition to its holding
company simply to diversify itsearnings. Outside the U.S. (e.g., in Japan), non-financial services
companies are permitted within the holding company. In this scenario, each company still looks
independent, and has its own customers, etc. In the other style, a bank would simply create its own
brokerage division or insurance division and attempt to sell those products to its own existing customers,
with incentives for combining all things with one company.
Banking services
Contents
[hide]
1 Specifications
2 Room-sized fireproof vaults
3 Fire-resistant safes
4 Jewelry safes
5 UL certification for safes
o 5.1 Class 125
o 5.2 Class 150
o 5.3 Class 350
o 5.4 Class TL-15
o 5.5 Class TL-30
o 5.6 Class TL-40
o 5.7 Class TRTL-30
o 5.8 Class TRTL-60
o 5.9 Class TXTL-60
6 In cartoons
7 See also
8 References
9 Further reading
[edit]Specifications
Specifications for safes include some or all of the following parameters:
Burglar-resistance
Fire-resistance
Environmental resistance (e.g., to water or dust)
Type of lock (e.g., combination, key, time lock, electronic locking)
Location (e.g., wall safe, floor safe)
Smart safes as part of an automated cash handling system
It is often possible to open a safe without access to the key or knowledge of the combination; this activity
is known as safe-cracking and is a popular theme in heist films.
A diversion safe, or hidden safe, is a safe that is made from an otherwise ordinary object such as a book,
a candle, a can, or even a wall outlet plug. Valuables are placed in these hidden safes, which are
themselves placed inconspicuously (for example, a book would be placed on a book shelf).
Fire resistant record protection equipment consists of self-contained devices that incorporate insulated
bodies, doors, drawers or lids, or non-rated multi-drawer devices housing individually rated containers
that contain one or more inner compartments for storage of records. These devices are intended to
provide protection to one or more types of records as evidenced by the assigned Class rating or ratings;
Class 350 for paper, Class 150 for microfilm, microfiche other and photographic film and Class 125 for
magnetic media and hard drives.
Strongbox multiple locking mechanism
These types of enclosures can be rated for periods of ½, 1, 2 and 4 hour durations.
In addition, these enclosures may be rated for their impact resistance, should the safe fall a number of
feet to a lower level or have debris fall upon it during a fire.
Burglary resistant safes are rated as to their resistance to the type of tools to be used in their attack and
also the duration of the attack.
The attack durations are for periods of 15 min., 30 min. and 60 min.
Safes can also contain hardware that automatically dispenses cash or validates bills as part of
an automated cash handling system.
[edit]Room-sized fireproof vaults
For larger volumes of heat-sensitive materials, a modular room-sized vault is much more economical than
purchasing and storing many fire rated safes. Typically these room-sized vaults are utilized by
corporations, government agencies and off-site storage service firms. Fireproof vaults are rated up to
Class 125-4 Hour for large data storage applications. These vaults utilize ceramic fiber, a high
temperature industrial insulating material, as the core of their modular panel system. All components of
the vault, not just the walls and roof panels, must be Class 125 rated to achieve that overall rating for the
vault. This includes the door assembly (a double door is needed since there is no single Class 125 vault
door available), cable penetrations, coolant line penetrations (for split HVAC systems), and air duct
penetrations.
There are also Class 150 applications (such as microfilm) and Class 350 vaults for protecting valuable
paper documents. Like the data-rated (Class 125) structures, these vault systems employ ceramic fiber
insulation and components rated to meet or exceed the required level of protection.
In recent years room-sized Class 125 vaults have been installed to protect entire data centers. As data
storage technologies migrate from tape-based storage methods to hard drives, this trend is likely to
continue.
[edit]Fire-resistant safes
A fire-resistant safe is a type of safe that is designed to protect its contents from high temperatures or
actual fire. Fire resistant safes are usually rated by the amount of time they can withstand the extreme
temperatures a fire produces, while not exceeding a set internal temperature, e.g., less than 350 °F
(177 °C) over 30 minutes. Models are typically available between half-hour and four-hour durations.
An in-floor safe installed in a concrete floor is very resistant to fire. However, not all floor safes are
watertight and will often fill with water from fire hoses, therefore everything stored inside should be placed
in either double zip lock bags, dry bags, or sealed plastic containers.
In the USA, both the writing of standards for fire-resistance and the actual testing of safes is performed
by Underwriters Laboratories.
[edit]Jewelry safes
Jewelry safes are burglary and fire safes made specifically to house jewelry and valuables. These high
end safes are typically manufactured with interior jewelry chests of fine woods and fabric liners with a
range of organizational configurations.
[edit]UL certification for safes
Underwriters Laboratories (UL) testing certifications for safes are known to be the some of the most
rigorous and most respected in the world. They are only matched by B.T.U/V.D.M.A. certifications
(Germany). J.I.S. (Japan) and CSTB (France) preheat the oven with the safe inside until the temperature
reaches the desired setting (as opposed to a sustained temperature of the rating), then the safe is cooled
artificially (as opposed to naturally). Also, J.I.S. and CSTB only drop their safes from 13-15 feet (as
opposed to 30). Rarely are safes dropped 15 feet (4.6 m) or more and they are usually artificially cooled
by the fire department. UL also runs an indirect explosion test on all safes. Additionally UL-768 certifies
the combination lock against tampering. UL-140 certifies a relocking mechanism that will permanently
lock the safe bolts, in case an electronic lock fails or a UL-768 rated lock is compromised.
[edit]Class 125
The safe sustains an internal atmosphere of 125 °F (52 °C) and 80% humidity. This class was introduced
with the emergence of floppy disks. The safes are tested with only non-paper media, but are clearly
sufficient to hold paper. New, more durable computer media, such as data on compact disks crystallize at
350 °F (177 °C),[1] which make this type of safe overly-sufficient to store these media.
However, Underwriters Laboratories have not tested whether data on Blu-ray disks, DVDs or CDs are
altered during testing. They have just tested floppy disks, which are not a common storage medium these
days.
An added benefit of this safe is that it is waterproof due to a gasket on the door and the label will state
this. These class ratings are used in conjunction with hour ratings such as: ½, 1, 2, 3, or 4.
[edit]Class 150
The safe sustains an internal atmosphere less than 150 °F (66 °C) and 85% humidity. This class was
introduced with the emergence of computer data tapes or magnetic reel-to-reel tapes. UL tests this with
paper and non-paper articles. This safe is also sufficient in storing some optical media, such as compact
disks. Cases can be purchased that will meet Class 125, if they are placed inside a Class 150 safe. Some
may be waterproof due to a gasket on the door and the label will state this. These class ratings are used
in conjunction with hour ratings such as: ½, 1, 2, 3, or 4.
[edit]Class 350
The safe sustains an internal atmosphere of less than 350 °F (177 °C) and 85% humidity. This is the most
basic of U.L. tests and specifically tests for the storage of paper. The ignition point of paper is 450 °F
(232 °C), so this safe is sufficient for storage of paper. Cases can be purchased that will meet Class 125,
if they are placed inside a Class 350 safe. These class ratings are used in conjunction with hour ratings
such as: ½, 1, 2, 3, or 4.
[edit]Class TL-15
This is a combination locked safe that offers limited protection against combinations of common
mechanical and electrical tools. The safe will resist abuse for 15 minutes from tools such as hand tools,
picking tools, mechanical or electric tools, grinding points, carbide drills and devices that apply pressure.
[edit]Class TL-30
This is a combination locked safe that offers moderate protection against combinations of mechanical and
electrical tools. The safe will resist abuse for 30 minutes from tools such as hand tools, picking tools,
mechanical or electrical tools, grinding points, carbide drills, devices that apply pressure, cutting wheels
and power saws.
[edit]Class TL-40
This is a combination locked safe that offers moderate protection against combinations of mechanical and
electrical tools. The safe will resist abuse for 40 minutes from tools such as hand tools, picking tools,
mechanical or electrical tools, grinding points, carbide drills, devices that apply pressure, cutting wheels
and power saws.
[edit]Class TRTL-30
This is a combination locked safe that offers high protection against combinations of mechanical,
electrical, and cutting tools. The safe will resist abuse for 30 minutes from tools such as hand tools,
picking tools, mechanical or electrical tools, grinding points, carbide drills, devices that apply pressure,
cutting wheels, power saws, impact tools and, in addition, can withstand an oxy-fuel welding and
cutting torch (tested gas limited to 1,000 cubic feet (28 m3) combined total oxygen and fuel gas.)
[edit]Class TRTL-60
This class will withstand the same assaults as Class TRTL-30 for 60 minutes.
[edit]Class TXTL-60
This class meets all the requirements for Class TRTL-60 and, in addition, can withstand high explosives
such as nitroglycerin or equivalent to not more than 4 ounces (110 g) of nitroglycerin in one charge (entire
test must not use more explosive than that equivalent to 8 ounces (230 g) of nitroglycerin).
[edit]In cartoons
Safes have become commonplace in cartoons, especially Looney Tunes, as an item to fall upon a
character. It acts as an alternative to an anvil or piano.
[edit]See also
Look up safe in Wiktionary,
the free dictionary.
Access control
Concealment device , an inconspicuous object used to hide things
Gun safe
Lock , a mechanical fastening device
Manual override , opening a safe without cracking it
Physical security
Safe-cracking , opening a safe without the combination
Safe deposit box , a lightweight safe
Security
Strongroom , a bank vault
Time-delay combination locks
Withdrawal can refer to any sort of separation, but is most commonly used to describe the group of
symptoms that occurs upon the abrupt discontinuation/separation or a decrease in dosage of the intake of
medications, recreational drugs, and/or alcohol. In order to experience the symptoms of withdrawal, one
must have first developed a physical dependence (often referred to as chemical dependency). This
happens after consuming one or more of these substances for a certain period of time, which is both dose
dependent and varies based upon the drug consumed. For example, prolonged use of an anti-depressant
is most likely to cause a much different reaction when discontinued than the repeated use of an opioid,
such as heroin. In fact, the route of administration, whether intravenous, intramuscular, oral or otherwise,
can also play a role in determining the severity of withdrawal symptoms. There are different stages of
withdrawal as well. Generally, a person will start to feel worse and worse, hit a plateau, and then the
symptoms begin to dissipate. However, withdrawal from certain drugs (benzodiazapines, alcohol) can be
fatal and therefore the abrupt discontinuation of any type of drug is not recommended. The term "cold
turkey" is used to describe the sudden cessation use of a substance and the ensuing physiologic
manifestations.
Contents
[hide]
1 Substances
2 Overview
3 Withdrawal from drugs of abuse
4 Withdrawal from prescription
medicine
5 Rebound
6 Pseudoabstinence
7 See also
8 References
9 External links
[edit]Substances
Examples (and ICD-10 code) of withdrawal syndrome include:
F10.1 alcohol withdrawal syndrome (which can lead to delirium tremens)
F11.1 opioids, including methadone withdrawal
F12.1 cannabis withdrawal
F13.1 benzodiazepine withdrawal syndrome
F14.1 cocaine withdrawal
F15.1 caffeine withdrawal
F17.1 nicotine withdrawal
F16.1 is the ICD-10 code for withdrawal from hallucinogens (such as LSD), but this is not currently a
recognized disorder.[1]
The term "withdrawal" can sometimes be used to describe the results of discontinuing prescription
medicine, as in SSRI discontinuation syndrome, though the term rebound effect is also used to
characterize these conditions.
[edit]Overview
The sustained use of many kinds of drugs causes adaptations within the body that tend to lessen the
drug's original effects over time, a phenomenon known as drug tolerance. At this point, one is said to also
have a physical dependency on the given chemical. This is the stage that withdrawal may be experienced
upon discontinuation. Some of these symptoms are generally the opposite of the drug's direct effect on
the body. Depending on the length of time a drug takes to leave the bloodstream elimination half-life,
withdrawal symptoms can appear within a few hours to several days after discontinuation and may also
occur in the form of cravings. A craving is the strong desire to obtain, and use a drug or other substance
similar to other cravings one might experience for food and hunger.
Although withdrawal symptoms are often associated with the use of recreational drugs, many drugs have
a profound effect on the user when stopped. When withdrawal from any medication occurs it can be
harmful or even fatal; hence prescription warning labels explicitly saying not to discontinue the drug
without doctor approval.
The symptoms from withdrawal may be even more dramatic when the drug has masked prolonged
malnutrition, disease, chronic pain, or sleep deprivation, conditions that drug abusers often suffer as a
secondary consequence of the drug. Many drugs (including alcohol) suppress appetite while
simultaneously consuming any money that might have been spent on food. When the drug is removed,
the discomforts return in force and are sometimes confused with addiction withdrawal symptoms, which
they quite properly are not.
[edit]Withdrawal from drugs of abuse
This article's section called "Withdrawal from drugs of abuse" needs additional citations for verification.Please help improve this article by adding reliable references. Unsourced material may be challenged and removed. (October 2009)
Central to the role of nearly all drugs that are commonly abused is the reward circuitry or the "pleasure
center" of the brain. The science behind the production of a sense of euphoria is very complex and still
questioned within the scientific community. While neurologists have discovered that addiction
encompasses several areas of the brain, the amygdala, Prefrontal Cortex, and the nucleus
accumbens are specifically responsible for the pleasurable feelings one may experience when using a
mind or mood-altering substance. Within the nucleus accumbens is the neurotransmitter dopamine, so
while specific mechanisms vary, nearly every drug either stimulates dopamine release or enhances its
activity, directly or indirectly. Sustained use of the drug results in less and less stimulation of the nucleus
accumbens until eventually it produces no euphoria at all. Discontinuation of the drug then produces a
withdrawal syndrome characterized by dysphoria — the opposite of euphoria — as nucleus accumbens
activity declines below normal levels.
Withdrawal symptoms can vary significantly among individuals, but there are some commonalities.
Subnormal activity in the nucleus accumbens is often characterized by depression,anxiety and craving,
and if extreme can drive the individual to continue the drug despite significant harm — the definition
of addiction — or even to suicide. In general, the longer the half-life of the drug, the longer the acute
abstinence syndrome is likely to last. However, with drugs with a longer half life, the acute abstinence
syndrome will be much milder than that of those with shorter half lives.
However, addiction is to be carefully distinguished from physical dependence. Addiction is a
psychological compulsion to use a drug despite harm that often persists long after all physical withdrawal
symptoms have abated. On the other hand, the mere presence of even profound physical dependence
does not necessarily denote addiction, e.g., in a patient using large doses of opioids to control chronic
pain under medical supervision.
As the symptoms vary, some people are, for example, able to quit smoking "cold turkey" (i.e.,
immediately, without any tapering off) while others may never find success despite repeated efforts.
However, the length and the degree of an addiction can be indicative of the severity of withdrawal.
Withdrawal is a more serious medical issue for some substances than for others.
While nicotine withdrawal, for instance, is usually managed without medical intervention, attempting to
give up a benzodiazepine or alcohol dependency can result in seizures and worse if not carried out
properly. An instantaneous full stop to a long, constant alcohol use can lead todelirium tremens, which
may be fatal.
Additionally, benzodiazepines have clearly been shown to induce a withdrawal syndrome in some people
that is often severe and protracted in course. Doctors Ashton and Lader are two separate internationally
recognized contributors who researched and described this condition that is now referred to as protracted
benzodiazepine withdrawal syndrome (PBWS). Noteworthy, some patients become physically dependent
on a small duration and dose (therapeutically prescribed dosages) of benzodiazepines. Patients may
develop physical and psychological adaptations that may manifest while taking the medications and/or up
on cessation that may lead to a severe withdrawal and discontinuation syndrome (PBWS). There is no
known cure for PBWS, except time (in some cases 4, 5, or perhaps 6 years or more is needed for the
withdrawal symptoms to slowly fade from 'misery' to 'comfort'). Paxil (an antidepressant) and
benzodiazepines share this unique phenomenon known as 'discontinuation syndrome'.
Although a distinguishing characteristic of a benzodiazepine is that the withdrawal effects clearly may
protract in course for an inordinate amount of time, iatrogenic dependence (doctor induced) can be an
overlooked phenomenon with benzodiazepines. When patients begin to complain and/or shown signs of
tolerance, dependence, interdose withdrawal, withdrawal, or protracted withdrawal to tranquilizers such
as benzodiazepines, the patient may be misdiagnosed with yet another physical or psychological
classification or diagnoses. This is because a great majority of health care providers have minimal training
in addictionology/chemical dependency, especially with recognizing the signs and symptoms related to
benzodiazepine dependency en route to tranquilizer withdrawal. Doctors may become perplexed or
frustrated with such patients and assign the patient with a diagnoses such as anxiety, psychosis,
somatization disorder, or other diagnoses pertaining to the wide range of symptoms that tranquilizer
dependent patients may complain about while on the medications or up on cessation of these
medications. It would be prudent to redirect such patients and/or doctors to refer to what has become
known as the "Ashton Manual" available on-line to help patients or victims of tranquilizer dependency
regain their physical and/or psychological well-being.
Unfortunately, a sizeable minority of tranquilizer victims endure the withdrawal syndrome with minimal
help from the medical community, while finding support from various organizations or internet support
groups with individuals who have made their lives and stories available to help support others who are
trying to recover. For those susceptible individuals who manifest with PBWS, recovering from
benzodiazepine dependency is serious business requiring an understanding of the 'slow and waxing-
waning nature of the withdrawal' as well as extreme patience.
An interesting side-note is that while physical dependence (and withdrawal on discontinuation) is virtually
inevitable with the sustained use of certain classes of drugs, notably the opioids, psychological addiction
is much less common. Most chronic pain patients, as mentioned earlier, are one example. There are also
documented cases of soldiers who used heroinrecreationally in Vietnam during the war, but who gave it
up when they returned home (see Rat Park for experiments on rats showing the same results). It is
thought that the severity or otherwise of withdrawal is related to the person's preconceptions about
withdrawal. In other words, people can prepare to withdraw by developing a rational set of beliefs about
what they are likely to experience. Self-help materials are available for this purpose.
[edit]Withdrawal from prescription medicine
As mentioned earlier, many drugs should not be stopped abruptly[2] without the advice and supervision of
a physician, especially if the medication induces dependence or if the condition they are being used to
treat is potentially dangerous and likely to return once medication is stopped, such
as diabetes, asthma, heart conditions and many psychological or neurological conditions,
like epilepsy, hypertension, schizophrenia and psychosis. To be safe, consult a doctor before
discontinuing any prescription medication.
Sudden cessation of the use of an antidepressant can deepen the feel of depression significantly (see
"Rebound" below), and some specific antidepressants can cause a unique set of other symptoms as well
when stopped abruptly.
Discontinuation of selective serotonin reuptake inhibitors (SSRIs), the most commonly prescribed class of
antidepressants, (and the related class serotonin-norepinephrine reuptake inhibitors or SNRIs) is
associated with a particular syndrome of physical and psychological symptoms known as SSRI
discontinuation syndrome. Effexor (venlafaxine) and Paxil (paroxetine), both of which have relatively
short half-lives in the body, are the most likely of the antidepressants to cause withdrawals. Prozac
(fluoxetine), on the other hand, is the least likely of SSRI and SNRI antidepressants to cause any
withdrawal symptoms, due to its exceptionally long half-life.
[edit]Rebound
Many substances can cause rebound effects (significant return of the original symptom in absence of the
original cause) when discontinued, regardless of their tendency to cause other withdrawal
symptoms. Rebound depression is common among users of any antidepressant who stop the drug
abruptly, whose states are sometimes worse than the original before taking medication. This is somewhat
similar (though generally less intense and more drawn out) to the 'crash' that users
of ecstasy, amphetamines, and other stimulants experience. Occasionally light users of opiates that
would otherwise not experience much in the way of withdrawals will notice some rebound depression as
well. Extended use of drugs that increase the amount of serotonin or other neurotransmitters in the brain
can cause some receptors to 'turn off' temporarily or become desensitized, so, when the amount of the
neurotransmitter available in the synapse returns to an otherwise normal state, there are fewer receptors
to attach to, causing feelings of depression until the brain re-adjusts.
Other drugs that commonly cause rebound are:
Nasal decongestants, such as Afrin (oxymetazoline) and Otrivin (xylometazoline), which can
cause rebound congestion if used for more than a few days
Many analgesics including Advil, Motrin (ibuprofen), Aspirin (acetylsalicylic acid), Tylenol
(acetaminophen or paracetamol), and some prescription but non-narcotic painkillers, which can cause
rebound headaches when taken for extended periods of time.
Sedatives and benzodiazepines, which can cause rebound insomnia when used regularly as
sleep aids.
With these drugs, the only way to relieve the rebound symptoms is to stop the medication causing them
and weather the symptoms for a few days; if the original cause for the symptoms is no longer present, the
rebound effects will go away on their own.
[edit]Pseudoabstinence
Pseudoabstinence is a term used by some authors to describe signs of withdrawal although the dose
remains constant. Such signs may arise in use of benzodiazepines [3] andamphetamines.
ChequeFrom Wikipedia, the free encyclopedia
(Redirected from Checkbook)
This article may require copy editing for grammar, style, cohesion, tone, or spelling. You can assist by editing it.
Notice (a) the bank clerk's red mark verifying the signature, (b) the two-pence stamp duty, (c) that this is a "crossed cheque" disallowing
transfer of payment to another account, (d) holes punched by hand through the cheque by the bank, and (e) that there are no
magnetic-ink characters for computer sorting—banks did not have computers in 1956 and had staff sort millions of cheques daily by
hand.
Contents
[hide]
1 Spelling
2 History
o 2.1 Early years
o 2.2 Modern era
3 Parts of a cheque
4 Usage
5 Declining Use
o 5.1 Alternatives to cheques
o 5.2 Europe
o 5.3 North America
o 5.4 Asia
o 5.5 Oceania
6 Variations on regular cheques
o 6.1 Cashier’s cheques and Bank drafts
o 6.2 Certified cheque
o 6.3 Payroll cheque
o 6.4 Warrants
o 6.5 Travellers cheque
o 6.6 Money or Postal order
o 6.7 Oversized cheques
o 6.8 Payment vouchers
7 Cheques around the world
o 7.1 Australia
o 7.2 Canada
o 7.3 India
o 7.4 New Zealand
o 7.5 United Kingdom
o 7.6 United States
8 Cheque fraud
o 8.1 Embezzlement
o 8.2 Forgery
o 8.3 Identity theft
9 Dishonoured cheques
10 Lock box
11 See also
12 Notes
o 12.1 Footnotes
o 12.2 Citations
13 External links
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Time dollars
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Medieval currencies
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Africa, The Americas,
Europe, Asia, Oceania
Production
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v · d · e
The spellings check, checque, and cheque were used interchangeably from the 17th century until the 20th
century.[2] However, since the 19th century, the spelling cheque (from the French word chèque) has become
standard for the financial instrument in the Commonwealth and Ireland, while check is used only for the verb "to
verify", thus distinguishing the two definitions in writing.[nb 3]
In American English, the usual spelling for both is check.[4]
[edit]History
See also: History of banking
Parts of a cheque based on a UK example
1. drawee, the financial institution where the cheque can be presented for payment
2. payee
3. date of issue
4. amount of currency
5. drawer, the person or entity making the cheque
6. signature of drawer
7. Machine readable routing and account information
The four main items on a cheque are
Drawer, the person or entity who makes the cheque
Payee, the recipient of the money
Drawee, the bank or other financial institution where the cheque can be presented for payment
Amount, the currency amount
As cheque usage increased during the 19th and 20th centuries additional items were added to increase
security or to make processing easier for the bank or financial institution. A signature of the drawer was
required to authorise the cheque and this is the main way to authenticate the cheque. Second it became
customary to write the amount in words as well as in numbers to avoid mistakes and make it harder to
fraudulently alter the amount after the cheque had been written. It is not a legal requirement to write down the
amount in words, although some banks will refuse to accept cheques that do not have the amount in both
numbers and words.
An issue date was added, and cheques may not be valid a certain amount of time after issue. In the US a
cheque is typically valid for six months after the date of issue, after which it is a stale-dated cheque, but this
depends on where the cheque is drawn;[12] in Australia this is typically fifteen months.[13] A cheque that has an
issue date in the future, a post-dated cheque, may not be able to be presented until that date has passed,
writing a post dated cheque may simply be ignored or is illegal in some countries. Conversely, an antedated
cheque has an issue date in the past.
A cheque number was added and cheque books were issued so that cheque numbers were sequential. This
allowed for some basic fraud detection by banks and made sure one cheque was not presented twice.
In some countries such as the US, cheques contain a memo line where the purpose of the cheque can be
indicated as a convenience without affecting the official parts of the cheque. In the United Kingdom this is not
available and such notes are sometimes written on the reverse side of the cheque.
In the US, at the top (when cheque oriented vertically) of the reverse side of the cheque, there are usually one
or more blank lines labelled something like "Endorse here".
Starting in the 1960s machine readable routing and account information was added to the bottom of cheques
in MICR format. This allowed automated sorting and routing of cheques between banks and led to automated
central clearing facilities. The information provided at the bottom of the cheque is country specific and is driven
by each country's cheque clearing system. This meant that the payee no longer had to go to the bank that
issued the cheque, instead they could deposit it at their own bank or any other banks and the cheque would be
routed back to the originating bank and funds transferred to their own bank account.
For additional protection, a cheque can be crossed so that funds must be paid into a bank account in the name
of the payee. The format and wording varies from country to country, but generally two parallel lines and/or the
words 'Account Payee' or similar may be placed either vertically across the cheque or in the top left hand
corner. In addition the words 'or bearer' must be not be used or crossed out on the payee line.
[edit]Usage
Parties to regular cheques generally include a drawer, the depositor writing a cheque; a drawee, the financial
institution where the cheque can be presented for payment; and a payee, the entity to whom the drawer issues
the cheque. The drawer drafts or draws a cheque, which is also called cutting a cheque, especially in the
United States. There may also be abeneficiary—for example, in depositing a cheque with a custodian of a
brokerage account, the payee will be the custodian, but the cheque may be marked "F/B/O" ("for the benefit
of") the beneficiary.
Ultimately, there is also at least one endorsee which would typically be the financial institution servicing the
payee's account, or in some circumstances may be a third party to whom the payee owes or wishes to give
money.
Cheques may be valid regardless of denomination and are used within numerous scenarios in place of cash.
A payee that accepts a cheque will typically deposit it in an account at the payee's bank, and have the bank
process the cheque. In some cases, the payee will take the cheque to a branch of the drawee bank, and cash
the cheque there. If a cheque is refused at the drawee bank (or the drawee bank returns the cheque to the
bank that it was deposited at) because there are insufficient funds for the cheque to clear, it is said that the
cheque has bounced. Once a cheque is approved and all appropriate accounts involved have been credited,
the cheque is stamped with some kind of cancellation mark, such as a "paid" stamp. The cheque is now
a cancelled cheque. Cancelled cheques are placed in the account holder's file. The account holder can request
a copy of a cancelled cheque as proof of a payment. This is known as the cheque clearing cycle.
Cheques can be lost or go astray within the cycle, or be delayed if further verification is needed in the case of
suspected fraud. A cheque may thus bounce some time after it has been deposited.
Following concerns about the amount of time it took banks to clear cheques, the United Kingdom Office of Fair
Trading set up a working group in 2006 to look at the cheque clearing cycle. Their report[14] acknowledged that
clearing times could be improved, but that the costs associated with speeding up the cheque clearing cycle
could not be justified considering the use of cheques was declining. However, they concluded the biggest
problem was the unlimited time a bank could take to dishonor a cheque. To address this, changes were
implemented so that the maximum time after a cheque was deposited that it could be dishonoured was six
days, what was known as the "certainty of fate" principle; see Cheque and Credit Clearing Company and "2-4-
6".
An advantage to the drawer of using cheques instead of debit card transactions, is that they know the drawer's
bank will not release the money until several days later. Paying with a cheque and making a deposit before it
clears the drawer's bank is called "kiting" or "floating" and is generally illegal in the United States, but rarely
enforced unless the drawer uses multiple chequing accounts with multiple institutions to increase the delay or
to steal the funds.
[edit]Declining Use
Cheques have been in decline for many years, both for point of sale transactions (for which credit
cards and debit cards are increasingly preferred) and for third party payments (e.g. bill payments), where the
decline has been accelerated by the emergence of telephone banking and online banking. Being paper-based,
cheques are costly for banks to process in comparison to electronic payments, so banks in many countries now
discourage the use of cheques, either by charging for cheques or by making the alternatives more attractive to
customers. Cheques are also more costly for the issuer and receiver of a cheque. In particular the handling of
money transfer requires more effort and is time consuming. The cheque has to be handed over on a personal
meeting or has to be sent by mail. The rise of automated teller machines (ATMs) has led to an era of easy
access to cash, which make the necessity of writing a cheque to someone because the banks were closed a
thing of the past.[clarification needed]
[edit]Alternatives to cheques
In addition to Cash there are number of other payment systems that have emerged to compete against
cheques;
1. Debit Card payments
2. Credit Card payments
3. Direct debit (initiated by payee)
4. Direct credit (initiated by payer), ACH in US, Giro in Europe
5. Wire transfer (local and international)
6. Electronic bill payments using Internet banking
7. Online payment services (for example PayPal and WorldPay)
[edit]Europe
In most European countries, cheques are now very rarely used, even for third party payments. In these
countries, it is a standard practice for businesses to publish their bank details on invoices, in order to facilitate
the receipt of payments by giro. Even before the introduction of online banking, it has been possible in some
countries to make payments to third parties using ATMs, which may accurately and rapidly capture invoice
amounts, due dates, and payee bank details via a bar code reader to reduce keying. In some countries,
entering the bank account number results in the bank revealing the name of the payee as an added safeguard
against fraud. One of the essential procedural differences is that with a cheque, the onus is on the payee to
initiate the payment in the banking system, whereas with a giro transfer, the onus is on the payer to effect the
payment. The process is also procedurally more simple, as no cheques are ever posted, can claim to have
been posted, or need banking or clearance.
In Germany, Austria, the Netherlands, Belgium, and Scandinavia, cheques have almost completely vanished in
favour of direct bank transfers and electronic payments. Direct bank transfers, using so-called giro transfers,
have been standard procedure since the 1950s to send and receive regular payments like rent and wages and
even mail-order invoices. In the Netherlands, Austria, and Germany, all kinds of invoices are commonly
accompanied by so-called acceptgiro's (Netherlands) or Überweisungen (German), which are essentially
standardised bank transfer order forms preprinted with the payee's account details and the amount payable.
The payer fills in his account details and hands the form to a clerk at his bank, which will then transfer the
money. It is also very common to allow the payee to automatically withdraw the requested amount from the
payer's account (Lastschrifteinzug (German) or Incasso (machtiging) (Netherlands)). Though similar to paying
by cheque, the payee only needs the payer's bank and account number. Since the early 1990s, this method of
payment has also been available to merchants. Due to this, credit cards are rather uncommon in Germany and
Austria, and are mostly used for the credit function rather than for cashless payment. However, debit cards are
widespread in these countries, since virtually all Austrian and German banks issue debit cards instead of
simple ATM cards for use on current accounts. Acceptance of cheques has been further diminished since the
late 1990s, because of the abolition of the Eurocheque. Cashing a foreign bank cheque is possible, but usually
very expensive.
In Finland, banks stopped issuing personal cheques in about 1993 in favour of giro systems, which are now
almost exclusively electronically initiated either via internet banking or payment machines located at banks and
shopping malls. All Nordic countries have used an interconnected international giro system since the 1950s,
and in Sweden, cheques are now totally abandoned. Electronic payments across the European Union are now
fast and inexpensive—usually free for consumers.
In Poland cheques were withdrawn from use in 2006, mainly because of lack of popularity due to widespread
adaptation of credit and debit cards.
In the United Kingdom, Ireland, and France, there is still use on cheques by some sectors of the population,
partly because cheques remain free of charge to personal customers; however, bank-to-bank transfers are
increasing in popularity. Since 2001, businesses in the United Kingdom have made more electronic payments
than cheque payments.[15] In a bid to discourage cheques, most utilities in the United Kingdom charge higher
prices to customers who choose to pay by a means other than direct debit, even if the customer pays by
another electronic method. The vast majority of retailers in the United Kingdom and many in France no longer
accept cheques as a means of payment. An example of this is when Shellannounced in September 2005 that it
would no longer accept cheques in its UK petrol stations.[16] More recently, this has been followed by other
major fuel retailers, such as Texaco,BP, and Total. Asda announced in April 2006 that it would stop accepting
cheques, initially as a trial in the London area,[17] and Boots announced in September 2006 that it would stop
accepting cheques, initially as a trial in Sussex and Surrey.[18] Currys (and other stores in the DSGi group)
and WH Smith also no longer accept cheques. Cheques are now widely predicted to become a thing of the
past, or at most, a niche product used to pay private individuals or those businesses that are not used to
providing their bank details to customers to allow electronic payments to be made to them (e.g. music teachers,
driving instructors, children's sports lessons, very small shops, schools etc.).[19] In fact, the UK Payments
Councilannounced in December 2009 that cheques would be phased out by October 2018, but only if adequate
alternatives are developed. They will perform annual checks on the progress of other payments systems and a
final review of the decision will be held in 2016.[20] Concerns have been expressed, however, by charities and
older people, who are still heavy users of cheques, and replacement plans have been criticised as open to
fraud.[21]
[edit]North America
This article is outdated. Please update this article to reflect recent events or newly available information. Please see the talk page for more information. (August 2010)
The United States still relies heavily on cheques, caused by the absence of a high volume system for low value
electronic payments.[22] About 70 billion cheques were written annually in the U.S. by 2001, though almost 25%
of Americans do not have bank accounts at all.[22] When sending a payment by online banking in the U.S. at
some banks, the sending bank mails a cheque to the payee's bank or to the payee rather than sending the
funds electronically[citation needed]. Certain companies with whom a person pays with a cheque will turn it into
anAutomated Clearing House (ACH) or electronic transaction. Banks try to save time processing cheques by
sending them electronically between banks. Many utilities and most credit cards will also allow customers to
pay by providing bank information and having the payee draw payment from the customer's account (direct
debit). Many people in the U.S. still use paper money orders to pay bills or transfer money, since they act like
cheques in payment processing systems, have security advantages over mailing cash, and do not require
access to a bank account in order to obtain.[22]
Canada's usage of cheques is slightly less than that of the U.S. The Interac system, which allows instant fund
transfers via magnetic strip and PIN, is widely used by merchants to the point that very few brick and mortar
merchants accept cheques anymore. Many merchants accept Interac debit payments but not credit card
payments, even though most Interac terminals can support credit card payments. Financial institutions also
facilitate transfers between accounts within different institutions with the Email Money Transfer (EMT) service.
Cheques are still widely used for government cheques, payroll, rent, and utility bill payments, though direct
deposits and online/telephone bill payments are also widely offered.
[edit]Asia
In many Asian countries cheques were not widely used and generally only used by the wealthy,
with cash being used for the majority of payments. Where cheques were used they have been declining rapidly,
by 2009 there was negligible consumer cheque usage in Japan, South Korea and Taiwan. This declining trend
was accelerated by these developed markets advanced financial services infrastructure. However many of the
developing markets have also seen an increasing use of electronic payment systems, 'leap-frogging' the less
efficient chequing system altogether.[23]
[edit]Oceania
In Australia, following global trends, the use of cheques continues to decline. In 1994 the value of daily cheque
transactions was AU$25 billion, by 2004 this had dropped to only AU$5 billion.
Similar to other countries New Zealand payment statistics indicate a strong move away from cheques in favour
of electronic payment methods. From being the most popular form of non-cash payment until the mid-1990s,
cheques now lag far behind EFTPOS payment transactions and electronic credits. Their usage is declining at
about 6% per year. In 1993 cheque payments accounted for over 50% of transactions through the banking
system with an averaged 130 cheques per capita. By the end of 2006, this had dropped to 9% with 41 cheques
per capita.
[edit]Variations on regular cheques
In addition to regular cheques, a number of variations were developed to address specific needs or to address
issues when using a regular cheque.
[edit]Cashier’s cheques and Bank drafts
Main article: Cashier's check
Cashier's cheques and banker's drafts also known as a bank cheque or treasurer's cheque, are cheques
issued against the funds of a financial institution rather than an individual account holder. Typically, the term
cashier's cheques are used in the US and banker's drafts are used in the UK. The mechanism differs slightly
from country to country but in general the bank issuing the cashiers cheque or bankers draft will allocate the
funds at the point the cheque is drawn. This provides a guarantee, save for a failure of the bank, that it will be
honoured. Cashier's cheques are perceived to be as good as cash but they are still a cheque, a misconception
often exploited by scam artists. A lost or stolen cheque can still be stopped like any other cheque so payment is
not completely guaranteed.
[edit]Certified cheque
Main article: Certified cheque
When a certified cheque is drawn, the bank operating the account verifies there are currently sufficient funds in
the drawer's account to honour the cheque. Those funds are then set aside in the bank's internal account until
the cheque is cashed or returned by the payee. Thus, a certified cheque cannot "bounce", and, in this manner,
its liquidity is similar to cash, absent failure of the bank. The bank indicates this fact by making a notation on
the face of the cheque (technically called an acceptance).
[edit]Payroll cheque
Main article: Payroll#Paycheck
A cheque used to pay wages may be referred to as a payroll cheque. Even when the use of cheques for paying
wages and salaries became rare, the vocabulary "pay cheque" still remained commonly used to describe the
payment of wages and salaries. Payroll cheques issued by the military to soldiers, or by some other
government entities to their employees, beneficiants, and creditors, are referred to as warrants.
[edit]Warrants
Main article: Warrant (of payment)
Warrants look like cheques and clear through the banking system like cheques, but are not drawn against
cleared funds in a deposit account. A cheque differs from a warrant in that the warrant is not necessarily
payable on demand and may not be negotiable.[24] They are often issued by government entities such as the
military to pay wages or supplies. In this case they are an instruction to the entity's treasurer department to pay
the warrant holder on demand or after a specified maturity date.
[edit]Travellers cheque
Main article: Traveller's cheque
A traveller's cheque is designed to allow the person signing it to make an unconditional payment to someone
else as a result of paying the account holder for that privilege. Traveller's cheques can usually be replaced if
lost or stolen and people often used to use them on vacation instead of cash as many businesses used to
accept traveller's cheques as currency. The use of credit or debit cards has, however, begun to replace the
traveller's cheque as the standard for vacation money due to their convenience and additional security for the
retailer. This has resulted in many businesses no longer accepting traveller's cheques.
[edit]Money or Postal order
Main articles: Money order and Postal order
A cheque sold by a post office or merchant such as a grocery for payment by a third party for a customer is
referred to as a money order or postal order. These are paid for in advance when the order is drawn and are
guaranteed by the institution that issues them and can only be paid to the named third party. This was a
common way to send low value payments to third parties avoiding the risks associated with sending cash via
the mail, prior to the advent of electronic payment methods.
[edit]Oversized cheques
Presentation of the Ansari X Prize $10 million award
Oversized cheques are often used in public events such as donating money to charity or giving out prizes such
as Publishers Clearing House. The cheques are commonly 18 by 36 inches (46 × 91 cm) in size,[25] however,
according to the Guinness Book of World Records, the largest ever is 12 by 25 metres (39 × 82 ft).
[26] Regardless of the size, such cheques can still be redeemed for their cash value as long as they have the
same parts as a normal cheque, although usually the oversized cheque is kept as a souvenir and a normal
cheque is provided.[27] A bank may levy additional charges for clearing an oversized cheque.
[edit]Payment vouchers
Some public assistance programs such as the Special Supplemental Nutrition Program for Women, Infants and
Children, or Aid to Families with Dependent Children make vouchers available to their beneficiaries, which are
good up to a certain monetary amount for purchase ofgrocery items deemed eligible under the particular
programme. The voucher can be deposited like any other cheque by a participatingsupermarket or other
approved business.
[edit]Cheques around the world
[edit]Australia
The Cheques Act 1986 is the body of law governing the issuance of cheques and payment orders in Australia.
Procedural and practical issues governing the clearance of cheques and payment orders are handled
by Australian Payments Clearing Association (APCA).
In 1999, banks adopted a system to allow faster clearance of cheques by electronically transmitting information
about cheques, this brought clearance times down from five to three days. Prior to that cheques had to be
physically transported to the paying bank before processing began. If it was dishonoured, it was physically
returned.
All licensed banks in Australia may issue cheques in their own name. Non-banks are not permitted to issue
cheques in their own name but may issue, and have drawn on them, payment orders (which functionally are no
different from cheques).
[edit]Canada
In Canada, cheque sizes and types—as well as endorsements requirements and MICR tolerances are
overseen by the Canadian Payments Association (CPA)
It is possible to write cheques in currencies (using the standardised ISO currency names) that are not
in Canadian Dollars.
Canadian cheques can legally be written in English or French or Eskimo-Aleut languages.
Personal cheques in Canada are sold directly from financial institutions through commercial suppliers.
Business cheques in Canada are also sold directly through financial institutions at the branch or online
through commercial suppliers.
A tele-cheque is a paper payment item that resembles a cheque except that it is neither created nor
signed by the payer—instead it is created (and may be signed) by a third party on behalf of the payer.
Under CPA Rules these are prohibited in the clearing system effective 27 January 2004.
[edit]India
Cheques were introduced in India by the Bank of Hindoostan, the first joint stock bank established in 1770.[6]
In 1881, the Negotiable Instruments Act (NI Act) was enacted in India, formalising the usage and
characteristics of instruments like the cheque, the bill of exchange and promissory note. The NI Act provided a
legal framework for non-cash paper payment instruments in India.[6]
In 1938, the Calcutta Clearing Banks' Association, which was the largest bankers' association at that time,
adopted clearing house.[6]
[edit]New Zealand
Instrument-specific legislation includes the Cheques Act 1960, part of the Bills of Exchange Act 1908, which
codifies aspects related to the cheque payment instrument, notably the procedures for the endorsement,
presentment and payment of cheques. A 1995 amendment provided for the electronic presentment of cheques
and removed the previous requirement to deliver cheques physically to the paying bank, opening the way
for cheque truncation and imaging. Truncation allows for the transmission of an electronic image of all or part of
the cheque to the paying bank’s branch, instead of the cumbersome physical presentment. This reduced the
total cheque clearance time, as well as eliminating the costs of physically moving the cheque.
The registered banks under supervision of Reserve Bank of New Zealand provide the cheque payment
services. Once banked, cheques are processed electronically together with other retail payment instrument.
[edit]United Kingdom
In the UK all cheques must now conform to "Cheque and Credit Clearing Company (C&CCC) Standard 3", the
industry standard detailing layout and font, be printed on a specific weight of paper (CBS1), and contain
explicitly defined security features.
Since 1995, all cheque printers must be members of the Cheque Printer Accreditation Scheme (CPAS). The
scheme is managed by the Cheque and Credit Clearing Company and requires that all cheques for use in the
British clearing process are produced by accredited printers who have adopted stringent security standards.
The rules concerning crossed cheques are set out in Section 1 of the Cheques Act 1992 and prevent cheques
being cashed by or paid into the accounts of third parties. On a crossed cheque the words “account payee
only” (or similar) are printed between two parallel vertical lines in the centre of the cheque. This makes the
cheque non-transferable and is to avoid cheques being endorsed and paid into an account other than that of
the named payee. Crossing cheques basically ensures that the money is paid into an account of the intended
beneficiary of the cheque.
Following concerns about the amount of time it took banks to clear cheques, the United Kingdom Office of Fair
Trading set up a working group in 2006 to look at the cheque clearing cycle. They produced a
report[14] recommending maximum times for the cheque clearing which were introduced in UK from November
2007.[28] In the report the date the credit appeared on the recipient's account (usually the day of deposit) was
designated "T". At "T + 2" (two business days afterwards) the value would count for calculation of credit interest
or overdraft interest on the recipient's account. At "T + 4" clients would be able to withdraw funds (though this
will often happen earlier, at the bank's discretion). "T + 6" is the last day that a cheque can bounce without the
recipient's permission—this is known as "certainty of fate". Before the introduction of this standard, the only
way to know the "fate" of a cheque has been "Special Presentation", which would normally involve a fee, where
the drawee bank contacts the payee bank to see if the payee has that money at that time. "Special
Presentation" needed to be stated at the time of depositing in the cheque.
Cheque volumes peaked in 1990 when four billion cheque payments were made. Of these, 2.5 billion were
cleared through the inter-bank clearing managed by the C&CCC, the remaining 1.5 billion being in-house
cheques which were either paid into the branch on which they were drawn or processed intra-bank without
going through the clearings. As volumes started to fall, the challenges faced by the clearing banks were then of
a different nature: how to benefit from technology improvements in a declining business environment.
Although the UK did not adopt the euro as its national currency when other European countries did in 1999,
many banks began offering euro denominated accounts with chequebooks, principally to business customers.
The cheques can be used to pay for certain goods and services in the UK. The same year, the C&CCC set up
the euro cheque clearing system to process euro denominated cheques separately from sterling cheques in
Great Britain.
Cheques will be withdrawn from use in the UK on 31 October 2018.[29]
[edit]United States
In the United States, cheques (spelled "checks") are governed by Article 3 of the Uniform Commercial Code,
under the rubric of negotiable instruments.[30]
An order check—the most common form in the United States—is payable only to the named payee or
his or her endorsee, as it usually contains the language "Pay to the order of (name)."
A bearer check is payable to anyone who is in possession of the document: this would be the case if
the cheque does not state a payee, or is payable to "bearer" or to "cash" or "to the order of cash", or if the
cheque is payable to someone who is not a person or legal entity, e.g. if the payee line is marked "Happy
Birthday".
A counter check is a bank cheque given to customers who have run out of cheques or whose cheques
are not yet available. It is often left blank—hence sometimes called a "blank check", though this term has
other uses—and is used for purposes of withdrawal.
In the United States, the terminology for a cheque historically varied with the type of financial institution on
which it is drawn. In the case of a savings and loan association it was anegotiable order of
withdrawal (compare Negotiable Order of Withdrawal account); if a credit union it was a share draft. Checks as
such were associated with chartered commercial banks. However, common usage has increasingly conformed
to more recent versions of Article 3, where check means any or all of these negotiable instruments. Certain
types of cheques drawn on a government agency, especially payroll cheques, may also be referred to as
a payroll warrant.
At the bottom of each cheque there is the routing / account number in MICR format. The routing transit
number is a nine-digit number in which the first four digits identifies the U.S. Federal Reserve Bank's cheque-
processing center. This is followed by digits 5 through 8, identifying the specific bank served by that cheque-
processing center. Digit 9 is a verificationcheck digit, computed using a complex algorithm of the previous eight
digits.[31]
Typically the routing number is followed by a group eight or nine MICR digits that indicates the
particular account number at that bank. The account number is assigned independently by the various
banks.
Typically the account number is followed by a group of three or four MICR digits that indicates a
particular cheque number from that account.
fractional routing number (U.S. only)—also known as the transit number, consists of a denominator
mirroring the first four digits of the routing number. And a hyphenated numerator, also known as the ABA
number, in which the first part is a city code (1–49), if the account is in one of 49 specific cities, or a state
code (50–99) if it is not in one of those specific cities; the second part of the hyphenated numerator mirrors
the 5th through 8th digits of the routing number with leading zeros removed.[31]
A draft is a bill of exchange which is not payable on demand of the payee. (However, draft in the U.S. Uniform
Commercial Code today means any bill of exchange, whether payable on demand or at a later date; if payable
on demand it is a "demand draft", or if drawn on a financial institution, a cheque.)
Cheque truncation was introduced in 2004 with the passing of the "Check Clearing for the 21st Century Act"
(or Check 21 Act), this allowed the creation of electronic substitute checks to replace the physical cheques
saving costs and processing time.
[edit]Cheque fraud
Main article: Cheque fraud
Cheques have been a tempting target for criminals to steal money or goods from the drawer, payee or the
banks. A number of measures have been introduced to combat fraud over the years. These range from things
like writing a cheque so its hard for to be altered after it is drawn to mechanisms like crossing a cheque so that
it can only be paid into another banks account providing some traceability. However, the inherent security
weaknesses of cheques as a payment method, such as having only the signature as the
main authentication method and not knowing if funds will be received until the clearing cycle to complete, have
made them vulnerable to a number of different types of fraud;
[edit]Embezzlement
Taking advantage of the float period (cheque kiting) to delay the notice of non-existent funds. This often
involves trying to convince a merchant or other recipient, hoping the recipient will not suspect that the cheque
will not clear, giving time for the fraudster to disappear.
[edit]Forgery
Sometimes, forgery is the method of choice in defrauding a bank. One form of forgery involves the use of a
victim's legitimate cheques, that have either been stolen and then cashed, or altering a cheque that has been
legitimately written to the perpetrator, by adding words and/or digits in order to inflate the amount.
[edit]Identity theft
Since cheques include significant personal information (name, account number, signature and in some
countries driver's license number, the address and/or phone number of the account holder), they can be used
for fraud, specifically identity theft. In the USA and Canada until recent years the social security number was
sometimes included on cheques. The practice was discontinued as identity theft became widespread.
[edit]Dishonoured cheques
A dishonoured cheque cannot be redeemed for its value and is worthless; they are also known as
an RDI (returned deposit item), or NSF (non-sufficient funds) cheque. Cheques are usually dishonoured
because the drawer's account has been frozen or limited, or because there are insufficient funds in the
drawer's account when the cheque was redeemed. A cheque drawn on an account with insufficient funds is
said to have bounced and may be called a rubber cheque.[32] Banks will typically charge customers for issuing a
dishonoured cheque, and in some jurisdictions such an act is a criminal action. A drawer may also issue
a stop on a cheque, instructing the financial institution not to honour a particular cheque.
In England and Wales, they are typically returned marked "Refer to Drawer"—an instruction to contact the
person issuing the cheque for an explanation as to why the cheque was not honoured. This wording was
brought in after a bank was successfully sued for libel after returning a cheque with the phrase "Insufficient
Funds" after making an error—the court ruled that as there were sufficient funds the statement was
demonstrably false and damaging to the reputation of the person issuing the cheque. Despite the use of this
revised phrase, successful libel lawsuits brought against banks by individuals remained for similar errors.[33]
However, in Scotland, a cheque acts as an assignment of the amount of money to the payee. As such, if a
cheque is dishonoured in Scotland, what funds are present in the bank account are "attached" and frozen, until
either sufficient funds are credited to the account to pay the cheque, the drawer recovers the cheque and
hands it into the bank, or the drawer obtains a letter from the payee that he has no further interest in the
cheque.
A cheque may also be dishonored because it is stale or not cashed within a "void after date". Many cheques
have an explicit notice printed on the cheque that it is void after some period of days. In the United States,
banks are not required by the Uniform Commercial Code to honour a stale-dated cheque, which is a cheque
presented six months after it is dated.[12]
[edit]Lock box
Main article: Lock box
Typically when customers pay bills with cheques (like gas or water bills), the mail will go to a "lock box" at the
post office. There a bank will pick up all the mail, sort it, open it, take the cheques and remittance advice out,
process it all through electronic machinery, and post the funds to the proper accounts. In modern systems,
taking advantage of the Check 21 Act, as in the U.S., many cheques are transformed into electronic objects
and the paper is destroyed.
[edit]See also
loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over
time, between the lender and the borrower.
In a loan, the borrower initially receives or borrows an amount of money, called the principal, from the
lender, and is obligated to pay back or repay an equal amount of money to the lender at a later time.
Typically, the money is paid back in regular installments, or partial repayments; in an annuity, each
installment is the same amount.
The loan is generally provided at a cost, referred to as interest on the debt, which provides an incentive
for the lender to engage in the loan. In a legal loan, each of these obligations and restrictions is enforced
by contract, which can also place the borrower under additional restrictions known as loan covenants.
Although this article focuses on monetary loans, in practice any material object might be lent.
Acting as a provider of loans is one of the principal tasks for financial institutions. For other institutions,
issuing of debt contracts such as bonds is a typical source of funding.
Contents
[hide]
1 Types of loans
o 1.1 Secured
o 1.2 Unsecured
o 1.3 Demand
2 Target markets
o 2.1 Personal or commercial
3 Loan payment
4 Abuses in lending
5 United States taxes
6 Income from discharge of
indebtedness
7 See also
8 References
[edit]Types of loans
[edit]Secured
See also: Loan guarantee
A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property)
as collateral for the loan.
A subsidized loan is a loan that will not gain interest before you begin to pay it. It is known to be used at
multiple colleges.
A unsubsidized loan is a loan that gains interest the day of disbursement.
A mortgage loan is a very common type of debt instrument, used by many individuals to
purchase housing. In this arrangement, the money is used to purchase the property. The financial
institution, however, is given security — a lien on the title to the house — until the mortgage is paid off in
full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and
sell it, to recover sums owing to it.
In some instances, a loan taken out to purchase a new or used car may be secured by the car, in much
the same way as a mortgage is secured by housing. The duration of the loan period is considerably
shorter — often corresponding to the useful life of the car. There are two types of auto loans, direct and
indirect. A direct auto loan is where a bank gives the loan directly to a consumer. An indirect auto loan is
where a car dealership acts as an intermediary between the bank or financial institution and the
consumer.
A type of loan especially used in limited partnership agreements is the recourse note.
A stock hedge loan is a special type of securities lending whereby the stock of a borrower is hedged by
the lender against loss, using options or other hedging strategies to reduce lender risk.[citation needed]
A pre-settlement loan is a non-recourse debt, this is when a monetary loan is given based on the merit
and awardable amount in a lawsuit case. Only certain types of lawsuit cases are eligible for a pre-
settlement loan.[citation needed] This is considered a secured non-recourse debt because if the case reaches a
verdict in favor of the defendant the loan is forgiven.
[edit]Unsecured
Unsecured loans are monetary loans that are not secured against the borrower's assets. These may be
available from financial institutions under many different guises or marketing packages:
credit card debt
personal loans
bank overdrafts
credit facilities or lines of credit
corporate bonds (may be secured or unsecured)
The interest rates applicable to these different forms may vary depending on the lender and the borrower.
These may or may not be regulated by law. In the United Kingdom, when applied to individuals, these
may come under the Consumer Credit Act 1974.
[edit]Demand
Demand loans are short term loans (typically no more than 180 days)[1] that are atypical in that they do
not have fixed dates for repayment and carry a floating interest rate which varies according to the prime
rate. They can be "called" for repayment by the lending institution at any time. Demand loans may be
unsecured or secured.
[edit]Target markets
[edit]Personal or commercial
See also: Credit_(finance)#Consumer_credit
Loans can also be subcategorized according to whether the debtor is an individual person (consumer) or
a business. Common personal loans include mortgage loans, car loans, home equity lines of credit, credit
cards, installment loans and payday loans. The credit score of the borrower is a major component in and
underwriting and interest rates (APR) of these loans. The monthly payments of personal loans can be
decreased by selecting longer payment terms, but overall interest paid increases as well. For car loans in
the U.S., the average term was about 60 months in 2009.[2]
Loans to businesses are similar to the above, but also include commercial mortgages and corporate
bonds. Underwriting is not based upon credit score but rather credit rating.
[edit]Loan payment
The most typical loan payment type is the fully amortizing payment in which each monthly rate has the
same value overtime.[3]
The fixed monthly payment P for a loan of L for n months and a monthly interest rate c is: [4]
[edit]Abuses in lending
Predatory lending is one form of abuse in the granting of loans. It usually involves granting a loan in order
to put the borrower in a position that one can gain advantage over him or her. Where the moneylender is
not authorized, they could be considered a loan shark.
Usury is a different form of abuse, where the lender charges excessive interest. In different time periods
and cultures the acceptable interest rate has varied, from no interest at all to unlimited interest rates.
Credit card companies in some countries have been accused by consumer organisations of lending at
usurious interest rates and making money out of frivolous "extra charges".[5]
Abuses can also take place in the form of the customer abusing the lender by not repaying the loan or
with an intent to defraud the lender.
[edit]United States taxes
Most of the basic rules governing how loans are handled for tax purposes in the United States are
codified by both Congress (the Internal Revenue Code) and the Treasury Department (Treasury
Regulations — another set of rules that interpret the Internal Revenue Code).[6] Yet such rules are
universally accepted.[7]
1. A loan is not gross income to the borrower.[8] Since the borrower has the obligation to repay the
loan, the borrower has no accession to wealth.[9]
2. The lender may not deduct the amount of the loan.[10] The rationale here is that one asset (the cash)
has been converted into a different asset (a promise of repayment).[11]Deductions are not typically
available when an outlay serves to create a new or different asset.[12]
3. The amount paid to satisfy the loan obligation is not deductible by the borrower.[13]
4. Repayment of the loan is not gross income to the lender.[14] In effect, the promise of repayment is
converted back to cash, with no accession to wealth by the lender.[15]
5. Interest paid to the lender is included in the lender’s gross income.[16] Interest paid represents
compensation for the use of the lender’s money or property and thus represents profit or an accession to
wealth to the lender.[17] Interest income can be attributed to lenders even if the lender doesn’t charge a
minimum amount of interest.[18]
6. Interest paid to the lender may be deductible by the borrower.[19] In general, interest paid in
connection with the borrower’s business activity is deductible, while interest paid on personal loans are
not deductible.[20] The major exception here is interest paid on a home mortgage.[21]
[edit]Income from discharge of indebtedness
Although a loan does not start out as income to the borrower, it becomes income to the borrower if the
borrower is discharged of indebtedness. [22] Thus, if a debt is discharged, then the borrower
essentially has received income equal to the amount of the indebtedness. The Internal Revenue
Code lists “Income from Discharge of Indebtedness” in Section 61(a)(12) as a source of gross
income.
Example: X owes Y $50,000. If Y discharges the indebtedness, then X no longer owes Y $50,000. For
purposes of calculating income, this should be treated the same way as if Y gave X $50,000.
For a more detailed description of the “discharge of indebtedness”, look at Section 108 (Cancellation of
Debt (COD) Income) of the Internal Revenue Code.[23]
[edit]See also
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences
the existence of the loan and theencumbrance of that realty through the granting of
a mortgage which secures the loan. However, the word mortgage alone, in everyday usage, is most often
used to mean mortgage loan.
A home buyer or builder can obtain financing (a loan) either to purchase or secure against the property
from a financial institution, such as a bank, either directly or indirectly through intermediaries. Features of
mortgage loans such as the size of the loan, maturity of the loan, interest rate, method of paying off the
loan, and other characteristics can vary considerably.
In many jurisdictions, though not all (Bali, Indonesia being one exception[1]), it is normal for home
purchases to be funded by a mortgage loan. Few individuals have enough savings or liquid funds to
enable them to purchase property outright. In countries where the demand for home ownership is highest,
strong domestic markets have developed.
The word mortgage is a Law French term meaning "dead pledge," apparently meaning that the pledge
ends (dies) either when the obligation is fulfilled or the property is taken through foreclosure.[2]
Contents
[hide]
1 Mortgage loan basics
o 1.1 Basic concepts and legal regulation
o 1.2 Mortgage loan types
o 1.3 Loan to value and downpayments
o 1.4 Value: appraised, estimated, and actual
o 1.5 Equity or homeowner's equity
o 1.6 Payment and debt ratios
o 1.7 Standard or conforming mortgages
2 Repaying the capital
o 2.1 Capital and interest
o 2.2 Interest only
o 2.3 No capital or interest
o 2.4 Interest and partial capital
o 2.5 Foreclosure and non-recourse lending
3 Mortgage lending: United States
o 3.1 Origination
o 3.2 Closing costs
o 3.3 Predatory mortgage lending
o 3.4 Financing industry
o 3.5 Delinquency
4 Mortgages in the UK
o 4.1 The mortgage loans industry and market
o 4.2 Mortgage types
4.2.1 Self-certification
4.2.2 100% mortgages
4.2.3 Together/Plus mortgages
o 4.3 UK mortgage process
5 Mortgage lending in Continental Europe
o 5.1 Costs
o 5.2 Recent trends
o 5.3 History
6 Mortgage insurance
7 Islamic mortgages
8 Other terminologies
9 See also
o 9.1 General, or related to more than one nation
o 9.2 Related to the United Kingdom
o 9.3 Related to the United States
o 9.4 Other nations
o 9.5 Legal details
10 References
11 External links
[edit]Mortgage loan basics
[edit]Basic concepts and legal regulation
According to Anglo-American property law, a mortgage occurs when an owner (usually of a fee
simple interest in realty) pledges his interest (right to the property) as security or collateralfor a loan.
Therefore, a mortgage is an encumbrance (limitation) on the right to the property just as
an easement would be, but because most mortgages occur as a condition for new loan money, the
word mortgage has become the generic term for a loan secured by such real property.[3]
As with other types of loans, mortgages have an interest rate and are scheduled to amortize over a set
period of time, typically 30 years. All types of real property can be, and usually are, secured with a
mortgage and bear an interest rate that is supposed to reflect the lender's risk.
Mortgage lending is the primary mechanism used in many countries to finance private ownership of
residential and commercial property (see commercial mortgages). Although the terminology and precise
forms will differ from country to country, the basic components tend to be similar:
Property: the physical residence being financed. The exact form of ownership will vary from
country to country, and may restrict the types of lending that are possible.
Mortgage : the security interest of the lender in the property, which may entail restrictions on the
use or disposal of the property. Restrictions may include requirements to purchasehome
insurance and mortgage insurance, or pay off outstanding debt before selling the property.
Borrower : the person borrowing who either has or is creating an ownership interest in the
property.
Lender : any lender, but usually a bank or other financial institution. Lenders may also
be investors who own an interest in the mortgage through a mortgage-backed security. In such a
situation, the initial lender is known as the mortgage originator, which then packages and sells the
loan to investors. The payments from the borrower are thereafter collected by a loan servicer.[4]
Principal: the original size of the loan, which may or may not include certain other costs; as any
principal is repaid, the principal will go down in size.
Interest : a financial charge for use of the lender's money.
Foreclosure or repossession: the possibility that the lender has to foreclose, repossess or seize
the property under certain circumstances is essential to a mortgage loan; without this aspect, the loan
is arguably no different from any other type of loan.
Many other specific characteristics are common to many markets, but the above are the essential
features. Governments usually regulate many aspects of mortgage lending, either directly (through legal
requirements, for example) or indirectly (through regulation of the participants or the financial markets,
such as the banking industry), and often through state intervention (direct lending by the government, by
state-owned banks, or sponsorship of various entities). Other aspects that define a specific mortgage
market may be regional, historical, or driven by specific characteristics of the legal or financial system.
Mortgage loans are generally structured as long-term loans, the periodic payments for which are similar to
an annuity and calculated according to the time value of money formulae. The most basic arrangement
would require a fixed monthly payment over a period of ten to thirty years, depending on local conditions.
Over this period the principal component of the loan (the original loan) would be slowly paid down
through amortization. In practice, many variants are possible and common worldwide and within each
country.
Lenders provide funds against property to earn interest income, and generally borrow these funds
themselves (for example, by taking deposits or issuing bonds). The price at which the lenders borrow
money therefore affects the cost of borrowing. Lenders may also, in many countries, sell the mortgage
loan to other parties who are interested in receiving the stream of cash payments from the borrower, often
in the form of a security (by means of a securitization). In the United States, the largest firms securitizing
loans are Fannie Mae and Freddie Mac, which are government sponsored enterprises.
Mortgage lending will also take into account the (perceived) riskiness of the mortgage loan, that is, the
likelihood that the funds will be repaid (usually considered a function of the creditworthiness of the
borrower); that if they are not repaid, the lender will be able to foreclose and recoup some or all of its
original capital; and the financial, interest rate risk and time delays that may be involved in certain
circumstances.
[edit]Mortgage loan types
There are many types of mortgages used worldwide, but several factors broadly define the characteristics
of the mortgage. All of these may be subject to local regulation and legal requirements.
Interest: interest may be fixed for the life of the loan or variable, and change at certain pre-defined
periods; the interest rate can also, of course, be higher or lower.
Term: mortgage loans generally have a maximum term, that is, the number of years after which
an amortizing loan will be repaid. Some mortgage loans may have no amortization, or require full
repayment of any remaining balance at a certain date, or even negative amortization.
Payment amount and frequency: the amount paid per period and the frequency of payments; in
some cases, the amount paid per period may change or the borrower may have the option to
increase or decrease the amount paid.
Prepayment: some types of mortgages may limit or restrict prepayment of all or a portion of the
loan, or require payment of a penalty to the lender for prepayment.
The two basic types of amortized loans are the fixed rate mortgages (FRM) and adjustable rate
mortgages (ARM) (also known as a floating rate or variable rate mortgage). In many countries, floating
rate mortgages are the norm and will simply be referred to as mortgages; in the United States, fixed rate
mortgages are typically considered "standard." Combinations of fixed and floating rate are also common,
whereby a mortgage loan will have a fixed rate for some period, and vary after the end of that period.
Historical U.S. Prime Rates
In a fixed rate mortgage, the interest rate, and hence periodic payment, remains fixed for the life (or term)
of the loan. Therefore the payment is fixed, although ancillary costs (such as property taxes and
insurance) can and do change. In the U.S., the term is usually up to 30 years (15 and 30 being the most
common), although longer terms may be offered in certain circumstances. For a fixed rate mortgage,
payments for principal and interest should not change over the life of the loan,
In an adjustable rate mortgage, the interest rate is generally fixed for a period of time, after which it will
periodically (for example, annually or monthly) adjust up or down to some market index. Common indices
in the U.S. include the Prime rate, the London Interbank Offered Rate(LIBOR), and the Treasury Index
("T-Bill"); other indices are in use but are less popular.
Adjustable rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely
used where fixed rate funding is difficult to obtain or prohibitively expensive. Since the risk is transferred
to the borrower, the initial interest rate may be from 0.5% to 2% lower than the average 30-year fixed rate;
the size of the price differential will be related to debt market conditions, including the yield curve.
The charge to the borrower depends upon the credit risk in addition to the interest rate risk. The mortgage
origination and underwriting process involves checking credit scores, debt-to-income, downpayments,
and assets. Jumbo mortgages and subprime lending are not supported by government guarantees and
face higher interest rates. Other innovations described below can affect the rates as well.
Depending upon the circumstances, there are various other methods, clauses, and innovations involving
mortgages. Graduated payment mortgage loan have increasing costs over time and are geared to young
borrowers who expect wage increases over time. Balloon payment mortgages have only partial
amortization, meaning that amount of monthly payments due are calculated (amortized) over a certain
term, but the outstanding principal balance is due at some point short of that term, and at the end of the
term a balloon payment is due. When interest rates are high relative to the rate on an existing seller's
loan, the buyer can consider assuming the seller's mortgage.[5] Budget loans include taxes and insurance
in the mortgage payment;[6] package loans add the costs of furnishings and other personal property to the
mortgage. Buydown mortgages allow the seller or lender to pay something similar to mortgage points to
reduce interest rate and encourage buyers.[7] Homeowners can also take out equity loans in which they
receive cash for a mortgage debt on their house. Foreign nationals due to their unique situation
face Foreign National mortgage conditions.
In the United Kingdom, flexible mortgages allow for more freedom by the borrower to skip payments or
prepay. Offset mortgages allow deposits to be counted against the mortgage loan. in the UK there is also
the endowment mortgage where the borrowers pay interest while the principal is paid with a life insurance
policy.
Commercial mortgages typically have different interest rates, risks, and contracts than personal
loans. Participation mortgages allow multiple investors to share in a loan. Builders may take out blanket
loans which cover several properties at once. Bridge loans may be used as temporary financing pending
a longer-term loan. Hard money loans provide financing in exchange for the mortgaging of real estate
collateral.
Reverse mortgage
Repayment mortgage
Seasoned mortgage
Term loan or Interest-only loan
Wraparound mortgage
[edit]Loan to value and downpayments
Main article: Loan-to-value ratio
Upon making a mortgage loan for the purchase of a property, lenders usually require that the borrower
make a downpayment; that is, contribute a portion of the cost of the property. This downpayment may be
expressed as a portion of the value of the property (see below for a definition of this term). The loan to
value ratio (or LTV) is the size of the loan against the value of the property. Therefore, a mortgage loan in
which the purchaser has made a downpayment of 20% has a loan to value ratio of 80%. For loans made
against properties that the borrower already owns, the loan to value ratio will be imputed against the
estimated value of the property.
The loan to value ratio is considered an important indicator of the riskiness of a mortgage loan: the higher
the LTV, the higher the risk that the value of the property (in case of foreclosure) will be insufficient to
cover the remaining principal of the loan.
[edit]Value: appraised, estimated, and actual
Since the value of the property is an important factor in understanding the risk of the loan, determining the
value is a key factor in mortgage lending. The value may be determined in various ways, but the most
common are:
1. Actual or transaction value: this is usually taken to be the purchase price of the property. If the
property is not being purchased at the time of borrowing, this information may not be available.
2. Appraised or surveyed value: in most jurisdictions, some form of appraisal of the value by a
licensed professional is common. There is often a requirement for the lender to obtain an official
appraisal.
3. Estimated value: lenders or other parties may use their own internal estimates, particularly in
jurisdictions where no official appraisal procedure exists, but also in some other circumstances.
[edit]Equity or homeowner's equity
The concept of equity in a property refers to the value of the property minus the outstanding debt, subject
to the definition of the value of the property. Therefore, a borrower who owns a property whose estimated
value is $400,000 but with outstanding mortgage loans of $300,000 is said to have homeowner's equity of
$100,000.
[edit]Payment and debt ratios
In most countries, a number of more or less standard measures of creditworthiness may be used.
Common measures include payment to income (mortgage payments as a percentage of gross or net
income); debt to income (all debt payments, including mortgage payments, as a percentage of income);
and various net worth measures. In many countries, credit scoresare used in lieu of or to supplement
these measures. There will also be requirements for documentation of the creditworthiness, such as
income tax returns, pay stubs, etc; the specifics will vary from location to location.
Some lenders may also require a potential borrower have one or more months of "reserve assets"
available. In other words, the borrower may be required to show the availability of enough assets to pay
for the housing costs (including mortgage, taxes, etc.) for a period of time in the event of the job loss or
other loss of income.
Many countries have lower requirements for certain borrowers, or "no-doc" / "low-doc" lending standards
that may be acceptable in certain circumstances.
[edit]Standard or conforming mortgages
Many countries have a notion of standard or conforming mortgages that define a perceived acceptable
level of risk, which may be formal or informal, and may be reinforced by laws, government intervention, or
market practice. For example, a standard mortgage may be considered to be one with no more than 70-
80% LTV and no more than one-third of gross income going to mortgage debt.
A standard or conforming mortgage is a key concept as it often defines whether or not the mortgage can
be easily sold or securitized, or, if non-standard, may affect the price at which it may be sold. In the
United States, a conforming mortgage is one which meets the established rules and procedures of the
two major government-sponsored entities in the housing finance market (including some legal
requirements). In contrast, lenders who decide to make nonconforming loans are exercising a higher risk
tolerance and do so knowing that they face more challenge in reselling the loan. Many countries have
similar concepts or agencies that define what are "standard" mortgages. Regulated lenders (such as
banks) may be subject to limits or higher risk weightings for non-standard mortgages. For example, banks
and mortgage brokerages in Canada face restrictions on lending more than 80% of the property value;
beyond this level, mortgage insurance is generally required.[8]
[edit]Repaying the capital
There are various ways to repay a mortgage loan; repayment depends on locality, tax laws and prevailing
culture.
[edit]Capital and interest
The most common way to repay a loan is to make regular payments of the capital (also called principal)
and interest over a set term. This is commonly referred to as (self) amortizationin the U.S. and as
a repayment mortgage in the UK. A mortgage is a form of annuity (from the perspective of the lender),
and the calculation of the periodic payments is based on thetime value of money formulas. Certain details
may be specific to different locations: interest may be calculated on the basis of a 360-day year, for
example; interest may be compoundeddaily, yearly, or semi-annually; prepayment penalties may apply;
and other factors. There may be legal restrictions on certain matters, and consumer protection laws may
specify or prohibit certain practices.
Depending on the size of the loan and the prevailing practice in the country the term may be short (10
years) or long (50 years plus). In the UK and U.S., 25 to 30 years is the usual maximum term (although
shorter periods, such as 15-year mortgage loans, are common). Mortgage payments, which are typically
made monthly, contain a capital (repayment of the principal) and an interest element. The amount of
capital included in each payment varies throughout the term of the mortgage. In the early years the
repayments are largely interest and a small part capital. Towards the end of the mortgage the payments
are mostly capital and a smaller portion interest. In this way the payment amount determined at outset is
calculated to ensure the loan is repaid at a specified date in the future. This gives borrowers assurance
that by maintaining repayment the loan will be cleared at a specified date, if the interest rate does not
change.
[edit]Interest only
The main alternative to capital and interest mortgage is an interest only mortgage, where the capital is not
repaid throughout the term. This type of mortgage is common in the UK, especially when associated with
a regular investment plan. With this arrangement regular contributions are made to a separate investment
plan designed to build up a lump sum to repay the mortgage at maturity. This type of arrangement is
called an investment-backed mortgage or is often related to the type of plan used: endowment
mortgage if an endowment policy is used, similarly a Personal Equity Plan (PEP) mortgage, Individual
Savings Account (ISA) mortgage or pension mortgage. Historically, investment-backed mortgages offered
various tax advantages over repayment mortgages, although this is no longer the case in the UK.
Investment-backed mortgages are seen as higher risk as they are dependent on the investment making
sufficient return to clear the debt.
Until recently it was not uncommon for interest only mortgages to be arranged without a repayment
vehicle, with the borrower gambling that the property market will rise sufficiently for the loan to be repaid
by trading down at retirement (or when rent on the property and inflation combine to surpass the interest
rate).
[edit]No capital or interest
For older borrowers (typically in retirement), it may be possible to arrange a mortgage where neither the
capital nor interest is repaid. The interest is rolled up with the capital, increasing the debt each year.
These arrangements are variously called reverse mortgages, lifetime mortgages or equity release
mortgages, depending on the country. The loans are typically not repaid until the borrowers die, hence
the age restriction. For further details, see equity release.
[edit]Interest and partial capital
In the U.S. a partial amortization or balloon loan is one where the amount of monthly payments due are
calculated (amortized) over a certain term, but the outstanding capital balance is due at some point short
of that term. In the UK, a part repayment mortgage is quite common, especially where the original
mortgage was investment-backed and on moving house further borrowing is arranged on a capital and
interest (repayment) basis.
[edit]Foreclosure and non-recourse lending
Main article: foreclosure
In most jurisdictions, a lender may foreclose the mortgaged property if certain conditions - principally,
non-payment of the mortgage loan - obtain. Subject to local legal requirements, the property may then be
sold. Any amounts received from the sale (net of costs) are applied to the original debt. In some
jurisdictions, mortgage loans are non-recourse loans: if the funds recouped from sale of the mortgaged
property are insufficient to cover the outstanding debt, the lender may not have recourse to the borrower
after foreclosure. In other jurisdictions, the borrower remains responsible for any remaining debt.
In virtually all jurisdictions, specific procedures for foreclosure and sale of the mortgaged property apply,
and may be tightly regulated by the relevant government. There are strict or judicial foreclosures and non-
judicial foreclosures, also known as power of sale foreclosures. In some jurisdictions, foreclosure and sale
can occur quite rapidly, while in others, foreclosure may take many months or even years. In many
countries, the ability of lenders to foreclose is extremely limited, and mortgage market development has
been notably slower.
[edit]Mortgage lending: United States
Main article: Mortgage underwriting in the United States
[edit]Origination
Main article: Loan origination
In the U.S., the process by which a mortgage is secured by a borrower is called origination. This involves
the borrower submitting a loan application and documentation related to his/her financial history and/or
credit history to the underwriter, which is typically a bank. Sometimes, a third party is involved, such as
a mortgage broker. This entity takes the borrower's information and reviews a number of lenders,
selecting the ones that will best meet the needs of the consumer. Origination is regulated by laws
including the Truth in Lending Act andReal Estate Settlement Procedures Act (1974). Credit scores are
often used, and these must comply with the Fair Credit Reporting Act. Additionally, various state
laws may apply. Underwriters receive the application and determine whether the loan can be accepted. If
the underwriter is not satisfied with the documentation provided by the borrower, additional
documentation and conditions may be imposed, called stipulations.
Documentation and credit history can be used to categorize loans into high-quality A-paper, Alt-A,
and subprime. Loans may also be categorized by whether there is full documentation, alternative
documentation, or little to no documentations, with extreme "no income no job no asset" loans referred to
as "NINJA" loans. No doc loans were popular in the early 2000s, but were largely phased out following
the subprime mortgage crisis. Low-doc loans carry a higher interest rate and were theoretically available
only to borrowers with excellent credit and additional income that may be hard to document (e.g. self
employment income). As of July 2010, no-doc loans were reportedly still being offered, but more
selectively and with high downpayment requirements (e.g., 40%).[9]
The following documents are typically required for traditional underwriter review. Over the past several
years, use of "automated underwriting" statistical models has reduced the amount of documentation
required from many borrowers. Such automated underwriting engines include Freddie Mac's "Loan
Prospector" and Fannie Mae's "Desktop Underwriter". For borrowers who have excellent credit and very
acceptable debt positions, there may be virtually no documentation of income or assets required at all.
Many of these documents are also not required for no-doc and low-doc loans.
Credit Report
1003 — Uniform Residential Loan Application
1004 — Uniform Residential Appraisal Report
1005 — Verification Of Employment (VOE)
1006 — Verification Of Deposit (VOD)
1007 — Single Family Comparable Rent Schedule
1008 — Transmittal Summary
Copy of deed of current home
Federal income tax records for last two years
Verification of Mortgage (VOM) or Verification of Payment (VOP)
Borrower's Authorization
Purchase Sales Agreement
1084A and 1084B (Self-Employed Income Analysis) and 1088 (Comparative Income Analysis) -
used if borrower is self-employed
[edit]Closing costs
In addition to the downpayment, the final deal of the mortgage includes will include closing costs which
include fees for "points" to lower the interest rate, application fees, credit check, attorney fees, title
insurance, appraisal fees, inspection fees, and other possible miscellaneous fees.[10] These fees can
sometimes be financed and added to the mortgage amount. In 2010, one survey estimated that the
average total closing cost United States on a $200,000 house was $3,741.[11]
[edit]Predatory mortgage lending
There is concern in the U.S. that consumers are often victims of predatory mortgage lending [2]. The main
concern is that mortgage lenders and brokers, operating legally, are findingloopholes in the law to obtain
additional profit. The typical scenario is that terms of the loan are beyond the means of the ill-informed
and uneducated borrower. The borrower makes a number of interest and principal payments, and then
defaults. The lender then takes the property and recovers the amount of the loan, and also keeps the
interest and principal payments, as well as loan origination fees.
[edit]Financing industry
Mortgage lending is a major sector finance in the United States, and many of the guidelines that loans
must meet are suited to satisfy investors and mortgage insurers. Mortgages arecommercial paper and
can be conveyed and assigned freely to other holders. In the U.S., the Federal government created
several programs, or government sponsored entities, to foster mortgage lending, construction and
encourage home ownership. These programs include the Government National Mortgage
Association (known as Ginnie Mae), the Federal National Mortgage Association (known as Fannie Mae)
and the Federal Home Loan Mortgage Corporation (known as Freddie Mac). These programs work by
offering a guarantee on the mortgage payments of certain conforming loans. These loans are
then securitized and issued at a slightly lower interest rate to investors, and are known as mortgage-
backed securities (MBS). After securitization these are sometimes called "agency paper" or "agency
bonds". Whether or not a loan is conforming depends on the size and set of a guidelines which are
implemented in an automated underwriting system.[12] Non-conforming mortgage loans which cannot be
sold to Fannie or Freddie are either "jumbo" or "subprime", and can also be packaged into mortgage-
backed securities. Some companies, called correspondent lenders, sell all or most of their closed loans to
these investors, accepting some risks for issuing them. They often offer niche loans at higher prices that
the investor does not wish to originate.
Securitization allows the banks to quickly relend the money to other borrowers (including in the form of
mortgages) and thereby to create more mortgages than the banks could with the amount they have on
deposit. This in turn allows the public to use these mortgages to purchase homes, something the
government wishes to encourage. Investors in conforming loans, meanwhile, gain low-risk income at a
higher interest rate (essentially the mortgage rate, minus the cuts of the bank and GSE) than they could
gain from most other bonds. Securitization has grown rapidly in the last 10 years as a result of the wider
dissemination of technology in the mortgage lending world. For borrowers with superior credit,
government loans and ideal profiles, this securitization keeps rates almost artificially low, since the pools
of funds used to create new loans can be refreshed more quickly than in years past, allowing for more
rapid outflow of capital from investors to borrowers without as many personal business ties as the past.
The increased amount of lending led (among other factors) to the United States housing bubble of 2000-
2006. The growth of lightly regulated derivative instruments based on mortgage-backed securities, such
as collateralized debt obligations and credit default swaps, is widely reported as a major causative factor
behind the 2007 subprime mortgage financial crisis. As a result of the housing bubble, many banks,
including Fannie Mae, established tighter lending guidelines making it much more difficult to obtain a
loan. [13]
[edit]Delinquency
At the start of 2008, 5.6% of all mortgages in the United States were delinquent.[14] By the end of the first
quarter that rate had risen, encompassing 6.4% of residential properties. This number did not include the
2.5% of homes in foreclosure.[15]
[edit]Mortgages in the UK
Main article: UK mortgage terminology
[edit]The mortgage loans industry and market
There are currently over 200 significant separate financial organizations supplying mortgage loans to
house buyers in Britain. The major lenders include building societies, banks, specialized mortgage
corporations, insurance companies, and pension funds. Over the years, the share of the new mortgage
loans market held by building societies has declined. Between 1977 and 1987, it fell drastically from 96%
to 66% while that of banks and other institutions rose from 3% to 36%. The banks and other institutions
that made major inroads into the mortgage market during this period were helped by such factors as:
relative managerial efficiency;
advanced technology, organizational capabilities, and expertise in marketing;
extensive branch networks; and
capacities to tap cheaper international sources of funds for lending.[16]
By the early 1990s, UK building societies had succeeded in greatly slowing if not reversing the decline in
their market share. In 1990, the societies held over 60% of all mortgage loans but took over 75% of the
new mortgage market – mainly at the expense of specialized mortgage loans corporations. Building
societies also increased their share of the personal savings deposits market in the early 1990s at the
expense of the banks – attracting 51% of this market in 1990 compared with 42% in 1989.[17] One study
found that in the five years 1987-1992, the building societies collectively outperformed the UK clearing
banks on practically all the major growth and performance measures. The societies' share of the new
mortgage loans market of 75% in 1990-91 was similar to the share level achieved in 1985. Profitability as
measured by return on capital was 17.8% for the top 20 societies in 1991, compared with only 8.5% for
the big four banks. Finally, bad debt provisions relative to advances were only 0.4% for the top 20
societies compared with 2.8% for the four banks.[18]
Though the building societies did subsequently recover a significant amount of the mortgage lending
business lost to the banks, they still only had about two-thirds of the total market at the end of the 1980s.
However, banks and building societies were by now becoming increasingly similar in terms of their
structures and functions. When the Abbey National building society converted into a bank in 1989, this
could be regarded either as a major diversification of a building society into retail banking – or as
significantly increasing the presence of banks in the residential mortgage loans market. Research
organization Industrial Systems Research has observed that trends towards the increased integration of
the financial services sector have made comparison and analysis of the market shares of different types
of institution increasingly problematical. It identifies as major factors making for consistently higher levels
of growth and performance on the part of some mortgage lenders in the UK over the years:
the introduction of new technologies, mergers, structural reorganization and the realization of
economies of scale, and generally increased efficiency in production and marketing operations –
insofar as these things enable lenders to reduce their costs and offer more price-competitive and
innovative loans and savings products;
buoyant retail savings receipts, and reduced reliance on relatively expensive wholesale markets
for funds (especially when interest rates generally are being maintained at high levels internationally);
lower levels of arrears, possessions, bad debts, and provisioning than competitors;
increased flexibility and earnings from secondary sources and activities as a result of political-
legal deregulation; and
being specialized or concentrating on traditional core, relatively profitable mortgage lending and
savings deposit operations.[19]
[edit]Mortgage types
The UK mortgage market is one of the most innovative and competitive in the world. There is little
intervention in the market by the state or state funded entities and virtually all borrowing is funded by
either mutual organisations (building societies and credit unions) or proprietary lenders (typically banks).
Since 1982, when the market was substantially deregulated, there has been substantial innovation and
diversification of strategies employed by lenders to attract borrowers. This has led to a wide range of
mortgage types.
As lenders derive their funds either from the money markets or from deposits, most mortgages revert to
a variable rate, either the lender's standard variable rate or a tracker rate, which will tend to be linked
to the underlying Bank of England (BoE) repo rate (or sometimes LIBOR). Initially they will tend to offer
an incentive deal to attract new borrowers. This may be:
A fixed rate; where the interest rate remains constant for a set period; typically for 2, 3, 4, 5 or 10
years. Longer term fixed rates (over 5 years) whilst available, tend to be more expensive and/or have
more onerous early repayment charges and are therefore less popular than shorter term fixed rates.
A capped rate; where similar to a fixed rate, the interest rate cannot rise above the cap but can
vary beneath the cap. Sometimes there is a collar associated with this type of rate which imposes a
minimum rate. Capped rate are often offered over periods similar to fixed rates, e.g. 2, 3, 4 or 5 years.
A discount rate; where there is set margin reduction in the standard variable rate (e.g. a 2%
discount) for a set period; typically 1 to 5 years. Sometimes the discount is expressed as a margin
over the base rate (e.g. BoE base rate plus 0.5% for 2 years) and sometimes the rate is stepped (e.g.
3% in year 1, 2% in year 2, 1% in year three).
A cashback mortgage; where a lump sum is provided (typically) as a percentage of the advance
e.g. 5% of the loan.
These rates are sometimes combined: For example, 4.5% 2 year fixed then a 3 year tracker at BoE rate
plus 0.89%.
With each incentive the lender may be offering a rate at less than the market cost of the borrowing.
Therefore, they typically impose a penalty if the borrower repays the loan within the incentive period or a
longer period (referred to as an extended tie-in). These penalties used to be called a redemption
penalty or tie-in, however since the onset of Financial Services Authority regulation they are referred to as
an early repayment charge.
[edit]Self-certification
Mortgage lenders usually use salaries declared on wage slips to work out a borrower's annual income
and will usually lend up to a fixed multiple of the borrower's annual income. Self-certification mortgages,
informally known as "self cert" mortgages, are available to employed and self employed people who have
a deposit to buy a house but lack the sufficient documentation to prove their income.
This type of mortgage can be beneficial to people whose income comes from multiple sources, whose
salary consists largely or exclusively of commissions or bonuses, or whose accounts may not show a true
reflection of their earnings. Self cert mortgages have two disadvantages: the interest rates charged are
usually higher than for normal mortgages and theloan to value ratio is usually lower.
[edit]100% mortgages
Normally when a bank lends a customer money they want to protect their money as much as possible;
they do this by asking the borrower to fund a certain percentage of the property purchase in the form of a
deposit.
100% mortgages are mortgages that require no deposit (100% loan to value). These are sometimes
offered to first time buyers, but almost always carry a higher interest rate on the loan.
USDA (United States Department of Agriculture) also offers 100% loan to value programs for borrowers
with an income not exceeding 115% of median income. Borrowers must not currently own a home but
does not need to be a first time home buyer. This type of program is offered through lending institutions.
USDA also offers a direct program, referred to as a Section 502 loan, to very low and low income
borrowers. Very low income borrowers are defined as 50% below the median income. Low income
borrowers are defined as 50-80% of median income. This type of program subsidizes the borrower's
mortgage payment USDA programs are targeted to certain areas and may not be available in all counties.
[edit]Together/Plus mortgages
A development of the theme of 100% mortgages is represented by Together/Plus type mortgages, which
have been launched by a number of lenders in recent years.
Together/Plus Mortgages represent loans of 100% or more of the property value - typically up to a
maximum of 125%. Such loans are normally (but not universally) structured as a package of a 95%
mortgage and an unsecured loan of up to 30% of the property value. This structure is mandated by
lenders' capital requirements which require additional capital for loans of 100% or more of the property
value.
[edit]UK mortgage process
UK lenders usually charge a valuation fee, which pays for a chartered surveyor to visit the property and
ensure it is worth enough to cover the mortgage amount. This is not a full survey so it may not identify all
the defects that a house buyer needs to know about. Also, it does not usually form a contract between the
surveyor and the buyer, so the buyer has no right to sue in contract if the survey fails to detect a major
problem. For an extra fee, the surveyor can usually carry out a building survey or a (cheaper)
"homebuyers survey" at the same time. However, the buyer may have a remedy against the surveyor in
tort. [20]
[edit]Mortgage lending in Continental Europe
Within the European Union, the Covered bonds market volume (covered bonds outstanding) amounted to
about EUR 2 trillion at year-end 2007 with Germany, Denmark, Spain, and France each having
outstandings above 200,000 EUR million[21]. In German language, Pfandbriefe is the term applied.
Pfandbrief-like securities have been introduced in more than 25 European countries – and in recent years
also in the U.S. and other countries outside Europe – each with their own unique law and regulations.
However, the diffusion of the concept differ: In 2000, the US institutions Fannie Mae and Freddie Mac
together reached one per cent of the national population. Furthermore, 87 per cent of their purchased
mortgages were granted to borrowers in metropolitan areas with higher income levels. In Europe, a wider
market has been achieved: In Denmark, mortgage banks reached 35 per cent of the population in 2002,
while the German Bausparkassen achieved widespread regional distribution and more than 30 per cent of
the German population concluded a Bauspar contract (as of 2001)[22].
[edit]Costs
A study issued by the UN Economic Commission for Europe compared German, US, and Danish
mortgage systems. The German Bausparkassen have reported nominal interest rates of approximately 6
per cent per annum in the last 40 years (as of 2004). In addition, they charge administration and service
fees (about 1.5 per cent of the loan amount). In the United States, the average interest rates for fixed-rate
mortgages in the housing market started in the tens and twenties in the 1980s and have (as of 2004)
reached about 6 per cent per annum. However, gross borrowing costs are substantially higher than the
nominal interest rate and amounted for the last 30 years to 10.46 per cent. In Denmark, similar to the
United States capital market, interest rates have fallen to 6 per cent per annum. A risk and administration
fee amounts to 0.5 per cent of the outstanding debt. In addition, an acquisition fee is charged which
amounts to one per cent of the principal[22].
[edit]Recent trends
On July 28, 2008, US Treasury Secretary Henry Paulson announced that, along with four large U.S.
banks, the Treasury would attempt to kick start a market for these securities in the United States,
primarily to provide an alternative form of mortgage-backed securities.[23] Similarly, in the UK "the
Government is inviting views on options for a UK framework to deliver more affordable long-term fixed-
rate mortgages, including the lessons to be learned from international markets and institutions".[24]
George Soros's October 10, 2008 Wall Street Journal editorial promoted the Danish mortgage
market model.[25] A survey of European Pfandbrief-like products was issued in 2005 by theBank for
International Settlements;[26] the International Monetary Fund in 2007 issued a study of the covered
bond markets in Germany and Spain,[27] while the European Central Bank in 2003 issued a study of
housing markets, addressing also mortgage markets and providing a two page overview of current
mortgage systems in the EU countries.[28]
[edit]History
While the idea originated in Prussia in 1769[29], a Danish act on mortgage credit associations of 1850
enabled the issuing of bonds (Danish: Realkreditobligationer) as a means to refinance mortgage loans [30].
With the German mortgage banks law of 1900, the whole German Empire was given a standardized legal
foundation for the emission of Pfandbriefe. An account from the perspective of development economics is
available.[31]
[edit]Mortgage insurance
Mortgage insurance is an insurance policy designed to protect the mortgagee (lender) from any default
by the mortgagor (borrower). It is used commonly in loans with a loan-to-value ratio over 80%, and
employed in the event of foreclosure and repossession.
This policy is typically paid for by the borrower as a component to final nominal (note) rate, or in one lump
sum up front, or as a separate and itemized component of monthly mortgage payment. In the last case,
mortgage insurance can be dropped when the lender informs the borrower, or its subsequent assigns,
that the property has appreciated, the loan has been paid down, or any combination of both to relegate
the loan-to-value under 80%.
In the event of repossession, banks, investors, etc. must resort to selling the property to recoup their
original investment (the money lent), and are able to dispose of hard assets (such as real estate) more
quickly by reductions in price. Therefore, the mortgage insurance acts as a hedge should the
repossessing authority recover less than full and fair market value for any hard asset.
[edit]Islamic mortgages
Main article: Islamic economic jurisprudence
The Sharia law of Islam prohibits the payment or receipt of interest, which means that Muslims cannot
use conventional mortgages. However, real estate is far too expensive for most people to buy outright
using cash: Islamic mortgages solve this problem by having the property change hands twice. In one
variation, the bank will buy the house outright and then act as a landlord. The homebuyer, in addition to
paying rent, will pay a contribution towards the purchase of the property. When the last payment is made,
the property changes hands.[citation needed]
Typically, this may lead to a higher final price for the buyers. This is because in some countries (such as
the United Kingdom and India) there is a Stamp Duty which is a tax charged by the government on a
change of ownership. Because ownership changes twice in an Islamic mortgage, a stamp tax may be
charged twice. Many other jurisdictions have similar transaction taxes on change of ownership which may
be levied. In the United Kingdom, the dual application of Stamp Duty in such transactions was removed in
the Finance Act 2003 in order to facilitate Islamic mortgages.[32]
An alternative scheme involves the bank reselling the property according to an installment plan, at a price
higher than the original price.
Both of these methods compensate the lender as if they were charging interest, but the loans are
structured in a way that in name they are not, and the lender shares the financial risks involved in the
transaction with the homebuyer.[citation needed]
[edit]Other terminologies
Like any other legal system, the mortgage business sometimes uses confusing jargon. Below are some
terms explained in brief. If a term is not explained here it may be related to thelegal mortgage rather than
to the loan.
Advance This is the money you have borrowed plus all the additional fees.
Base rate In UK, this is the base interest rate set by the Bank of England. In the United States, this value
is set by the Federal Reserve and is known as the Discount Rate.
Bridging loan This is a temporary loan that enables the borrower to purchase a new property before the
borrower is able to sell another current property.
Disbursements These are all the fees of the solicitors and governments, such as stamp duty, land
registry, search fees, etc.
Early redemption charge / Pre-payment penalty / Redemption penalty This is the amount of money
due if the mortgage is paid in full before the time finished.
equity This is the market value of the property minus all loans outstanding on it.
First time buyer This is the term given to a person buying property who has not owned property within
the last three years.
Loan origination fee A charge levied by a creditor for underwriting a loan. The fee often is expressed in
points. A point is 1 percent of the loan amount.
Sealing fee This is a fee made when the lender releases the legal charge over the property.
Subject to contract This is an agreement between seller and buyer before the actual contract is made.
[edit]See also
[edit]General, or related to more than one nation
Commercial mortgage
Nonrecourse debt
Refinancing
Shared appreciation mortgage
No Income No Asset (NINA)
Annual percentage rate
Foreign currency mortgage
Credit card
From Wikipedia, the free encyclopedia
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v · d · e
Credit card
An example of the front in a typical credit card:
1. Issuing bank logo
2. EMV chip on "smart cards"
3. Hologram
4. Credit card number
5. Card brand logo
6. Expiration Date
7. Card Holder Name
8. contactless chip
An example of the reverse side of a typical credit card:
1. Magnetic Stripe
2. Signature Strip
3. Card Security Code
A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services.[1] The issuer of the card creates a revolving account and grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user.
A credit card is different from a charge card: a charge card requires the balance to be paid in full each month. In contrast, credit cards allow the consumers a continuing balance of debt, subject to interest being charged. A credit card also differs from a cash card, which can be used like currency by the owner of the card. Most credit cards are issued by banks or credit unions, and are the shape and size specified by the ISO/IEC 7810 standard as ID-1. This is defined as 85.60 × 53.98 mm (3.370 × 2.125 in) (33/8 × 21/8 in) in size.
Contents
[hide]
1 History
o 1.1 Collectible credit cards
2 How credit cards work
o 2.1 Advertising, solicitation, application and approval
o 2.2 Interest charges
o 2.3 Benefits to customers
o 2.4 Detriments to customers
2.4.1 High interest and bankruptcy
2.4.2 Inflated pricing for all consumers
o 2.5 Grace period
o 2.6 Benefits to merchants
o 2.7 Costs to merchants
o 2.8 Parties involved
o 2.9 Transaction steps
o 2.10 Secured credit cards
o 2.11 Prepaid "credit" cards
3 Features
4 Security problems and solutions
o 4.1 Code 10
5 Credit history
6 Profits and losses
7 Costs
o 7.1 Interest expenses
o 7.2 Operating costs
o 7.3 Charge offs
o 7.4 Rewards
o 7.5 Fraud
o 7.6 Promotion
o 7.7 Revenues
7.7.1 Interchange fee
7.7.2 Interest on outstanding balances
7.7.3 Fees charged to customers
8 Over limit charges
o 8.1 US
o 8.2 UK
9 Neutral consumer resources
o 9.1 Canada
10 Controversy
o 10.1 Hidden costs
11 Credit card numbering
12 Credit cards in ATMs
13 Credit cards as funding for entrepreneurs
14 See also
15 References
16 External links
History
The concept of using a card for purchases was described in 1887 by Edward Bellamy in his utopian novel Looking Backward. Bellamy used the term credit card eleven times in this novel.[2]
The modern credit card was the successor of a variety of merchant credit schemes. It was first used in the 1920s, in the United States, specifically to sell fuel to a growing number of automobile owners. In 1938 several companies started to accept each other's cards. Western Union had begun issuing charge cards to its frequent customers in 1921. Some charge cards were printed on paper card stock, but were easily counterfeited.
The Charga-Plate was an early predecessor to the credit card and used in the U.S. from the 1930s to the late 1950s. It was a 2½" × 1¼" rectangle of sheet metal, similar to a military dog tag, and embossed with the customer's name, city and state. It held a small paper card for a signature. In recording a purchase, the plate was laid into a recess in the imprinter, with a paper "charge slip" positioned on top of it. The record of the transaction included an impression of the embossed information, made by the imprinter pressing an inked ribbon against the charge slip.[3] Charga-Plate was a trademark of Farrington Manufacturing Co. Charga-Plates were issued by large-scale merchants to their regular customers, much like department store credit cards of today. In some cases, the plates were kept in the issuing store rather than held by customers. When an authorized user made a purchase, a clerk retrieved the plate from the store's files and then processed the purchase. Charga-Plates speeded back-office bookkeeping that was done manually in paper ledgers in each store, before computers.
The concept of customers paying different merchants using the same card was implemented in 1950 by Ralph Schneider and Frank McNamara, founders of Diners Club, to consolidate multiple cards. The Diners Club, which was created partially through a merger with Dine and Sign, produced the first "general purpose" charge card, and required the entire bill to be paid with each statement. That was followed byCarte Blanche and in 1958 by American Express which created a worldwide credit card network (although these were initially charge cards that acquired credit card features after BankAmericard demonstrated the feasibility of the concept).
However, until 1958, no one had been able to create a working revolving credit financial instrument issued by a third-party bank that was generally accepted by a large number of merchants (as opposed to merchant-issued revolving cards accepted by only a few merchants). A dozen experiments by small American banks had been attempted (and had failed). In September 1958, Bank of America launched theBankAmericard in Fresno, California. BankAmericard became the first successful recognizably modern credit card (although it underwent a troubled gestation during which its creator resigned), and with its overseas affiliates, eventually evolved into the Visa system. In 1966, the ancestor of MasterCard was born when a group of California banks established Master Charge to compete with BankAmericard; it received a significant boost when Citibank merged its proprietary Everything Card (launched in 1967) into Master Charge in 1969.
Early credit cards in the U.S., of which BankAmericard was the most prominent example, were mass produced and mass mailed to bank customers who were thought to be good credit risks; that is, they were unsolicited. These mass mailings were known as "drops" in banking terminology, and were outlawed in 1970 due to the financial chaos that they caused, but not before 100 million credit cards had been dropped into the U.S. population. After 1970, only credit card applications could be sent unsolicited in mass mailings.
The fractured nature of the U.S. banking system under the Glass–Steagall Act meant that credit cards became an effective way for those who were traveling around the country to move their credit to places where they could not directly use their banking facilities. In 1966 Barclaycardin the UK launched the first credit card outside of the U.S.
There are now countless variations on the basic concept of revolving credit for individuals (as issued by banks and honored by a network of financial institutions), including organization-branded credit cards, corporate-user credit cards, store cards and so on.
Although credit cards reached very high adoption levels in the US, Canada and the UK in the mid twentieth century, many cultures were more cash-oriented, or developed alternative forms of cash-less payments, such as Carte bleue or the Eurocard (Germany, France, Switzerland, and others). In these places, adoption of credit cards was initially much slower. It took until the 1990s to reach anything like the percentage market-penetration levels achieved in the US, Canada, or UK. In some countries, acceptance still remains poor as the use of a credit card system depends on the banking system being perceived as reliable. Japan remains a very cash oriented society, with credit card adoption being limited to only the largest of merchants, although an alternative system based on RFIDs inside cellphones has seen some acceptance. Because of strict regulations regarding banking system overdrafts, some countries, France in particular, were much faster to develop and adopt chip-based credit cards which are now seen as major anti-fraud credit devices. Debit cards and online banking are used more widely than credit cards in some countries.
The design of the credit card itself has become a major selling point in recent years. The value of the card to the issuer is often related to the customer's usage of the card, or to the customer's financial worth. This has led to the rise of Co-Brand and Affinity cards - where the card design is related to the "affinity" (a university or professional society, for example) leading to higher card usage. In most cases a percentage of the value of the card is returned to the affinity group.
Collectible credit cards
A growing field of numismatics (study of money), or more specifically exonumia (study of money-like objects), credit card collectors seek to collect various embodiments of credit from the now familiar plastic cards to older paper merchant cards, and even metal tokens that were accepted as merchant credit cards. Early credit cards were made of celluloid plastic, then metal and fiber, then paper, and are now mostly plastic.
How credit cards work
Credit cards are issued by a credit card issuer, such as a bank or credit union, after an account has been approved by the credit provider, after which cardholders can use it to make purchases at merchants accepting that card. Merchants often advertise which cards they accept by displaying acceptance marks – generally derived from logos – or may communicate this orally, as in "Credit cards are fine" (implicitly meaning "major brands"), "We take (brands X, Y, and Z)", or "We don't take credit cards".
When a purchase is made, the credit card user agrees to pay the card issuer. The cardholder indicates consent to pay by signing a receipt with a record of the card details and indicating the amount to be paid or by entering a personal identification number (PIN). Also, many merchants now accept verbal authorizations via telephone and electronic authorization using the Internet, known as a card not present transaction (CNP).
Electronic verification systems allow merchants to verify in a few seconds that the card is valid and the credit card customer has sufficient credit to cover the purchase, allowing the verification to happen at time of purchase. The verification is performed using a credit card payment terminal or point-of-sale (POS) system with a communications link to the merchant'sacquiring bank. Data from the card is obtained from a magnetic stripe or chip on the card; the latter system is called Chip and PIN in the United Kingdom and Ireland, and is implemented as an EMV card.
For card not present transactions where the card is not shown (e.g., e-commerce, mail order, and telephone sales), merchants additionally verify that the customer is in physical possession of the card and is the authorized user by asking for additional information such as the security code printed on the back of the card, date of expiry, and billing address.
Each month, the credit card user is sent a statement indicating the purchases undertaken with the card, any outstanding fees, and the total amount owed. After receiving the statement, the cardholder may dispute any charges that he or she thinks are incorrect (see 15 U.S.C. § 1643 , which limits cardholder liability for unauthorized use of a credit card to $50, and theFair Credit Billing Act for details of the US regulations). Otherwise, the cardholder must pay a defined minimum proportion of the bill by a due date, or may choose to pay a higher amount up to the entire amount owed. The credit issuer charges interest on the amount owed if the balance is not paid in full (typically at a much higher rate than most other forms of debt). In addition, if the credit card user fails to make at least the minimum payment by the due date, the issuer may impose a "late fee" and/or other penalties on the user. To help mitigate this, some financial institutions can arrange for automatic payments to be deducted from the user's bank accounts, thus avoiding such penalties altogether as long as the cardholder has sufficient funds.
Advertising, solicitation, application and approval
Credit card advertising regulations include the Schumer box disclosure requirements. A large fraction of junk mail consists of credit card offers created from lists provided by the majorcredit reporting agencies. In the United States, the three major US credit bureaus (Equifax, TransUnion and Experian) allow consumers to opt out from related credit card solicitation offers via its Opt Out Pre Screen program.
Interest charges
Credit card issuers usually waive interest charges if the balance is paid in full each month, but typically will charge full interest on the entire outstanding balance from the date of each purchase if the total balance is not paid.
For example, if a user had a $1,000 transaction and repaid it in full within this grace period, there would be no interest charged. If, however, even $1.00 of the total amount remained unpaid, interest would be
charged on the $1,000 from the date of purchase until the payment is received. The precise manner in which interest is charged is usually detailed in a cardholder agreement which may be summarized on the back of the monthly statement. The general calculation formula most financial institutions use to determine the amount of interest to be charged is APR/100 x ADB/365 x number of days revolved. Take the Annual percentage rate (APR) and divide by 100 then multiply to the amount of the average daily balance (ADB) divided by 365 and then take this total and multiply by the total number of days the amount revolved before payment was made on the account. Financial institutions refer to interest charged back to the original time of the transaction and up to the time a payment was made, if not in full, as RRFC or residual retail finance charge. Thus after an amount has revolved and a payment has been made, the user of the card will still receive interest charges on their statement after paying the next statement in full (in fact the statement may only have a charge for interest that collected up until the date the full balance was paid, i.e. when the balance stopped revolving).
The credit card may simply serve as a form of revolving credit, or it may become a complicated financial instrument with multiple balance segments each at a different interest rate, possibly with a single umbrella credit limit, or with separate credit limits applicable to the various balance segments. Usually this compartmentalization is the result of special incentive offers from the issuing bank, to encourage balance transfers from cards of other issuers. In the event that several interest rates apply to various balance segments, payment allocation is generally at the discretion of the issuing bank, and payments will therefore usually be allocated towards the lowest rate balances until paid in full before any money is paid towards higher rate balances. Interest rates can vary considerably from card to card, and the interest rate on a particular card may jump dramatically if the card user is late with a payment on that cardor any other credit instrument, or even if the issuing bank decides to raise its revenue.
Benefits to customers
The main benefit to each customer is convenience. Compared to debit cards and cheques, a credit card allows small short-term loans to be quickly made to a customer who need not calculate a balance remaining before every transaction, provided the total charges do not exceed the maximum credit line for the card. Credit cards also provide more fraud protection than debit cards. In the UK for example, the bank is jointly liable with the merchant for purchases of defective products over £100.[4]
Many credit cards offer rewards and benefits packages, such as offering enhanced product warranties at no cost, free loss/damage coverage on new purchases, and points which may be redeemed for cash, products, or airline tickets. Additionally, carrying a credit card may be a convenience to some customers as it eliminates the need to carry any cash for most purposes.
Detriments to customers
High interest and bankruptcy
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Low introductory credit card rates are limited to a fixed term, usually between 6 and 12 months, after which a higher rate is charged. As all credit cards charge fees and interest, some customers become so indebted to their credit card provider that they are driven to bankruptcy. Some credit cards often levy a rate of 20 to 30 percent after a payment is missed; in other cases a fixed charge is levied without change to the interest rate. In some cases universal default may apply: the high default rate is applied to a card in good standing by missing a payment on an unrelated account from the same provider. This can lead to a snowball effect in which the consumer is drowned by unexpectedly high interest rates. Further, most card
holder agreements enable the issuer to arbitrarily raise the interest rate for any reason they see fit. As of December 2009, First Premier Bank is reportedly offering a credit card with a 79.9% interest rate.[5]
Inflated pricing for all consumers
Merchants that accept credit cards must pay interchange fees and discount fees on all credit-card transactions.[6][7] In some cases merchants are barred by their credit agreements from passing these fees directly to credit card customers, or from setting a minimum transaction amount (no longer prohibited in the United States).[8] The result is that merchants may charge all customers (including those who do not use credit cards) higher prices to cover the fees on credit card transactions.[7] In the United States in 2008 credit card companies collected a total of $48 billion in interchange fees, or an average of $427 per family, with an average fee rate of about 2% per transaction.[7]
Grace period
A credit card's grace period is the time the customer has to pay the balance before interest is assessed on the outstanding balance. Grace periods may vary, but usually range from 20 to 50 days depending on the type of credit card and the issuing bank. Some policies allow for reinstatement after certain conditions are met.
Usually, if a customer is late paying the balance, finance charges will be calculated and the grace period does not apply. Finance charges incurred depend on the grace period and balance; with most credit cards there is no grace period if there is any outstanding balance from the previous billing cycle or statement (i.e. interest is applied on both the previous balance and new transactions). However, there are some credit cards that will only apply finance charge on the previous or old balance, excluding new transactions.
Benefits to merchants
An example of street markets accepting credit cards. Most simply display theacceptance marks (stylized
logos, shown in the upper-left corner of the sign) of all the cards they accept.
For merchants, a credit card transaction is often more secure than other forms of payment, such as cheques, because the issuing bank commits to pay the merchant the moment the transaction is authorized, regardless of whether the consumer defaults on the credit card payment (except for legitimate disputes, which are discussed below, and can result in charges back to the merchant). In most cases, cards are even more secure than cash, because they discourage theft by the merchant's employees and reduce the amount of cash on the premises.
Prior to credit cards, each merchant had to evaluate each customer's credit history before extending credit. That task is now performed by the banks which assume the credit risk. Credit cards can also aid in securing a sale, especially if the customer does not have enough cash on his or her person or checking account. Extra turnover is generated by the fact that the customer can purchase goods and/or services immediately and is less inhibited by the amount of cash in his or her pocket and the immediate state of his or her bank balance. Much of merchants' marketing is based on this immediacy.
For each purchase, the bank charges the merchant a commission (discount fee) for this service and there may be a certain delay before the agreed payment is received by the merchant. The commission is often a percentage of the transaction amount, plus a fixed fee (interchange rate). In addition, a merchant may be penalized or have their ability to receive payment using that credit card restricted if there are too many cancellations or reversals of charges as a result of disputes. Some small merchants require credit purchases to have a minimum amount to compensate for the transaction costs.
In some countries, for example the Nordic countries, banks guarantee payment on stolen cards only if an ID card is checked and the ID card number/civic registration number is written down on the receipt together with the signature. In these countries merchants therefore usually ask for ID. Non-Nordic citizens, who are unlikely to possess a Nordic ID card or driving license, will instead have to show their passport, and the passport number will be written down on the receipt, sometimes together with other information. Some shops use the card's PIN for identification, and in that case showing an ID card is not necessary.
Costs to merchants
Merchants are charged several fees for the privilege of accepting credit cards. The merchant is usually charged a commission of around 1 to 3 per-cent of the value of each transaction paid for by credit card. The merchant may also pay a variable charge, called an interchange rate, for each transaction.[6] In some instances of very low-value transactions, use of credit cards will significantly reduce the profit margin or cause the merchant to lose money on the transaction. Merchants must accept these transactions as part of their costs to retain the right to accept credit card transactions. Merchants with very low average transaction prices or very high average transaction prices are more averse to accepting credit cards. In some cases merchants may charge users a "credit card supplement", either a fixed amount or a percentage, for payment by credit card.[9] This practice is prohibited by the credit card contracts in the United States, although the contracts allow the merchants to give discounts for cash payment.
In certain countries, merchants are required to pay the acquiring banks a monthly terminal rental fee[citation
needed] if the terminals are provided by the acquiring banks. Merchants can apply to the acquiring banks for waivers of the fees, which the banks usually agree to for merchants with a high volume of sales, but not for smaller ones.[citation needed]
Parties involved
Cardholder: The holder of the card used to make a purchase; the consumer.
Card-issuing bank: The financial institution or other organization that issued the credit card to the cardholder. This bank bills the consumer for repayment and bears the risk that the card is used fraudulently. American Express and Discover were previously the only card-issuing banks for their respective brands, but as of 2007, this is no longer the case. Cards issued by banks to cardholders in a different country are known as offshore credit cards.
Merchant: The individual or business accepting credit card payments for products or services sold to the cardholder.
Acquiring bank : The financial institution accepting payment for the products or services on behalf of the merchant.
Independent sales organization : Resellers (to merchants) of the services of the acquiring bank.
Merchant account : This could refer to the acquiring bank or the independent sales organization, but in general is the organization that the merchant deals with.
Credit Card association: An association of card-issuing banks such as Visa, MasterCard, Discover, American Express, etc. that set transaction terms for merchants, card-issuing banks, and acquiring banks.
Transaction network: The system that implements the mechanics of the electronic transactions. May be operated by an independent company, and one company may operate multiple networks.
Affinity partner: Some institutions lend their names to an issuer to attract customers that have a strong relationship with that institution, and get paid a fee or a percentage of the balance for each card issued using their name. Examples of typical affinity partners are sports teams, universities, charities, professional organizations, and major retailers.
The flow of information and money between these parties — always through the card associations — is known as the interchange, and it consists of a few steps.
This section
requires expansion.
Transaction steps
Authorization : The cardholder pays for the purchase and the merchant submits the transaction to the acquirer (acquiring bank). The acquirer verifies the credit card number, the transaction type and the amount with the issuer (Card-issuing bank) and reserves that amount of the cardholder's credit limit for the merchant. An authorization will generate an approval code, which the merchant stores with the transaction.
Batching: Authorized transactions are stored in "batches", which are sent to the acquirer. Batches are typically submitted once per day at the end of the business day. If a transaction is not submitted in the batch, the authorization will stay valid for a period determined by the issuer, after which the held amount will be returned back to the cardholder's available credit (see authorization hold). Some transactions may be submitted in the batch without prior authorizations; these are either transactions falling under the merchant's floor limit or ones where the authorization was unsuccessful but the merchant still attempts to force the transaction through. (Such may be the case when the cardholder is not present but owes the merchant additional money, such as extending a hotel stay or car rental.)
Clearing and Settlement: The acquirer sends the batch transactions through the credit card association, which debits the issuers for payment and credits the acquirer. Essentially, the issuer pays the acquirer for the transaction.
Funding: Once the acquirer has been paid, the acquirer pays the merchant. The merchant receives the amount totaling the funds in the batch minus either the "discount rate," "mid-qualified
rate", or "non-qualified rate" which are tiers of fees the merchant pays the acquirer for processing the transactions.
Chargebacks: A chargeback is an event in which money in a merchant account is held due to a dispute relating to the transaction. Chargebacks are typically initiated by the cardholder. In the event of a chargeback, the issuer returns the transaction to the acquirer for resolution. The acquirer then forwards the chargeback to the merchant, who must either accept the chargeback or contest it. A merchant is responsible for the chargeback only if she has violated the card acceptance procedures as per the merchant agreement with card acquirers.[citation needed]
Secured credit cards
A secured credit card is a type of credit card secured by a deposit account owned by the cardholder. Typically, the cardholder must deposit between 100% and 200% of the total amount of credit desired. Thus if the cardholder puts down $1000, they will be given credit in the range of $500–$1000. In some cases, credit card issuers will offer incentives even on their secured card portfolios. In these cases, the deposit required may be significantly less than the required credit limit, and can be as low as 10% of the desired credit limit. This deposit is held in a special savings account. Credit card issuers offer this because they have noticed that delinquencies were notably reduced when the customer perceives something to lose if the balance is not repaid.
The cardholder of a secured credit card is still expected to make regular payments, as with a regular credit card, but should they default on a payment, the card issuer has the option of recovering the cost of the purchases paid to the merchants out of the deposit. The advantage of the secured card for an individual with negative or no credit history is that most companies report regularly to the major credit bureaus. This allows for building of positive credit history.
Although the deposit is in the hands of the credit card issuer as security in the event of default by the consumer, the deposit will not be debited simply for missing one or two payments. Usually the deposit is only used as an offset when the account is closed, either at the request of the customer or due to severe delinquency (150 to 180 days). This means that an account which is less than 150 days delinquent will continue to accrue interest and fees, and could result in a balance which is much higher than the actual credit limit on the card. In these cases the total debt may far exceed the original deposit and the cardholder not only forfeits their deposit but is left with an additional debt.
Most of these conditions are usually described in a cardholder agreement which the cardholder signs when their account is opened.
Secured credit cards are an option to allow a person with a poor credit history or no credit history to have a credit card which might not otherwise be available. They are often offered as a means of rebuilding one's credit. Fees and service charges for secured credit cards often exceed those charged for ordinary non-secured credit cards, however, for people in certain situations, (for example, after charging off on other credit cards, or people with a long history of delinquency on various forms of debt), secured cards are almost always more expensive then unsecured credit cards.
Sometimes a credit card will be secured by the equity in the borrower's home.
Prepaid "credit" cards
See also: Stored-value card
A prepaid credit card is not a true credit card,[10] since no credit is offered by the card issuer: the card-holder spends money which has been "stored" via a prior deposit by the card-holder or someone else, such as a parent or employer. However, it carries a credit-card brand (such
as Visa, MasterCard, American Express, Discover, or JCB) and can be used in similar ways just as though it were a regular credit card.[10] Unlike debit cards, prepaid credit cards generally do not require a PIN. An exception are prepaid credit cards with an EMVchip. These cards do require a PIN if the payment is processed via Chip and PIN technology.
After purchasing the card, the cardholder loads the account with any amount of money, up to the predetermined card limit and then uses the card to make purchases the same way as a typical credit card. Prepaid cards can be issued to minors (above 13) since there is no credit line involved. The main advantage over secured credit cards (see above section) is that you are not required to come up with $500 or more to open an account.[11] With prepaid credit cards purchasers not charged any interest but are often charged a purchasing fee plus monthly fees after an arbitrary time period. Many other fees also usually apply to a prepaid card.[10]
Prepaid credit cards are sometimes marketed to teenagers[10] for shopping online without having their parents complete the transaction.[12]
Because of the many fees that apply to obtaining and using credit-card-branded prepaid cards, the Financial Consumer Agency of Canada describes them as "an expensive way to spend your own money".[13] The agency publishes a booklet entitled Pre-paid Cards[14] which explains the advantages and disadvantages of this type of prepaid card.
Features
As well as convenient, accessible credit, credit cards offer consumers an easy way to track expenses, which is necessary for both monitoring personal expenditures and the tracking of work-related expenses for taxation and reimbursement purposes. Credit cards are accepted worldwide, and are available with a large variety of credit limits, repayment arrangement, and other perks (such as rewards schemes in which points earned by purchasing goods with the card can be redeemed for further goods and services or credit card cashback).
Some countries, such as the United States, the United Kingdom, and France, limit the amount for which a consumer can be held liable due to fraudulent transactions as a result of a consumer's credit card being lost or stolen.
Security problems and solutions
Main article: Credit card fraud
See also: Wireless identity theft
Credit card security relies on the physical security of the plastic card as well as the privacy of the credit card number. Therefore, whenever a person other than the card owner has access to the card or its number, security is potentially compromised. Once, merchants would often accept credit card numbers without additional verification for mail order purchases. It's now common practice to only ship to confirmed addresses as a security measure to minimise fraudulent purchases. Some merchants will accept a credit card number for in-store purchases, whereupon access to the number allows easy fraud, but many require the card itself to be present, and require a signature. A lost or stolen card can be cancelled, and if this is done quickly, will greatly limit the fraud that can take place in this way. For internet purchases, there is sometimes the same level of security as for mail order (number only) hence requiring only that the fraudster take care about collecting the goods, but often there are additional measures.[citation
needed] European banks can require a cardholder's security PIN be entered for in-person purchases with the card.
The PCI DSS is the security standard issued by The PCI SSC (Payment Card Industry Security Standards Council). This data security standard is used by acquiring banks to impose cardholder data security measures upon their merchants.
A smart card, combining credit card anddebit card properties. The 3 by 5 mm security chip embedded in
the card is shown enlarged in the inset. The contact pads on the card enable electronic access to the
chip.
The low security of the credit card system presents countless opportunities for fraud.[according to whom?] This opportunity has created a huge[specify] black market in stolen credit card numbers, which are generally used quickly before the cards are reported stolen.[citation needed]
The goal of the credit card companies is not to eliminate fraud, but to "reduce it to manageable levels".[15] This implies that high-cost low-return fraud prevention measures will not be used if their cost exceeds the potential gains from fraud reduction - as would be expected from organisations whose goal is profit maximisation.
Internet fraud may be by claiming a chargeback which is not justified ("friendly fraud"), or carried out by the use of credit card information which can be stolen in many ways, the simplest being copying information from retailers, either online or offline. Despite efforts to improve security for remote purchases using credit cards, security breaches are usually the result of poor practice by merchants. For example, a website that safely uses SSL to encrypt card data from a client may then email the data, unencrypted, from the webserver to the merchant; or the merchant may store unencrypted details in a way that allows them to be accessed over the Internet or by a rogue employee; unencrypted card details are always a security risk. Even encryption data may be cracked.
Controlled Payment Numbers which are used by various banks such as Citibank (Virtual Account Numbers), Discover (Secure Online Account Numbers, Bank of America (Shop Safe), 5 banks using eCarte Bleue and CMB's Virtualis in France, and Swedbank of Sweden's eKort product are another option for protecting against credit card fraud. These are generally one-time use numbers that front one's actual account (debit/credit) number, and are generated as one shops on-line. They can be valid for a relatively short time, for the actual amount of the purchase, or for a price limit set by the user. Their use can be limited to one merchant. If the number given to the merchant is compromised, it will be rejected if an attempt is made to use it again.
A similar system of controls can be used on physical cards. For example if a consumer has a Chip and PIN (EMV) enabled card the card can be limited so that it be used only at point of sale locations (i.e. restricted from being used on-line)[citation needed] and only in a given territory (i.e. only for use in Canada). This
technology provides the option for banks to support many other controls too that can be turned on and off and varied by the credit card owner in real time as circumstances change (i.e., they can change temporal, numerical, geographical and many other parameters on their primary and subsidiary cards). Apart from the obvious benefits of such controls: from a security perspective this means that a customer can have a Chip and PIN card secured for the real world, and limited for use in the home country. In this eventuality a thief stealing the details will be prevented from using these overseas in non chip and pin (EMV) countries. Similarly the real card can be restricted from use on-line so that stolen details will be declined if this tried. Then when card users shop online they can use virtual account numbers. In both circumstances an alert system can be built in notifying a user that a fraudulent attempt has been made which breaches their parameters, and can provide data on this in real time. This is the optimal method of security for credit cards, as it provides very high levels of security, control and awareness in the real and virtual world. Furthermore it requires no changes for merchants at all and is attractive to users, merchants and banks, as it not only detects fraud but prevents it.[citation needed]
Additionally, there are security features present on the physical card itself in order to prevent counterfeiting. For example, most modern credit cards have a watermark that will fluoresce under ultraviolet light. A Visa card has a letter V superimposed over the regular Visa logo and a Mastercard has the letters MC across the front of the card. Older Visa cards have a bald eagle or dove across the front. In the aforementioned cases, the security features are only visible under ultraviolet light and are invisible in normal light. Similar security features are present in paper currency and certain ID cards in the United States, as well.[citation needed]
The Federal Bureau of Investigation and U.S. Postal Inspection Service are responsible for prosecuting criminals who engage in credit card fraud in the United States, but they do not have the resources to pursue all criminals. In general, federal officials only prosecute cases exceeding US$5,000. Three improvements to card security have been introduced to the more common credit card networks but none has proven to help reduce credit card fraud so far. First, the on-line verification system used by merchants is being enhanced to require a 4 digitPersonal Identification Number (PIN) known only to the card holder. Second, the cards themselves are being replaced with similar-looking tamper-resistant smart cards which are intended to make forgery more difficult. The majority of smart card (IC card) based credit cards comply with the EMV (Europay MasterCard Visa) standard. Third, an additional 3 or 4 digitCard Security Code (CSC) is now present on the back of most cards, for use in card not present transactions. Stakeholders at all levels in electronic payment have recognized the need to develop consistent global standards for security that account for and integrate both current and emerging security technologies. They have begun to address these needs through organizations such as PCI DSS and the Secure POS Vendor Alliance.[16]
Code 10
Code 10 calls are made when merchants are suspicious about accepting a credit card. The phrase "Code 10 authorization" is used to avoid alerting the customer to the fact that the merchant is suspicious of their card[citation needed].
The operator then asks the merchant a series of YES or NO questions to find out whether the merchant is suspicious of the card or the cardholder. The merchant may be asked to retain the card if it is safe to do so.
Credit history
The way credit card owners pay off their balances has a tremendous effect on their credit history. Two of the most important factors reported to a credit bureau are the timeliness of the debt payments and the amount of debt to credit limit. Lenders want to see payments made as agreed, usually on a monthly basis, and a credit balance of around one-third the credit limit. The credit information stays on the credit report
generally for 7 years. However, there are a few jurisdictions and situations where the timeframe might differ.
Profits and losses
In recent times, credit card portfolios have been very profitable for banks, largely due to the booming economy of the late nineties. However, in the case of credit cards, such high returns go hand in hand with risk, since the business is essentially one of making unsecured (uncollateralized) loans, and thus dependent on borrowers not to default in large numbers.
Costs
Credit card issuers (banks) have several types of costs:
Interest expenses
Banks generally borrow the money they then lend to their customers. As they receive very low-interest loans from other firms, they may borrow as much as their customers require, while lending their capital to other borrowers at higher rates. If the card issuer charges 15% on money lent to users, and it costs 5% to borrow the money to lend, and the balance sits with the cardholder for a year, the issuer earns 10% on the loan. This 10% difference is the "net interest spread" and the 5% is the "interest expense".
Operating costs
This is the cost of running the credit card portfolio, including everything from paying the executives who run the company to printing the plastics, to mailing the statements, to running the computers that keep track of every cardholder's balance, to taking the many phone calls which cardholders place to their issuer, to protecting the customers from fraud rings. Depending on the issuer, marketing programs are also a significant portion of expenses.
Charge offs
When a consumer becomes severely delinquent on a debt (often at the point of six months without payment), the creditor may declare the debt to be a charge-off. It will then be listed as such on the debtor's credit bureau reports (Equifax, for instance, lists "R9" in the "status" column to denote a charge-off.) The item will include relevant dates, and the amount of the bad debt.[citation needed]
A charge-off is considered to be "written off as uncollectable." To banks, bad debts and even fraud are simply part of the cost of doing business.
However, the debt is still legally valid, and the creditor can attempt to collect the full amount for the time periods permitted under state law, which is usually 3 to 7 years. This includes contacts from internal collections staff, or more likely, an outside collection agency. If the amount is large (generally over $1500–$2000), there is the possibility of a lawsuit or arbitration.
In the United States, as the charge off number climbs or becomes erratic, officials from the Federal Reserve take a close look at the finances of the bank and may impose various operating strictures on the bank, and in the most extreme cases, may close the bank entirely.[citation needed]
Rewards
Many credit card customers receive rewards, such as frequent flyer points, gift certificates, or cash back as an incentive to use the card. Rewards are generally tied to purchasing an item or service on the
card, which may or may not include balance transfers, cash advances, or other special uses. Depending on the type of card, rewards will generally cost the issuer between 0.25% and 2.0% of the spread. Networks such as Visa or MasterCard have increased their fees to allow issuers to fund their rewards system. Some issuers discourage redemption by forcing the cardholder to call customer service for rewards. On their servicing website, redeeming awards is usually a feature that is very well hidden by the issuers. Others encourage redemption for lower cost merchandise; instead of an airline ticket, which is very expensive to an issuer, the cardholder may be encouraged to redeem for a gift certificate instead[citation needed]. With a fractured and competitive environment, rewards points cut dramatically into an issuer's bottom line, and rewards points and related incentives must be carefully managed to ensure a profitable portfolio. Unlike unused gift cards, in whose case the breakage in certain US states goes to the state's treasury, unredeemed credit card points are retained by the issuer.
Fraud
In relative numbers the values lost in bank card fraud are minor, calculated in 2006 at 7 cents per 100 dollars worth of transactions (7 basis points).[17] In 2004, in the UK, the cost of fraud was over £500 million.[18] When a card is stolen, or an unauthorized duplicate made, most card issuers will refund some or all of the charges that the customer has received for things they did not buy. These refunds will, in some cases, be at the expense of the merchant, especially in mail order cases where the merchant cannot claim sight of the card. In several countries, merchants will lose the money if no ID card was asked for, therefore merchants usually require ID card in these countries. Credit card companies generally guarantee the merchant will be paid on legitimate transactions regardless of whether the consumer pays their credit card bill. Most banking services have their own credit card services that handle fraud cases and monitor for any possible attempt at fraud. Employees that are specialized in doing fraud monitoring and investigation are often placed in Risk Management, Fraud and Authorization, or Cards and Unsecured Business. Fraud monitoring emphasizes minimizing fraud losses while making an attempt to track down those responsible and contain the situation. Credit card fraud is a major white collar crime that has been around for many decades, even with the advent of the chip based card (EMV) that was put into practice in some countries to prevent cases such as these. Even with the implementation of such measures, credit card fraud continues to be a problem.
Promotion
Promotional purchase is any purchase on which separate terms and conditions are set on each individual transaction unlike a standard purchase where the terms are set on the cardholder’s account record and their pricing strategy. All promotional purchases that post to a particular account will be carrying its own balance called as Promotional Balance.
Revenues
Offsetting costs are the following revenues:
Interchange fee
Main article: Interchange fee
In addition to fees paid by the card holder, merchants must also pay interchange fees to the card-issuing bank and the card association.[19][20] For a typical credit card issuer, interchange fee revenues may represent about a quarter of total revenues.[21]
These fees are typically from 1 to 6 percent of each sale, but will vary not only from merchant to merchant (large merchants can negotiate lower rates[21]), but also from card to card, with business cards and rewards cards generally costing the merchants more to process. The interchange fee that applies to a particular transaction is also affected by many other variables including: the type of merchant, the
merchant's total card sales volume, the merchant's average transaction amount, whether the cards were physically present, how the information required for the transaction was received, the specific type of card, when the transaction was settled, and the authorized and settled transaction amounts. In some cases, merchants add a surcharge to the credit cards to cover the interchange fee, encouraging their customers to instead use cash, debit cards, or even cheques.
Interest on outstanding balances
Interest charges vary widely from card issuer to card issuer. Often, there are "teaser" rates in effect for initial periods of time (as low as zero percent for, say, six months), whereas regular rates can be as high as 40 percent. In the U.S. there is no federal limit on the interest or late fees credit card issuers can charge; the interest rates are set by the states, with some states such as South Dakota, having no ceiling on interest rates and fees, inviting some banks to establish their credit card operations there. Other states, for example Delaware, have very weak usury laws. The teaser rate no longer applies if the customer doesn't pay their bills on time, and is replaced by a penalty interest rate (for example, 23.99%) that applies retroactively.
Fees charged to customers
The major fees are for:
Late payments or overdue payments
Charges that result in exceeding the credit limit on the card (whether done deliberately or by mistake), called overlimit fees
Returned cheque fees or payment processing fees (e.g. phone payment fee)
Cash advances and convenience cheques (often 3% of the amount)
Transactions in a foreign currency (as much as 3% of the amount). A few financial institutions do not charge a fee for this.
Membership fees (annual or monthly), sometimes a percentage of the credit limit.
Exchange rate loading fees (sometimes these might not be reported on the customer's statement, even when applied).[22] The variation of exchange rates applied by different credit cards can be very substantial, as much as 10% according to a Lonely Planet report in 2009.[23]
Over limit charges
Consumers who keep their account in good order by always staying within their credit limit, and always making at least the minimum monthly payment will see interest as the biggest expense from their card provider. Those who are not so careful and regularly surpass their credit limit or are late in making payments are exposed to multiple charges that were typically as high as £25 - £35 [24] until a ruling from the Office of Fair Trading [25] that they would presume charges over £12 to be unfair which led the majority of card providers to reduce their fees to exactly that level.
US
The Credit CARD Protection Act of 2009, initiated during the term of President G W Bush, and signed into law by President Obama, requires that consumers "opt-in" to over-limit charges. Some card issuers have therefore commenced solicitations requesting customers to opt in to overlimit fees, presenting this as a
benefit as it may avoid the possibility of a future transaction being declined. Other issuers have simply discontinued the practice of charging overlimit fees. Whether a customer opts in to the overlimit fee or not, banks will in practice have discretion as to whether they choose to authorize transactions above the credit limit or not. Of course, any approved over limit transactions will only result in an overlimit fee for those customers who have opted in to the fee. This legislation took effect on February 22, 2010.
UK
The higher level of fees originally charged were claimed to be designed to recoup the costs of the card operator's overall business and to ensure that the credit card business as a whole generated a profit, rather than simply recovering the cost to the provider of the limit breach which has been estimated as typically between £3-£4. Profiting from a customer's mistakes is arguably not permitted under UK common law, if the charges constitute penalties for breach of contract, or under the Unfair Terms In Consumer Regulations 1999.
Subsequent rulings in respect of personal current accounts suggest that the argument that these charges are penalties for breach of contract is weak, and given the OFT's ruling it seems unlikely that any further test case will take place.
Whilst the law remains in the balance, many consumers have made claims against their credit cards providers for the charges that they have incurred, plus interest that they would have earned had the money not been deducted from their account. It is likely that claims for amounts charged in excess of £12 will succeed, but claims for charges at the OFT's £12 threshold level are more contentious.
Neutral consumer resources
Canada
The Government of Canada maintains a database of the fees, features, interest rates and reward programs of nearly 200 credit cards available in Canada. This database is updated on a quarterly basis with information supplied by the credit card issuing companies. Information in the database is published every quarter on the website of the Financial Consumer Agency of Canada (FCAC).
Information in the database is published in two formats. It is available in PDF comparison tables that break down the information according to type of credit card, allowing the reader to compare the features of, for example, all the student credit cards in the database.
The database also feeds into an interactive tool on the FCAC website.[26] The interactive tool uses several interview-type questions to build a profile of the user's credit card usage habits and needs, eliminating unsuitable choices based on the profile, so that the user is presented with a small number of credit cards and the ability to carry out detailed comparisons of features, reward programs, interest rates, etc.
Controversy
Credit card debt has increased steadily. Since the late 1990s, lawmakers, consumer advocacy groups, college officials and other higher education affiliates have become increasingly concerned about the rising use of credit cards among college students. The major credit card companies have been accused of targeting a younger audience, in particular collegestudents, many of whom are already in debt with college tuition fees and college loans and who typically are less experienced at managing their own finances. Credit card debt may also negatively affect their grades as they are likely to work more both part and full time positions.[27]
Another controversial area is the universal default feature of many North American credit card contracts. When a cardholder is late paying a particular credit card issuer, that card's interest rate can be raised,
often considerably. With universal default, a customer's other credit cards, for which the customer may be current on payments, may also have their rates and/or credit limit changed. The universal default feature allows creditors to periodically check cardholders' credit portfolios to view trade, allowing these other institutions to decrease the credit limit and/or increase rates on cardholders who may be late with another credit card issuer. Being late on one credit card will potentially affect all the cardholder's credit cards.Citibank voluntarily stopped this practice in March 2007 and Chase stopped the practice in November 2007.[28] The fact that credit card companies can change the interest rate on debts that were incurred when a different rate of interest was in place is similar to adjustable rate mortgages where interest rates on current debt may rise. However, in both cases this is agreed to in advance, and is a trade off that allows a lower initial rate as well as the possibility of an even lower rate (mortgages, if interest rates fall) or perpetually keeping a below-market rate (credit cards, if the user makes their debt payments on time). It should be noted that the Universal Default practice was actually encouraged by Federal Regulators, particularly those at the Office of the Comptroller of the Currency (OCC) as a means of managing the changing risk profiles of cardholders.
Another controversial area is the trailing interest issue. Trailing interest is the practice of charging interest on the entire bill no matter what percentage of it is paid. U.S Senator Carl Levinraised the issue of millions of Americans affected by hidden fees, compounding interest and cryptic terms. Their woes were heard in a Senate Permanent Subcommittee on Investigations hearing which was chaired by Senator Levin, who said that he intends to keep the spotlight on credit card companies and that legislative action may be necessary to purge the industry.[29] In 2009, the C.A.R.D. Act was signed into law, enacting protections for many of the issues Levin had raised.
In the United States, some have called for Congress to enact additional regulations on the industry; to expand the disclosure box clearly disclosing rate hikes, use plain language, incorporate balance payoff disclosures, and also to outlaw universal default. At a congress hearing around March 1, 2007, Citibank announced it would no longer practice this, effective immediately. Opponents of such regulation argue that customers must become more proactive and self-responsible in evaluating and negotiating terms with credit providers. Some of the nation's influential top credit card issuers, who are among the top fifty corporate contributors to political campaigns, successfully opposed it.
Hidden costs
In the United Kingdom, merchants won the right through The Credit Cards (Price Discrimination) Order 1990[30] to charge customers different prices according to the payment method. As of 2007, the United Kingdom was one of the world's most credit-card-intensive countries, with 2.4 credit cards per consumer, according to the UK Payments Administration Ltd.[31]
In the United States, until 1984 federal law prohibited surcharges on card transactions. Although the federal Truth in Lending Act provisions that prohibited surcharges expired that year, a number of states have since enacted laws that continue to outlaw the practice; California, Colorado, Connecticut, Florida, Kansas, Massachusetts, Maine, New York, Oklahoma, and Texas have laws against surcharges. As of 2006, the United States probably had one of the world's if not the top ratio of credit cards per capita, with 984 million bank-issued Visa and MasterCard credit card and debit card accounts alone for an adult population of roughly 220 million people.[32] The credit card per US capita ratio was nearly 4:1 as of 2003[33] and as high as 5:1 as of 2006.[34]
Credit card numbering
Main article: Credit card number
The numbers found on credit cards have a certain amount of internal structure, and share a common numbering scheme.
The card number's prefix, called the Bank Identification Number, is the sequence of digits at the beginning of the number that determine the bank to which a credit card number belongs. This is the first six digits for MasterCard and Visa cards. The next nine digits are the individual account number, and the final digit is a validity check code.
In addition to the main credit card number, credit cards also carry issue and expiration dates (given to the nearest month), as well as extra codes such as issue numbers and security codes. Not all credit cards have the same sets of extra codes nor do they use the same number of digits.
Credit cards in ATMs
Many credit cards can also be used in an ATM to withdraw money against the credit limit extended to the card, but many card issuers charge interest on cash advances before they do so on purchases. The interest on cash advances is commonly charged from the date the withdrawal is made, rather than the monthly billing date. Many card issuers levy a commission for cash withdrawals, even if the ATM belongs to the same bank as the card issuer. Merchants do not offer cashback on credit card transactions because they would pay a percentage commission of the additional cash amount to their bank or merchant services provider, thereby making it uneconomical.
Many credit card companies will also, when applying payments to a card, do so at the end of a billing cycle, and apply those payments to everything before cash advances. For this reason, many consumers have large cash balances, which have no grace period and incur interest at a rate that is (usually) higher than the purchase rate, and will carry those balance for years, even if they pay off their statement balance each month.
Credit cards as funding for entrepreneurs
Credit cards are a risky way for entrepreneurs to acquire capital for their start ups when more conventional financing is unavailable. It's widely reported that Len Bosack and Sandy Lernerused personal credit cards[35] to start Cisco Systems. It is rumoured that Larry Page and Sergey Brin's start up of Google was financed by credit cards to buy the necessary computers and office equipment, more specifically "a terabyte of hard disks".[36] Similarly, filmmaker Robert Townsend financed part of Hollywood Shuffle using credit cards.[37] Director Kevin Smithfunded Clerks in part by maxing out several credit cards. Actor Richard Hatch also financed his production of Battlestar Galactica: The Second Coming partly through his credit cards. Famed hedge fund manager Bruce Kovner began his career (and, later on, his firm Caxton Associates) in financial markets by borrowing from his credit card. UK entrepreneur James Caan (as seen on Dragon's Den) financed his first business using several credit cards.
debit card (also known as a bank card or check card) is a plastic card that provides an alternative
payment method to cash when making purchases. Functionally, it can be called an electronic check, as
the funds are withdrawn directly from either the bank account, or from the remaining balance on the card.
In some cases, the cards are designed exclusively for use on the Internet, and so there is no physical
card.[1][2]
In many countries the use of debit cards has become so widespread that their volume of use has
overtaken or entirely replaced the check and, in some instances, cash transactions. Like credit cards,
debit cards are used widely for telephone and Internet purchases and, unlike credit cards, the funds are
transferred immediately from the bearer's bank account instead of having the bearer pay back the money
at a later date.
Debit cards may also allow for instant withdrawal of cash, acting as the ATM card for withdrawing cash
and as a check guarantee card. Merchants may also offer cashback facilities to customers, where a
customer can withdraw cash along with their purchase.
Contents
[hide]
1 Types of debit card systems
o 1.1 Online Debit System
o 1.2 Offline Debit System
o 1.3 Electronic Purse Card System
o 1.4 Prepaid debit cards
2 Advantages and disadvantages
o 2.1 Consumer protection
o 2.2 Financial access
o 2.3 Issues with deferred posting of offline debit
o 2.4 Internet purchases
o 2.5 Overdraft fees
3 Debit cards around the world
o 3.1 Australia
o 3.2 Brazil
o 3.3 Canada
3.3.1 Consumer protection in Canada
o 3.4 Chile
o 3.5 Colombia
o 3.6 Denmark
o 3.7 France
o 3.8 Germany
o 3.9 Hong Kong
o 3.10 Hungary
o 3.11 India
o 3.12 Iraq
o 3.13 Italy
o 3.14 Japan
o 3.15 Kuwait
o 3.16 The Netherlands
o 3.17 New Zealand
o 3.18 Philippines
o 3.19 Poland
o 3.20 Portugal
o 3.21 Russia
o 3.22 Saudi Arabia
o 3.23 Singapore
o 3.24 United Kingdom
o 3.25 United States
3.25.1 FSA, HRA, and HSA debit cards
4 See also
5 References
[edit]Types of debit card systems
Debit card
An example of the front of a typical debit card:
1. Issuing bank logo
2. EMV chip
3. Hologram
4. Card number
5. Card brand logo
6. Expiration date
7. Cardholder's name
An example of the reverse side of a typical debit card:
1. Magnetic stripe
2. Signature strip
3. Card Security Code
There are currently three ways that debit card transactions are processed: online debit (also known
as PIN debit), offline debit (also known as signature debit) and the Electronic Purse Card System.
[3] It should be noted that one physical card can include the functions of an online debit card, an offline
debit card and an electronic purse card.
Although many debit cards are of the Visa or MasterCard brand, there are many other types of debit card,
each accepted only within a particular country or region, for example Switch (now: Maestro) and Solo in
the United Kingdom, Interac in Canada, Carte Bleue in France,Laser in Ireland, "EC electronic cash"
(formerly Eurocheque) in Germany and EFTPOS cards in Australia and New Zealand. The need forcross-
border compatibility and the advent of the euro recently led to many of these card networks (such
as Switzerland's "EC direkt", Austria's "Bankomatkasse" and Switch in the United Kingdom) being re-
branded with the internationally recognised Maestro logo, which is part of theMasterCard brand. Some
debit cards are dual branded with the logo of the (former) national card as well as Maestro (e.g. EC cards
in Germany, Laser cards in Ireland, Switch and Solo in the UK, Pinpas cards in the Netherlands,
Bancontact cards in Belgium, etc.). The use of a debit card system allows operators to package their
product more effectively while monitoring customer spending. An example of one of these systems is
ECS by Embed International.
[edit]Online Debit System
Online debit cards require electronic authorization of every transaction and the debits are reflected in the
user’s account immediately. The transaction may be additionally secured with the personal identification
number (PIN) authentication system and some online cards require such authentication for every
transaction, essentially becoming enhanced automatic teller machine (ATM) cards. One difficulty in using
online debit cards is the necessity of an electronic authorization device at the point of sale (POS) and
sometimes also a separate PINpad to enter the PIN, although this is becoming commonplace for all card
transactions in many countries. Overall, the online debit card is generally viewed as superior to the offline
debit card because of its more secure authentication system and live status, which alleviates problems
with processing lag on transactions that may only issue online debit cards. Some on-line debit systems
are using the normal authentication processes of Internet banking to provide real-time on-line debit
transactions. The most notable of these are Ideal and POLi.
[edit]Offline Debit System
Offline debit cards have the logos of major credit cards (e.g. Visa or MasterCard) or major debit cards
(e.g. Maestro in the United Kingdomand other countries, but not the United States) and are used at
the point of sale like a credit card (with payer's signature). This type of debit card may be subject to a
daily limit, and/or a maximum limit equal to the current/checking account balance from which it draws
funds. Transactions conducted with offline debit cards require 2–3 days to be reflected on users’ account
balances. In some countries and with some banks and merchant service organizations, a "credit" or
offline debit transaction is without cost to the purchaser beyond the face value of the transaction, while a
small fee may be charged for a "debit" or online debit transaction (although it is often absorbed by
the retailer). Other differences are that online debit purchasers may opt to withdraw cash in addition to the
amount of the debit purchase (if the merchant supports that functionality); also, from the merchant's
standpoint, the merchant pays lower fees on online debit transaction as compared to "credit" (offline)
debit transaction.
[edit]Electronic Purse Card System
Smart-card-based electronic purse systems (in which value is stored on the card chip, not in an externally
recorded account, so that machines accepting the card need no network connectivity) are in use
throughout Europe since the mid-1990s, most notably in Germany (Geldkarte), Austria (Quick), the
Netherlands (Chipknip), Belgium (Proton), Switzerland (CASH) and France (Mon€o, which is usually
carried by a debit card). In Austria and Germany, all current bank cards now include electronic purses.
[edit]Prepaid debit cards
Prepaid debit cards, also called reloadable debit cards or reloadable prepaid cards, are often used for
recurring payments.[4] The payer loads funds to the cardholder's card account. Prepaid debit cards use
either the offline debit system or the online debit system to access these funds. Particularly for companies
with a large number of payment recipients abroad, prepaid debit cards allow the delivery of international
payments without the delays and fees associated with international checks and bank transfers.
[5] Providers include Caxton FX prepaid cards,[6] Escape prepaid cards, Travelex prepaid
cards[7] and TransCash prepaid Visa cards.[8] Whereas, web-based services such as stock photography
websites (istockphoto), outsourced services (oDesk), and affiliate networks (MediaWhiz) have all started
offering prepaid debit cards for their contributors/freelancers/vendors.
[edit]Advantages and disadvantages
The examples and perspective in this article deal primarily with the United States and do not represent a worldwide view of the subject. Please improve this article and discuss the issue on the talk page. (December 2010)
The widespread use of debit and check cards have revealed numerous advantages and disadvantages to
the consumer and retailer alike.
Advantages of debit cards
A consumer who is not credit worthy and may find it difficult or impossible to obtain a credit card
can more easily obtain a debit card, allowing him/her to make plastic transactions. For example,
legislation often prevents minors from taking out debt, which includes the use of a credit card, but not
online debit card transactions.
For most transactions, a check card can be used to avoid check writing altogether. Check cards
debit funds from the user's account on the spot, thereby finalizing the transaction at the time of
purchase, and bypassing the requirement to pay a credit card bill at a later date, or to write an
insecure check containing the account holder's personal information.
Like credit cards, debit cards are accepted by merchants with less identification and scrutiny than
personal checks, thereby making transactions quicker and less intrusive. Unlike personal checks,
merchants generally do not believe that a payment via a debit card may be later dishonored.
Unlike a credit card, which charges higher fees and interest rates when a cash advance is
obtained, a debit card may be used to obtain cash from an ATM or a PIN-based transaction at no
extra charge, other than a foreign ATM fee.
Disadvantages of debit cards
Use of a debit card is not usually limited to the existing funds in the account to which it is linked,
most banks allow a certain threshold over the available bank balance which can cause overdraft fees
if the users transaction does not reflect available balance.
Many banks are now charging over-limit fees or non-sufficient funds fees based upon pre-
authorizations, and even attempted but refused transactions by the merchant (some of which may be
unknown until later discovery by account holder).
Many merchants mistakenly believe that amounts owed can be "taken" from a customer's
account after a debit card (or number) has been presented, without agreement as to date, payee
name, amount and currency, thus causing penalty fees for overdrafts, over-the-limit, amounts not
available causing further rejections or overdrafts, and rejected transactions by some banks.
In some countries debit cards offer lower levels of security protection than credit cards.[9] Theft of
the users PIN using skimming devices can be accomplished much easier with a PIN input than with a
signature-based credit transaction. However, theft of users' PIN codes using skimming devices can
be equally easily accomplished with a debit transaction PIN input, as with a credit transaction PIN
input, and theft using a signature-based credit transaction is equally easy as theft using a signature-
based debit transaction.
In many places, laws protect the consumer from fraud much less than with a credit card. While
the holder of a credit card is legally responsible for only a minimal amount of a fraudulent transaction
made with a credit card, which is often waived by the bank, the consumer may be held liable for
hundreds of dollars, or even the entire value of fraudulent debit transactions. The consumer also has
a shorter time (usually just two days) to report such fraud to the bank in order to be eligible for such a
waiver with a debit card,[9] whereas with a credit card, this time may be up to 60 days. A thief who
obtains or clones a debit card along with its PIN may be able to clean out the consumer's bank
account, and the consumer will have no recourse.
Federally Imposed Maximum Liability for Unauthorized Card Use (United States)
Reported
Maximum Card Holder Liability
Credit Card Debit Card
Before Use $0 $0
Within 2 business days $50 $50
After 2 but before 60 business days $50 $500
After 60 business days Unlimited Unlimited
[10][11]
In the UK and Ireland, among other countries, a consumer who purchases goods or services with
a credit card can pursue the credit card issuer if the goods or services are not delivered or are
unmerchantable. While they must generally exhaust the process provided by the retailer first, this is
not necessary if the retailer has gone out of business. This protection is not provided by legislation
when using a debit card but may be offered to a limited extent as a benefit provided by the card
network, e.g. Visa debit cards.
When a transaction is made using a credit card, the bank's money is being spent, and therefore,
the bank has a vested interest in claiming its money where there is fraud or a dispute. The bank may
fight to void the charges of a consumer who is dissatisfied with a purchase, or who has otherwise
been treated unfairly by the merchant. But when a debit purchase is made, the consumer has spent
his/her own money, and the bank has little if any motivation to collect the funds.
In some countries, and for certain types of purchases, such as gasoline (via a pay at the
pump system), lodging, or car rental, the bank may place a hold on funds much greater than the
actual purchase for a fixed period of time.[9] However, this isn't the case in other countries, such as
Sweden. Until the hold is released, any other transactions presented to the account, including checks,
may be dishonoured, or may be paid at the expense of an overdraft fee if the account lacks any
additional funds to pay those items.
While debit cards bearing the logo of a major credit card are accepted for virtually all transactions
where an equivalent credit card is taken, a major exception in some countries is at car rental facilities.
[12] In some countries, such as Canada & Australia, car rental agencies require an actual credit card to
be used, or at the very least, will verify the creditworthiness of the renter using a debit card. In
Canada and additional unspecified countries, car rental companies will deny a rental to anyone who
does not fit the requirements, and such a credit check may actually hurt one's credit score, as long as
there is such a thing as a credit score in the country of purchase and/or the country of residence of
the customer.
[edit]Consumer protection
Consumer protections vary, depending on the network used. Visa and MasterCard, for instance, prohibit
minimum and maximum purchase sizes, surcharges, and arbitrary security procedures on the part of
merchants. Merchants are usually charged higher transaction fees for credit transactions, since debit
network transactions are less likely to be fraudulent. This may lead them to "steer" customers to debit
transactions. Consumers disputing charges may find it easier to do so with a credit card, since the money
will not immediately leave their control. Fraudulent charges on a debit card can also cause problems with
a checking account because the money is withdrawn immediately and may thus result in an overdraft
orbounced checks. In some cases debit card-issuing banks will promptly refund any disputed charges
until the matter can be settled, and in some jurisdictions the consumer liability for unauthorized charges is
the same for both debit and credit cards.
In some countries, like India and Sweden, the consumer protection is the same regardless of the network
used. Some banks set minimum and maximum purchase sizes, mostly for online-only cards. However,
this has nothing to do with the card networks, but rather with the bank's judgement of the person's age
and credit records. Any fees that the customers have to pay to the bank are the same regardless of
whether the transaction is conducted as a credit or as a debit transaction, so there is no advantage for the
customers to choose one transaction mode over another. Shops may add surcharges to the price of the
goods or services in accordance with laws allowing them to do so. Banks consider the purchases as
having been made at the moment when the card was swiped, regardless of when the purchase
settlement was made. Regardless of which transaction type was used, the purchase may result in an
overdraft because the money is considered to have left the account at the moment of the card swiping.
[edit]Financial access
Debit cards and secured credit cards are popular among college students who have not yet established a
credit history. Debit cards may also be used by expatriated workers to send money home to their families
holding an affiliated debit card.
[edit]Issues with deferred posting of offline debit
To the consumer, a debit transaction is perceived as occurring in real-time; i.e. the money is withdrawn
from their account immediately following the authorization request from the merchant, which in many
countries, is the case when making an online debit purchase. However, when a purchase is made using
the "credit" (offline debit) option, the transaction merely places an authorization hold on the customer's
account; funds are not actually withdrawn until the transaction is reconciled and hard-posted to the
customer's account, usually a few days later. However, the previous sentence applies to all kinds of
transaction types, at least when using a card issued by a European bank. This is in contrast to a typical
credit card transaction; though it can also have a lag time of a few days before the transaction is posted to
the account, it can be many days to a month or more before the consumer makes repayment with actual
money.
Because of this, in the case of a benign or malicious error by the merchant or bank, a debit transaction
may cause more serious problems (e.g. money not accessible; overdrawn account) than in the case of a
credit card transaction (e.g. credit not accessible; over credit limit). This is especially true in the United
States, where check fraud is a crime in every state, but exceeding your credit limit is not.
[edit]Internet purchases
Debit cards may also be used on the Internet. Internet transactions may be conducted in either online or
offline mode, although shops accepting online-only cards are rare in some countries (such as Sweden),
while they are common in other countries (such as the Netherlands). For a comparison, PayPal offers the
customer to use an online-only Maestro card if the customer enters a Dutch address of residence, but not
if the same customer enters a Swedish address of residence.
Internet purchases use neither a PIN code nor a signature for identification. Transactions may be
conducted in either credit or debit mode (which is sometimes, but not always, indicated on the receipt),
and this has nothing to do with whether the transaction was conducted on online or offline mode, since
both credit and debit transactions may be conducted in both modes.
[edit]Overdraft fees
A 2007 Washington Post article — on banks' lucrative debit card overdraft fees — pointed out that debit
card issuers could notify customers electronically, allowing them to avoid overdraft fees. Nessa Feddis,
banking industry spokesperson and lobbyist, contended that "current technology makes real-time
notification of overdrafts cost-prohibitive."[13] The article contended that "financial institutions don't want to
change the status quo because they make good and easy money off their own customers' mistakes and
irresponsibility."[13]
[edit]Debit cards around the world
In some countries, banks tend to levy a small fee for each debit card transaction. In some countries (e.g.
the UK) the merchants bear all the costs and customers are not charged. There are many people who
routinely use debit cards for all transactions, no matter how small. Some (small) retailers refuse to accept
debit cards for small transactions, where paying the transaction fee would absorb the profit margin on the
sale, making the transaction uneconomic for the retailer.
[edit]Australia
Main article: EFTPOS
Debit cards in Australia are called different names depending on the issuing bank: Commonwealth Bank
of Australia: Keycard; Westpac Banking Corporation: Handycard; National Australia
Bank: FlexiCard; ANZ Bank: Access card; Bendigo Bank: Cashcard.
EFTPOS is very popular in Australia and has been operating there since the 1980s. EFTPOS-enabled
cards are accepted at almost all swipe terminals able to accept credit cards, regardless of the bank that
issued the card, including Maestro cards issued by foreign banks, with most businesses accepting them,
with 450,000 Point Of Sale terminals.[14]
EFTPOS cards can also be used to deposit and withdraw cash over the counter at Australia Post outlets
participating in giroPost, just as if the transaction was conducted at a bank branch, even if the bank
branch is closed. Electronic transactions in Australia are generally processed via the Telstra
Argent and Optus Transact Plus network - which has recently superseded the old Transcend network in
the last few years. Most early keycards were only usable for EFTPOS and at ATM or bank branches,
whilst the new debit card system works in the same ways a credit card, except it will only use funds in the
specified bank account. This means that, among other advantages, the new system is suitable for
electronic purchases without a delay of 2 to 4 days for bank-to-bank money transfers.
Australia operates both electronic credit card transaction authorization and traditional EFTPOS debit card
authorization systems, the difference between the two being that EFTPOS transactions are authorized by
a personal identification number (PIN) while credit card transactions are usually authorized by the printing
and signing of a receipt. If the user fails to enter the correct pin 3 times, the consequences range from the
card being locked out and requiring a phone call or trip to the branch to reactivate with a new PIN, the
card being cut up by the merchant, or in the case of an ATM, being kept inside the machine, both of which
require a new card to be ordered.
Generally credit card transaction costs are borne by the merchant with no fee applied to the end user
while EFTPOS transactions cost the consumer an applicable withdrawal fee charged by their bank.
The introduction of Visa and MasterCard debit cards along with regulation in the settlement fees charged
by the operators of both EFTPOS and credit cards by the Reserve Bank has seen a continuation in the
increasing ubiquity of credit card use among Australians and a general decline in the profile of EFTPOS.
However, the regulation of settlement fees also removed the ability of banks, who typically provide
merchant services to retailers on behalf of Visa, MasterCard or Bankcard, from stopping those retailers
charging extra fees to take payment by credit card instead of cash or EFTPOS. Though only a few
operators with strong market power have done so, the passing on of fees charged for credit card
transactions may result in an increased use of EFTPOS.
[edit]Brazil
In Brazil debit cards are called cartão de débito (singular) and are getting increasingly popular[15] as a
replacement of checks, that are still uncommonly popular in the country.
[edit]Canada
Main article: Interac
Canada has a nation-wide EFTPOS system, called Interac Direct Payment. Since being introduced in
1994, IDP has become the most popular payment method in the country. Previously, debit cards have
been in use for ABM usage since the late 1970's, with Credit Unions in Saskatchewan and Alberta,
Canada introducing the first card-based, networked ATMs beginning in June, 1977. Debit Cards, which
could be used anywhere a credit card was accepted, were first introduced in Canada by Saskatchewan
Credit Unions in 1982.[16] In the early 1990s, pilot projects were conducted among Canada's six largest
banks to gauge security, accuracy and feasibility of the Interac system. Slowly in the later half of the
1990s, it was estimated that approximately 50% of retailers offered Interac as a source of payment.
Retailers, many small transaction retailers like coffee shops, resisted offering IDP to promote faster
service. In 2009, 99% of retailers offer IDP as an alternative payment form.
In Canada, the debit card is sometimes referred to as a "bank card". It is a client card issued by a bank
that provides access to funds and other bank account transactions, such as transferring funds, checking
balances, paying bills, etc., as well as point of purchase transactions connected on the Interac network.
Since its national launch in 1994, Interac Direct Payment has become so widespread that, as of 2001,
more transactions in Canada were completed using debit cards than cash.[17] This popularity may be
partially attributable to two main factors: the convenience of not having to carry cash, and the availability
of automated bank machines (ABMs) and Direct Payment merchants on the network.
Debit cards may be considered similar to stored-value cards in that they represent a finite amount of
money owed by the card issuer to the holder. They are different in that stored-value cards are generally
anonymous and are only usable at the issuer, while debit cards are generally associated with an
individual's bank account and can be used anywhere on the Interacnetwork.
In Canada, the bank cards can be used at POS and ABMs. Interac Online has also been introduced in
recent years allowing clients of most major Canadian banks to use their debit cards for online payment
with certain merchants as well. Certain financial institutions also allow their clients to use their debit cards
in the United States on the NYCE network.[18]
[edit]Consumer protection in Canada
Consumers in Canada are protected under a voluntary code* entered into by all providers of debit card
services, The Canadian Code of Practice for Consumer Debit Card Services[19](sometimes called the
"Debit Card Code"). Adherence to the Code is overseen by the Financial Consumer Agency of
Canada (FCAC), which investigates consumer complaints.
According to the FCAC website, revisions to the Code that came into effect in 2005 put the onus on the
financial institution to prove that a consumer was responsible for a disputed transaction, and also place a
limit on the number of days that an account can be frozen during the financial institution's investigation of
a transaction.
[edit]Chile
Chile has an EFTPOS system called Redcompra (Purchase Network) which is currently used in at least
23,000 establishments throughout the country. Goods may be purchased using this system at most
supermarkets, retail stores, pubs and restaurants in major urban centers.
[edit]Colombia
Colombia has a system called Redeban-Multicolor and Credibanco Visa which are currently used in at
least 23,000 establishments throughout the country. Goods may be purchased using this system at most
supermarkets, retail stores, pubs and restaurants in major urban centers. Colombian debit cards are
Maestro (pin), Visa Electron (pin), Visa Debit (as Credit) and MasterCard-Debit (as Credit).
[edit]Denmark
The Danish debit card Dankort was introduced on 1 September 1983, and despite the initial transactions
being paper-based, the Dankort quickly won widespread acceptance in Denmark. By 1985 the
first EFTPOS terminals were introduced, and 1985 was also the year when the number of Dankort
transactions first exceeded 1 million.[20] It is not uncommon that Dankort is the only card accepted at
smaller stores, thus making it harder for tourists to travel without cash.
Miscellaneous facts & numbers
In 2007 PBS, the Danish operator of the Dankort system, processed a total of 737 million Dankort
transactions.[21] Of these, 4.5 million just on a single day, 21 December. This remains the current
record.
At the end of 2007, there were 3.9 million Dankort in existence.[21]
More than 80,000 Danish shops have a Dankort terminal. Another 11,000 internet shops also
accept the Dankort.[21]
[edit]France
Carte Bancaire (CB), the national payment scheme, in 2008, had 57,5 milion cards carrying its logo and
7,76 billion transactions (POS and ATM) were processed through the e-rsb network (135 transactions per
card mostly debit or deferred debit). Most CB cards are debit cards, either debit or deferred debit. Less
than 10% of CB cards were credit cards. Banks in France charge annual fees for debit cards (despite
card payments being very cost efficient for the banks), yet they do not charge personal customers for
checkbooks or processing checks (despite checks being very costly for the banks). This imbalance most
probably dates from the unilateral introduction in France of Chip and PIN debit cards in the early 1990s,
when the cost of this technology was much higher than it is now. Credit cards of the type found in the
United Kingdom and United States are unusual in France and the closest equivalent is the deferred debit
card, which operates like a normal debit card, except that all purchase transactions are postponed until
the end of the month, thereby giving the customer between 1 and 31 days of interest-free credit. The
annual fee for a deferred debit card is around €10 more than for one with immediate debit. Most France
debit cards are branded with the Carte Bleue logo, which assures acceptance throughout France. Most
card holders choose to pay around €5 more in their annual fee to additionally have a Visa or
a MasterCard logo on theirCarte Bleue, so that the card is accepted internationally. A Carte Bleue without
a Visa or a MasterCard logo is often known as a "Carte Bleue Nationale" and a Carte Bleue with a Visa or
a MasterCard logo is known as a "Carte Bleue Internationale", or more frequently, simply called a "Visa"
or "MasterCard". Many smaller merchants in France refuse to accept debit cards for transactions under a
certain amount because of the minimum fee charged by merchants' banks per transaction (this minimum
amount varies from €5 to €15.25 which is equivalent to 100 francs, or in some rare cases even more). But
more and more merchants accept debit cards for small amounts, due to the massive daily use of debit
card nowadays. Merchants in France do not differentiate between debit and credit cards, and so both
have equal acceptance. This is legal in France to set a minimum amount to transactions but the
merchants must display it clearly.
[edit]Germany
Debit cards have enjoyed wide acceptance in Germany for years. Facilities already existed before
EFTPOS became popular with the Eurocheque card, an authorization system initially developed for
paper checks where, in addition to signing the actual check, customers also needed to show the card
alongside the check as a security measure. Those cards could also be used at ATMs and for card-
based electronic funds transfer (called Girocard) with PIN entry. These are now the only functions of
such cards: the Eurocheque system (along with the brand) was abandoned in 2002 during the transition
from the Deutsche Mark to the euro. As of 2005, most stores and petrol outlets have EFTPOS facilities.
Processing fees are paid by the businesses, which leads to some business owners refusing debit card
payments for sales totalling less than a certain amount, usually 5 or 10 euro.
To avoid the processing fees, many businesses resorted to using direct debit, which is then
called electronic direct debit (German: Elektronisches Lastschriftverfahren, abbr. ELV). The point-of-
sale terminal reads the bank sort code and account number from the card but instead of handling the
transaction through the Girocard network it simply prints a form, which the customer signs to authorise the
debit note. However, this method also avoids any verification or payment guarantee provided by the
network. Further, customers can return debit notes by notifying their bank without giving a reason. This
means that the beneficiary bears the risk of fraud and illiquidity. Some business mitigate the risk by
consulting a proprietaryblacklist or by switching to Girocard for higher transaction amounts.
Around 2000, an Electronic Purse Card was introduced, dubbed Geldkarte ("money card"). It makes
use of the smart card chip on the front of the standard issue debit card. This chip can be charged with up
to 200 euro, and is advertised as a means of making medium to very small payments, even down to
several euros or cent payments. The key factor here is that no processing fees are deducted by banks. It
did not gain the popularity its inventors had hoped for. However, this could change as this chip is now
used as means of age verification at cigarette vending machines, which has been mandatory since
January 2007. Furthermore, some payment discounts are being offered (e.g. a 10% reduction for public
transport fares) when paying with "Geldkarte". The "Geldkarte" payment lacks all security measures,
since it does not require the user to enter a PIN or sign a sales slip: the loss of a "Geldkarte" is similar to
the loss of a wallet or purse - anyone who finds it can then use their find to pay for their own purchases.
[edit]Hong Kong
A popular payment instant method widely used in Hong Kong is EPS. Bank customers can use their ATM
card to make an instant EPS payment, much like a debit card. Most banks in Hong Kong provide ATM
cards with EPS capability.
[edit]Hungary
In Hungary debit cards are far more common and popular than credit cards. Many Hungarians even refer
to their debit card ("betéti kártya") mistakenly using the word for credit card ("hitelkártya").[22]
[edit]India
The debit card has limited popularity in India as the merchant is charged for each transaction. The debit
card therefore is mostly used for ATM transactions. Most of the banks issueVISA debit cards, while some
banks (like SBI and Citibank India) issue Maestro cards. The debit card transactions are routed through
the VISA or MasterCard networks rather than directly via the issuing bank.
The National Payments Corporation of India (NPCI) is introducing a payment network and debit card
dubbed 'India card'. The Reserve Bank of India is expecting this system will gradually replace the
overseas run networks from Visa and MaterCard for Indian ATM, debit and credit card services.[23]
[edit]Iraq
Iraq's two biggest state-owned banks, Rafidain Bank and Rasheed Bank, together with the Iraqi
Electronic Payment System (IEPS) have established a company called International Smart Card, which
have developed a national credit card called 'Qi Card'. The card is issued since 2008. According to the
company's website: 'after less than two years of the initial launch of the Qi card solution, we have hit 1.6
million cardholder with the potential to issue 2 million cards by the end of 2010, issuing about 100,000
card monthly is a testament to the huge success of the Qi card solution. Parallel to this will be the
expansion into retail stores through a network of points of sales of about 30,000 units by 2015'
[edit]Italy
Debit cards are quite popular in Italy. There are both classic and prepaid cards. The main classic debit
card in Italy is PagoBancomat: this kind of card is issued by Italian banks, often with a credit card (so you
get a dual mode card). It allows access to the owner's bank account funds and it is widely accepted in
most shops, although on the Internet it is allowed only the credit card mode. The major debit prepaid card
is issued by Poste Italiane S.p.A., is called Postepay and runs on the Visa Electron circuit. It can be used
on Poste Italiane's ATMs (Postamat) and on Visa Electron-compatible bank ATMs all over the world. It
has no fees when used on the Internet and in POS-based transactions. Other cards are issued by other
companies, such as Vodafone CashCard, Banca di Milano's Carta Jeans and Carta Moneta Online.
[edit]Japan
In Japan people usually use their cash cards (キャッシュカード kyasshu kādo?), originally intended only
for use with cash machines, as debit cards. The debit functionality of these cards is usually referred to
as J-Debit (ジェイデビット Jeidebitto?), and only cash cards from certain banks can be used. A cash
card has the same size as a VISA/MasterCard. As identification, the user will have to enter his or her four-
digit PIN when paying. J-Debit was started in Japan on March 6, 2000.
Suruga Bank began service of Japan's first Visa Debit in 2006. Ebank will start service of Visa Debit by
the end of 2007.[24]
[edit]Kuwait
In Kuwait, all banks provide a debit card to their account holders. This card is branded as KNET, which is
the central switch in Kuwait. KNET card transactions are free for both customer and the merchant and
therefore KNET debit cards are used for low valued transactions as well. KNET cards are mostly co-
branded as Maestro or Visa Electron which makes it possible to use the same card outside Kuwait on any
terminal supporting these payment schemes.
[edit]The Netherlands
In the Netherlands using EFTPOS is known as pinnen (pinning), a term derived from the use of
a Personal Identification Number. PINs are also used for ATM transactions, and the term is used
interchangeably by many people, although it was introduced as a marketing brand for EFTPOS. The
system was launched in 1987, and in 2006 there were 166,375 terminals throughout the country,
including mobile terminals used by delivery services and on markets. All banks offer a debit card suitable
for EFTPOS with current accounts.
PIN transactions are usually free to the customer, but the retailer is charged per-transaction and monthly
fees. Equens, an association with all major banks as its members, runs the system, and until August 2005
also charged for it. Responding to allegations of monopoly abuse, it has handed over contractual
responsibilities to its member banks, who now offer competing contracts. Interpay, a legal predecessor of
Equens, was fined €47 million in 2004, but the fine was later dropped, and a related fine for banks was
lowered from €17 million to €14 million. Per-transaction fees are between 5-10 eurocents, depending on
volume.
Credit cards use in the Netherlands is very low, and most credit cards cannot be used with EFTPOS, or
charge very high fees to the customer. Debit cards can often, though not always, be used in the entire EU
for EFTPOS. Most debit cards are Maestro cards.
Electronic Purse Cards (called Chipknip) were introduced in 1996, but have never become very
popular.
[edit]New Zealand
The EFTPOS (electronic fund transfer at point of sale) in New Zealand is highly popular. In 2006, 70
percent of all retail transactions were made by eftpos, with an average of 306 EFTPOS transaction being
made per person. At the same time, there were 125,000 EFTPOS terminals in operation (one for every 30
people), and 5.1 million EFTPOS cards in circulation (1.27 per capita).[25]
The system involves the merchant swiping (or inserting) the customer's card and entering the purchase
amount. Point of sale systems with integrated EFTPOS often sent the purchase total to the terminal and
the customer swipes their own card. The customer then selects the account they wish to use:
Current/Cheque (CHQ), Savings (SAV), or Credit Card (CRD), before entering in their PIN. After a short
processing time in which the terminal contacts the EFTPOS network and the bank, the transaction is
accepted (or declined) and a receipt is printed. The EFTPOS system is used for credit cards as well, with
a customer selecting Credit Card and entering their PIN, or for older credit cards without loaded PIN,
pressing OK and signing their receipt with identification through matching signatures. Larger businesses
connect to the EFTPOS network by dedicated phone lines or more recently internet protocolconnections.
Most smaller businesses however have their EFTPOS terminals communicate through their regular voice
line, often resulting in shouts for people to get off the phone or "Declined Transmission Error" transactions
when the merchant forgets someone is on the phone.
Virtually all retail outlets have EFTPOS facilities, so much that retailers without EFTPOS have to advertise
so. In addition, an increasing number of mobile operator, such as taxis, stall holders and pizza deliverers
have mobile EFTPOS systems. The system is made up of two primary networks: EFTPOS NZ, which is
owned by ANZ National Bank and Paymark Limited (formerly Electronic Transaction Services Limited),
which is owned by ASB Bank, Westpac, and the Bank of New Zealand. The two networks are intertwined
and highly sophisticated and secure, able to handle huge volumes of transactions during busy periods
such as the lead-up to Christmas. Network failures are rare, but when they occur they cause massive
disruption, resulting in major delays and loss of income for businesses. Most businesses have to resort to
manual "zip-zap" swipe machines in such case.[26] Newer POS-based terminals have the ability to
"capture" transactions in the event of a communications break-down - instead of entering a PIN, the
customer signs their receipt and the transaction is accepted on a matching signature, and the transaction
is stored until the network is restored. A notable example of this occurs on the Cook Strait ferries, where
in the middle of Cook Strait there is no mobile phone reception to connect to the EFTPOS network.
EFTPOS is used for transactions large and small, from 50c up to thousands of dollars (or the daily limit of
the EFTPOS card). Depending on the user's bank, a fee maybe charged for use of EFTPOS. Most youth
accounts do not attract fees for electronic transactions, meaning the use of EFTPOS by the younger
generations has become virtually ubiquitous. Typically merchants don't pay fees for transactions, most
only having to pay for the equipment rental.
ATM cards and EFTPOS cards were once separate, but today EFTPOS and ATM cards are combined
into a single EFTPOS-ATM card. The cards are issued by banks to customers, and often come in multiple
designs, with some banks allowing customers to place a picture of their choice on their EFTPOS card.
One of the disadvantages of New Zealand's well-established EFTPOS system is that it is incompatible
with overseas systems and non-face-to-face purchases. In response to this, many banks have adopted
international debit card systems such as Maestro and Visa Debit in addition to the New Zealand EFTPOS
system.
[edit]Philippines
In the Philippines, all three national ATM network consortia offer proprietary PIN debit. This was first
offered by Express Payment System in 1987, followed by Megalink with Paylink in 1993
then BancNet with the Point-of-Sale in 1994.
Express Payment System or EPS was the pioneer provider, having launched the service in 1987 on
behalf of the Bank of the Philippine Islands. The EPS service has subsequently been extended in late
2005 to include the other Expressnet members: Banco de Oro and Land Bank of the Philippines. They
currently operate 10,000 terminals for their cardholders.
Megalink launched Paylink EFTPOS system in 1993. Terminal services are provided by Equitable Card
Network on behalf of the consortium. Service is available in 2,000 terminals, mostly in Metro Manila.
BancNet introduced their Point of sale System in 1994 as the first consortium-operated EFTPOS service
in the country. The service is available in over 1,400 locations throughout the Philippines, including
second and third-class municipalities. In 2005, BancNet signed a Memorandum of Agreement to serve as
the local gateway for China UnionPay, the sole ATM switch in the People's Republic of China. This will
allow the estimated 1.0 billion Chinese ATM cardholders to use the BancNet ATMs and the EFTPOS in
all SM Supermalls.
Visa debit cards are issued by Union Bank of the Philippines (e-Wallet & eon), Chinatrust, Equicom
Savings Bank (Key Card & Cash Card), Banco De Oro, HSBC, HSBC Savings Bank& Sterling Bank of
Asia (VISA ShopNPay prepaid and debit cards). Union Bank of the Philippines cards, Equicom Savings
Bank & Sterling Bank of Asia EMV cards which can also be used for internet purchases. Sterling Bank of
Asia has released its first line of prepaid and debit Visa cards with EMV chip. MasterCard debit cards are
issued by Banco de Oro, Security Bank (Cashlink & Cash Card) & Smart Communications (Smart Money)
tied up with Banco De Oro. MasterCard Electronic cards are issued by BPI (Express Cash) and Security
Bank(CashLink Plus). All VISA and MasterCard based debit cards in the Philippines are non-embossed
and are marked either for "Electronic Use Only" (VISA/MasterCard) or "Valid only where MasterCard
Electronic is Accepted" (MasterCard Electronic).
[edit]Poland
In Poland, local debit cards, such as PolCard, have become largely substituted with international ones,
such as Visa, MasterCard, or the unembossed Visa Electron or Maestro. Most banks in Poland block
Internet and MOTO transactions with unembossed cards, requiring the customer to buy an embossed
card or a card for Internet/MOTO transactions only[citation needed]. The number of banks which do not block
MOTO transactions on unembossed cards has recently started to increase.
[edit]Portugal
In Portugal, debit cards are accepted almost everywhere: ATMs, stores, etc. The most commonly
accepted are Visa and MasterCard, or the unembossed Visa Electron or Maestro. Regarding Internet
payments debit cards can't be used for transfers, due to its unsafeness, so banks recommend the use of
'MBnet', a pre-registered safe system that creates a virtual card with a pre-selected credit limit. All the
card system is regulated by SIBS, the institution created by Portuguese banks to manage all the
regulations and communication processes proply. SIBS' shareholders are all the 27 banks operating in
Portugal.
[edit]Russia
In addition to VISA and Master Card, there are some local payment system based in general on Smart
Card technology.
Sbercard . This payment system was created by Sberbank around 1995–1996. It uses BGS
Smartcard Systems AG smart card technology i.e. DUET. Sberbank was a single retail bank
in USSR before 1990. De facto this is a payment system of the SberBank.
Zolotaya Korona . This card brand was created in 1994. Zolotaya Korona is based
on CFT technology.
STB Card . This card uses the classic magnetic stripe technology. It almost fully collapsed after
1998 (GKO crisis) with STB bank failure.
Union Card . The card also uses the classic magnetic stripe technology. This card brand is on the
decline. These accounts are being reissued as Visa or MasterCard accounts.
Nearly every transaction, regardless of brand or system, is processed as an immediate debit transaction.
Non-debit transactions within these systems have spending limits that are strictly limited when compared
with typical Visa or MasterCard accounts.
Automated teller machineFrom Wikipedia, the free encyclopedia
(Redirected from Automatic Teller Machine)
"cash machine" redirects here. For the Hard-Fi song, see Cash Machine.
An NCR Personas 75-Series interior, multi-function ATM in the United States
Smaller indoor ATMs dispense money inside convenience stores and other busy areas, such as this off-premise Wincor
Nixdorf mono-function ATM in Sweden
An automated teller machine (ATM), commonly called a cashpoint in UK English after the trademark of the
same name, is a computerised telecommunications device that provides the clients of a financial institution with
access to financial transactions in a public space without the need for a cashier, human clerk or bank teller.
ATMs are known by various other names including automatic banking machine, cash machine, and various
regional varients derived from trademarks on ATM systems held by particular banks.
On most modern ATMs, the customer is identified by inserting a plastic ATM card with a magnetic stripe or a
plastic smart card with a chip, that contains a unique card number and some security information such as an
expiration date or CVVC (CVV). Authentication is provided by the customer entering a personal identification
number (PIN).
Using an ATM, customers can access their bank accounts in order to make cash withdrawals, credit card cash
advances, and check their account balances as well as purchase prepaid cellphone credit. If the currency being
withdrawn from the ATM is different from that which the bank account is denominated in (e.g.: Withdrawing
Japanese Yen from a bank account containing US Dollars), the money will be converted at a
wholesale exchange rate. Thus, ATMs often provide the best possible exchange rate for foreign travelers and
are heavily used for this purpose as well.[1]
Contents
[hide]
1 History
2 Location
3 Financial networks
4 Global use
5 Hardware
6 Software
7 Security
o 7.1 Physical
o 7.2 Transactional secrecy and integrity
o 7.3 Customer identity integrity
o 7.4 Device operation integrity
o 7.5 Customer security
o 7.6 Alternative uses
8 Reliability
9 Fraud
o 9.1 Card fraud
10 Related devices
11 See also
12 References
13 Further reading
14 External links
[edit]History
An old Nixdorf ATM
The idea of self-service in retail banking developed through independent and simultaneous efforts in Japan,
Sweden, the United States and the United Kingdom. In the USA, Luther George Simjian has been credited with
developing and building the first cash dispenser machine.[2] There is strong evidence to suggest that Simjian
worked on this device before 1959 while his 132nd patent (US3079603) was first filed on 30 June 1960 (and
granted 26 February 1963). The rollout of this machine, called Bankograph, was delayed a couple of years.
This was due in part to Simjian's Reflectone Electronics Inc. being acquired by Universal Match Corporation.
[3] An experimental Bankograph was installed in New York City in 1961 by the City Bank of New York, but
removed after 6 months due to the lack of customer acceptance. The Bankograph was an automated envelope
deposit machine (accepting coins, cash and cheques) and it did not have cash dispensing features.[4] The
Bankograph, however, embodied the preoccupation by US banks in finding alternative means to capture core
deposits, while the concern of European and Asian banks was cash distribution.[original research?]
A first cash dispensing device was used in Tokyo in 1966.[5][6] Although little is known of this first device, it
seems to have been activated with a credit card rather than accessing current account balances. This
technology had no immediate consequence in the international market.[original research?]
Plaque commemorating installation of world's first bank cash machine
In simultaneous and independent efforts, engineers in Sweden and Britain developed their own cash machines
during the early 1960s. The first of these that was put into use was by Barclays Bank in Enfield Town in North
London, United Kingdom,[7] on 27 June 1967. This machine was the first in the UK and was used by English
comedy actor Reg Varney, at the time so as to ensure maximum publicity for the machines that were to
become mainstream in the UK. This instance of the invention has been credited to John Shepherd-Barron,
[8] who was awarded an OBE in the 2005 New Year's Honours List.[9] His design used special checks that were
matched with a personal identification number, as plastic bank cards had not yet been invented.[10]
Other engineers at De La Rue Instruments contributed to the design and development of Shepherd-Barron's
machine.[original research?] The Barclays-De La Rue machine (called De La Rue Automatic Cash System or DACS)
beat the Swedish saving banks' and a company called Metior's (a device called Bankomat) by nine days
and Westminster Bank’s-Smith Industries-Chubb system (called Chubb MD2) by a month. The collaboration of
a small start-up called Speytec and Midland Bank developed a third machine which was marketed after 1969 in
Europe and the USA by the Burroughs Corporation. The patent for this device (GB1329964) was filed on
September 1969 (and granted in 1973) by John David Edwards, Leonard Perkins, John Henry Donald, Peter
Lee Chappell, Sean Benjamin Newcombe & Malcom David Roe.
Both the DACS and MD2 accepted only a single-use token or voucher which was retained by the machine
while the Speytec worked with a card with a magnetic stripe at the back. Hence all this these worked on various
principles including Carbon-14 and low-coercivity magnetism in order to make fraud more difficult. The idea of a
PIN stored on the card was developed by a British engineer working in the MD2 named James Goodfellow in
1965 (patent GB1197183 filed on 2 May 1966 with Anthony Davies). The essence of this system was that is it
enabled the verification of the customer with the debited account without human intervention. This patent is
also the earliest instance of a complete “currency dispenser system” in the patent record. This patent was filled
on 5 March 1968 in the USA (US 3543904) and granted on 1 December 1970. It had a profound influence on
the industry as a whole. Not only did future entrants into the cash dispenser market such as NCR
Corporation and IBM licence Goodfellow’s PIN system, but a number of later patents references this patent as
“Prior Art Device”.[11]
After looking first hand at the experiences in Europe, in 1968 the networked ATM was pioneered in the US,
in Dallas, Texas, by Donald Wetzel, who was a department head at an automated baggage-handling company
called Docutel. On September 2, 1969, Chemical Bank installed the first ATM in the U.S. at its branch
in Rockville Centre, New York. The first ATMs were designed to dispense a fixed amount of cash when a user
inserted a specially coded card.[12] A Chemical Bank advertisement boasted "On Sept. 2 our bank will open at
9:00 and never close again."[13] Chemicals' ATM, initially known as a Docuteller was designed by Donald
Wetzel and his company Docutel. Chemical executives were initially hesitant about the electronic banking
transition given the high cost of the early machines. Additionally, executives were concerned that customers
would resist having machines handling their money.[14] In 1995, the Smithsonian National Museum of American
History recognised Docutel and Wetzel as the inventors of the networked ATM.[15]
ATMs first came into use in December 1972 in the UK; the IBM 2984 was designed at the request of Lloyds
Bank. The 2984 CIT (Cash Issuing Terminal) was the first true Cashpoint, similar in function to today's
machines; Cashpoint is still a registered trademark of Lloyds TSB in the UK. All were online and issued a
variable amount which was immediately deducted from the account. A small number of 2984s were supplied to
a US bank. Notable historical models of ATMs include the IBM 3624 and 473x series, Diebold 10xx and TABS
9000 series, and NCR 50xx series.
[edit]Location
This section does not cite any references or sources.Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. (February 2011)
An ATM Encrypting PIN Pad (EPP) withGerman markings
ATMs are placed not only near or inside the premises of banks, but also in locations such as shopping
centers/malls, airports, grocery stores, petrol/gas stations, restaurants, or any place large numbers of people
may gather. These represent two types of ATM installations: on and off premise. On premise ATMs are
typically more advanced, multi-function machines that complement an actual bank branch's capabilities and
thus more expensive. Off premise machines are deployed by financial institutions and also ISOs (or
Independent Sales Organizations) where there is usually just a straight need for cash, so they typically are the
cheaper mono-function devices. In Canada, when an ATM is not operated by a financial institution it is known
as a "White Label ATM".
In North America, banks often have drive-thru lanes providing access to ATMs.
Many ATMs have a sign above them indicating the name of the bank or organization owning the ATM, and
possibly including the list of ATM networks to which that machine is connected. This type of sign is called
a topper.[citation needed]
[edit]Financial networks
An ATM in the Netherlands. The logos of a number of interbank networks this ATM is connected to are shown
Most ATMs are connected to interbank networks, enabling people to withdraw and deposit money from
machines not belonging to the bank where they have their account or in the country where their accounts are
held (enabling cash withdrawals in local currency). Some examples of interbank networks
include PULSE, PLUS, Cirrus, Interac, Interswitch, STAR, and LINK.
ATMs rely on authorization of a financial transaction by the card issuer or other authorizing institution via the
communications network. This is often performed through an ISO 8583 messaging system.
Many banks charge ATM usage fees. In some cases, these fees are charged solely to users who are not
customers of the bank where the ATM is installed; in other cases, they apply to all users.
In order to allow a more diverse range of devices to attach to their networks, some interbank networks have
passed rules expanding the definition of an ATM to be a terminal that either has the vault within its footprint or
utilizes the vault or cash drawer within the merchant establishment, which allows for the use of a scrip cash
dispenser.
A Diebold 1063ix with a dial-up modem visible at the base
ATMs typically connect directly to their host or ATM Controller via either ADSL or dial-up modem over
atelephone line or directly via a leased line. Leased lines are preferable to POTS lines because they require
less time to establish a connection. Leased lines may be comparatively expensive to operate versus a POTS
line, meaning less-trafficked machines will usually rely on a dial-up modem. That dilemma may be solved as
high-speed Internet VPN connections become more ubiquitous. Common lower-level layer communication
protocols used by ATMs to communicate back to the bank include SNA over SDLC, TC500 over Async, X.25,
and TCP/IP overEthernet.
In addition to methods employed for transaction security and secrecy, all communications traffic between the
ATM and the Transaction Processor may also be encrypted via methods such as SSL.[16]
[edit]Global use
There are no hard international or government-compiled numbers totaling the complete number of ATMs in use
worldwide. Estimates developed byATMIA place the number of ATMs in use currently at over 1.8 million.[17]
For the purpose of analyzing ATM usage around the world, financial institutions generally divide the world into
seven regions, due to the penetration rates, usage statistics, and features deployed. Four regions (USA,
Canada, Europe, and Japan) have high numbers of ATMs per million people.[18] and generally slowing growth
rates.[19] Despite the large number of ATMs, there is additional demand for machines in the Asia/Pacific area as
well as in Latin America.[20][21] ATMs have yet to reach high numbers in the Near East/Africa.[22]
The world's most northerly installed ATM is located at Longyearbyen, Svalbard, Norway.[citation needed]
The world's most southerly installed ATM is located at McMurdo Station, Antarctica.[23]
While India claims to have the world's highest installed ATM at Nathu La Pass, India installed by the Union
Bank of India at 4310 meters, there are higher ATMs installed in Nagchu County, Tibet at 4500 meters
by Agricultural Bank of China.[24][25]
Israel has the world's lowest installed ATM at Ein Bokek at the Dead Sea, installed independently by a grocery
store at 421 meters below (Mediterranean) Sea level.[26]
While ATMs are ubiquitous on modern cruise ships, ATMs can also be found on some US Navy ships.[27]
[edit]Hardware
A block diagram of an ATM
An ATM is typically made up of the following devices:
CPU (to control the user interface and transaction devices)
Magnetic and/or Chip card reader (to identify the customer)
PIN Pad (similar in layout to a Touch tone or Calculator keypad), often manufactured as part of a
secure enclosure.
Secure cryptoprocessor , generally within a secure enclosure.
Display (used by the customer for performing the transaction)
Function key buttons (usually close to the display) or a Touchscreen (used to select the various
aspects of the transaction)
Record Printer (to provide the customer with a record of their transaction)
Vault (to store the parts of the machinery requiring restricted access)
Housing (for aesthetics and to attach signage to)
Recently, due to heavier computing demands and the falling price of computer-like architectures, ATMs have
moved away from custom hardware architectures using microcontrollers and/or application-specific integrated
circuits to adopting the hardware architecture of a personal computer, such as, USB connections for
peripherals, ethernet and IP communications, and use personal computer operating systems. Although it is
undoubtedly cheaper to use commercial off-the-shelf hardware, it does make ATMs potentially vulnerable to
the same sort of problems exhibited by conventional computers.
Business owners often lease ATM terminals from ATM service providers.
Two Loomis employees refilling an ATM at the Downtown Seattle REI
The vault of an ATM is within the footprint of the device itself and is where items of value are kept. Scrip cash
dispensers do not incorporate a vault.
Mechanisms found inside the vault may include:
Dispensing mechanism (to provide cash or other items of value)
Deposit mechanism including a Check Processing Module and Bulk Note Acceptor (to allow the
customer to make deposits)
Security sensors (Magnetic, Thermal, Seismic, gas)
Locks: (to ensure controlled access to the contents of the vault)
Journaling systems; many are electronic (a sealed flash memory device based on proprietary
standards) or a solid-state device (an actual printer) which accrues all records of activity including access
timestamps, number of bills dispensed, etc. - This is considered sensitive data and is secured in similar
fashion to the cash as it is a similar liability.
ATM vaults are supplied by manufacturers in several grades. Factors influencing vault grade selection include
cost, weight, regulatory requirements, ATM type, operator risk avoidance practices, and internal volume
requirements.[28] Industry standard vault configurations include Underwriters Laboratories UL-291 "Business
Hours" and Level 1 Safes,[29] RAL TL-30 derivatives,[30] and CEN EN 1143-1:2005 - CEN III/VdS and CEN
IV/LGAI/VdS.[31][32]
ATM manufacturers recommend that vaults be attached to the floor to prevent theft.[33]
[edit]Software
A Suncorp Metway ATM running OS/2
With the migration to commodity PC hardware, standard commercial "off-the-shelf" operating systems and
programming environments can be used inside of ATMs. Typical platforms previously used in ATM
development include RMX or OS/2. Today the vast majority of ATMs worldwide use a Microsoft OS,
primarily Windows XP Professional or Windows XP Embedded.
A small number of deployments may still be running older versions such as Windows NT, Windows
CE or Windows 2000. Notably, Vista was not widely adopted in ATMs.[citation needed] There is a computer industry
security view or consensus that desktop operating systems have greater risks as operating systems for cash
dispensing machines than other types of operating systems like (Secure) Real Time Operating Systems
(RTOSs). RISKS Digest has many articles about cash machine operating system vulnerabilities.[34]
A Wincor Nixdorf ATM running Windows 2000
Linux is also finding some reception in the ATM marketplace. An example of this is Banrisul, the largest bank in
the south of Brazil, which has replaced the MS-DOS operating systems in its ATMs with Linux. Banco do
Brasil is also migrating ATMs to Linux.
Common application layer transaction protocols, such as Diebold 91x (911 or 912) and NCR NDC or
NDC+ provide emulation of older generations of hardware on newer platforms with incremental extensions
made over time to address new capabilities, although companies like NCR continuously improve these
protocols issuing newer versions (e.g. NCR's AANDC v3.x.y, where x.y are subversions). Most major ATM
manufacturers provide software packages that implement these protocols. Newer protocols such as IFX have
yet to find wide acceptance by transaction processors.[35]
With the move to a more standardized software base, financial institutions have been increasingly interested in
the ability to pick and choose the application programs that drive their equipment. WOSA/XFS, now known
as CEN XFS (or simply XFS), provides a common API for accessing and manipulating the various devices of
an ATM. J/XFS is a Java implementation of the CEN XFS API.
While the perceived benefit of XFS is similar to the Java's "Write once, run anywhere" mantra, often different
ATM hardware vendors have different interpretations of the XFS standard. The result of these differences in
interpretation means that ATM applications typically use amiddleware to even out the differences between
various platforms.
With the onset of Windows operating systems and XFS on ATM's, the software applications have the ability to
become more intelligent. This has created a new breed of ATM applications commonly referred to as
programmable applications. These types of applications allows for an entirely new host of applications in which
the ATM terminal can do more than only communicate with the ATM switch. It is now empowered to connected
to other content servers andvideo banking systems.
Notable ATM software that operates on XFS platforms include Triton PRISM, Diebold Agilis
EmPower, NCR APTRA Edge, CR2 BankWorld, KAL Kalignite, Phoenix Interactive VISTAatm, and Wincor
Nixdorf ProTopas.
With the move of ATMs to industry-standard computing environments, concern has risen about the integrity of
the ATM's software stack.[36]
[edit]Security
Security, as it relates to ATMs, has several dimensions. ATMs also provide a practical demonstration of a
number of security systems and concepts operating together and how various security concerns are dealt with.
[edit]Physical
A Wincor Nixdorf Procash 2100xe Frontload that was opened with an angle grinder
Early ATM security focused on making the ATMs invulnerable to physical attack; they were effectively safes
with dispenser mechanisms. A number of attacks on ATMs resulted, with thieves attempting to steal entire
ATMs by ram-raiding.[37] Since late 1990s, criminal groups operating in Japan improved ram-raiding by stealing
and using a truck loaded with a heavy construction machinery to effectively demolish or uproot an entire ATM
and any housing to steal its cash.[38]
Another attack method, plofkraak, is to seal all openings of the ATM with silicone and fill the vault with a
combustible gas or to place an explosive inside, attached, or near the ATM. This gas or explosive is ignited and
the vault is opened or distorted by the force of the resulting explosion and the criminals can break in.[39] This
type of theft has occurred in the Netherlands, Belgium, France, Denmark, Germany and Australia.[40][41] This
type of attack can be completely prevented by using gas explosion prevention devices.[42]
Modern ATM physical security, per other modern money-handling security, concentrates on denying the use of
the money inside the machine to a thief, by means of techniques such as dye markers and smoke canisters.
A common method is to simply rob the staff filling the machine with money. To avoid this, the schedule for filling
them is kept secret, varying and random. The money is often kept in cassettes, which will dye the money if
incorrectly opened.
[edit]Transactional secrecy and integrity
A Triton brand ATM with a dip style card reader and a triple DES keypad
The security of ATM transactions relies mostly on the integrity of the secure cryptoprocessor: the ATM often
uses commodity components that are not considered to be "trusted systems".
Encryption of personal information, required by law in many jurisdictions, is used to prevent fraud. Sensitive
data in ATM transactions are usually encrypted with DES, but transaction processors now usually require the
use of Triple DES.[43] Remote Key Loading techniques may be used to ensure the secrecy of the initialization of
the encryption keys in the ATM. Message Authentication Code (MAC) or Partial MAC may also be used to
ensure messages have not been tampered with while in transit between the ATM and the financial network.
[edit]Customer identity integrity
A BTMU ATM with a palm scanner (to the right of the screen)
There have also been a number of incidents of fraud by Man-in-the-middle attacks, where criminals have
attached fake keypads or card readers to existing machines. These have then been used to record customers'
PINs and bank card information in order to gain unauthorized access to their accounts. Various ATM
manufacturers have put in place countermeasures to protect the equipment they manufacture from these
threats.[44][45]
Alternate methods to verify cardholder identities have been tested and deployed in some countries, such as
finger and palm vein patterns,[46] iris , and facial recognition technologies. However, recently, cheaper mass
production equipment has been developed and is being installed in machines globally that detect the presence
of foreign objects on the front of ATMs, current tests have shown 99% detection success for all types
of skimming devices.[47]
[edit]Device operation integrity
ATMs that are exposed to the outside must be vandal and weather resistant
Openings on the customer-side of ATMs are often covered by mechanical shutters to prevent tampering with
the mechanisms when they are not in use. Alarm sensors are placed inside the ATM and in ATM servicing
areas to alert their operators when doors have been opened by unauthorized personnel.
Rules are usually set by the government or ATM operating body that dictate what happens when integrity
systems fail. Depending on the jurisdiction, a bank may or may not be liable when an attempt is made to
dispense a customer's money from an ATM and the money either gets outside of the ATM's vault, or was
exposed in a non-secure fashion, or they are unable to determine the state of the money after a failed
transaction.[48] Bank customers often complain that banks have made it difficult to recover money lost in this
way, but this is often complicated by the bank's own internal policies regarding suspicious activities typical of
the criminal element.[49]
[edit]Customer security
Dunbar Armored ATM Techs watching over ATMs that have been installed in a van
In some countries, multiple security cameras and security guards are a common feature.[50] In the United
States, The New York State Comptroller's Office has criticized the New York State Department of Banking for
not following through on safety inspections of ATMs in high crime areas.[51]
Critics of ATM operators assert that the issue of customer security appears to have been abandoned by the
banking industry;[52] it has been suggested that efforts are now more concentrated on deterrent legislation than
on solving the problem of forced withdrawals.[53]
At least as far back as July 30, 1986, critics of the industry have called for the adoption of an emergency PIN
system for ATMs, where the user is able to send a silent alarm in response to a threat.[54] Legislative efforts to
require an emergency PIN system have appeared in Illinois,[55] Kansas [56] and Georgia,[57] but none have
succeeded as of yet. In January 2009, Senate Bill 1355 was proposed in the Illinois Senate that revisits the
issue of the reverse emergency PIN system.[58] The bill is again resisted by the banking lobby and supported by
the police.[59]
In 1998 three towns outside of Cleveland Ohio, in response to an ATM crime wave, adopted ATM Consumer
Security Legislation requiring that a 9-1-1 switch be installed at all outside ATMs within their jurisdiction. Since
the passing of these laws 11 years ago, there have been no repeat crimes. In the wake of an ATM Murder in
Sharon Hill, Pennsylvania, The City Council of Sharon Hill passed an ATM Consumer Security Bill as well, with
the same result. As of July 2009, ATM Consumer Security Legislation is currently pending in New York, New
Jersey, and Washington D.C.
In China, many efforts to promote security have been made. On-premises ATMs are often located inside the
bank's lobby which may be accessible 24 hours a day. These lobbies have extensive CCTV coverage, an
emergency telephone and a security guard on the premises. Bank lobbies that aren't guarded 24 hours a day
may also have secure doors that can only be opened from outside by swiping your bank card against a wall-
mounted scanner, allowing the bank to identify who enters the building. Most ATMs will also display on-screen
safety warnings and may also be fitted with convex mirrors above the display allowing the user to see what is
happening behind them.
[edit]Alternative uses
Two NCR Personas 84 ATMs at a bank inJersey dispensing two types of pound sterling banknotes: Bank of England
noteson the left, and States of Jersey notes on the right
Although ATMs were originally developed as just cash dispensers, they have evolved to include many other
bank-related functions. In some countries, especially those which benefit from a fully integrated cross-bank
ATM network (e.g.: Multibanco in Portugal), ATMs include many functions which are not directly related to the
management of one's own bank account, such as:
Deposit currency recognition, acceptance, and recycling[60][61]
Paying routine bills, fees, and taxes (utilities, phone bills, social security, legal fees, taxes, etc.)
Printing bank statements
Updating passbooks
Loading monetary value into stored value cards
Purchasing
Postage stamps .
Lottery tickets
Train tickets
Concert tickets
Movie tickets
Shopping mall gift certificates.
Games and promotional features[62]
Fastloans
CRM at the ATM
Donating to charities[63]
Cheque Processing Module
Adding pre-paid cell phone / mobile phone credit.
Paying (in full or partially) the credit balance on a card linked to a specific current account.
Increasingly banks are seeking to use the ATM as a sales device to deliver pre approved loans and targeted
advertising using products such as ITM (the Intelligent Teller Machine) from CR2 or Aptra Relate from NCR.
ATMs can also act as an advertising channel for companies to advertise their own products or third-party
products and services.[64]
In Canada, ATMs are called guichets automatiques in French and sometimes "Bank Machines" in English.
The Interac shared cash network does not allow for the selling of goods from ATMs due to specific security
requirements for PIN entry when buying goods.[65] CIBC machines in Canada, are able to top-up the minutes on
certain pay as you go phones.
A South Korean ATM with mobile bank port and bar code reader
Manufacturers have demonstrated and have deployed several different technologies on ATMs that have not yet
reached worldwide acceptance, such as:
Biometrics , where authorization of transactions is based on the scanning of a customer's fingerprint,
iris, face, etc. Biometrics on ATMs can be found in Asia.[66][67][68]
Cheque/Cash Acceptance, where the ATM accepts and recognise cheques and/or currency without
using envelopes[69] Expected to grow in importance in the US through Check 21 legislation.
Bar code scanning [70]
On-demand printing of "items of value" (such as movie tickets, traveler's cheques, etc.)
Dispensing additional media (such as phone cards)
Co-ordination of ATMs with mobile phones[71]
Customer-specific advertising[72]
Integration with non-banking equipment[73][74]
[edit]Reliability
An ATM running Microsoft Windows that has crashed
Before an ATM is placed in a public place, it typically has undergone extensive testing with bothtest money and
the backend computer systems that allow it to perform transactions. Banking customers also have come to
expect high reliability in their ATMs,[75] which provides incentives to ATM providers to minimize machine and
network failures. Financial consequences of incorrect machine operation also provide high degrees of incentive
to minimize malfunctions.[76]
ATMs and the supporting electronic financial networks are generally very reliable, with industry benchmarks
typically producing 98.25% customer availability for ATMs[77] and up to 99.999% availability for host systems. If
ATMs do go out of service, customers could be left without the ability to make transactions until the beginning
of their bank's next time of opening hours.
This said, not all errors are to the detriment of customers; there have been cases of machines giving out money
without debiting the account, or giving out higher value notes as a result of
incorrect denomination of banknote being loaded in the money cassettes. Errors that can occur may
be mechanical (such as card transport mechanisms; keypads; hard disk failures; envelope deposit
mechanisms); software (such asoperating system; device driver; application); communications; or purely down
to operator error.
An ATM running OS/2 that has crashed
To aid in reliability, some ATMs print each transaction to a roll paper journal that is stored inside the ATM,
which allows both the users of the ATMs and the related financial institutions to settle things based on the
records in the journal in case there is a dispute. In some cases, transactions are posted to an electronic journal
to remove the cost of supplying journal paper to the ATM and for more convenient searching of data.
Improper money checking can cause the possibility of a customer receiving counterfeit banknotes from an
ATM. While bank personnel are generally trained better at spotting and removing counterfeit cash,[78][79] the
resulting ATM money supplies used by banks provide no absolute guarantee for proper banknotes, as
the Federal Criminal Police Office of Germany has confirmed that there are regularly incidents of false
banknotes having been dispensed through bank ATMs.[80] Some ATMs may be stocked and wholly owned by
outside companies, which can further complicate this problem. Bill validation technology can be used by ATM
providers to help ensure the authenticity of the cash before it is stocked in an ATM; ATMs that have cash
recycling capabilities include this capability.[81]
[edit]Fraud
As with any device containing objects of value, ATMs and the systems they depend on to function are the
targets of fraud. Fraud against ATMs and people's attempts to use them takes several forms.
The first known instance of a fake ATM was installed at a shopping mall in Manchester, Connecticut in 1993.
By modifying the inner workings of a Fujitsu model 7020 ATM, a criminal gang known as The Bucklands Boys
were able to steal information from cards inserted into the machine by customers.[82]
In some cases, bank fraud could occur at ATMs whereby the bank accidentally stocks the ATM with bills in the
wrong denomination, therefore giving the customer more money than should be dispensed.[83] The result of
receiving too much money may be influenced by the card holder agreement in place between the customer and
the bank.[84][85]
In a variation of this, WAVY-TV reported an incident in Virginia Beach of September 2006 where a hacker who
had probably obtained a factory-default admin password for a gas station's white label ATM caused the unit to
assume it was loaded with $5 USD bills instead of $20s, enabling himself—and many subsequent customers—
to walk away with four times the money they said they wanted to withdraw.[86] This type of scam was featured
on the TV series The Real Hustle.
ATM behavior can change during what is called "stand-in" time, where the bank's cash dispensing network is
unable to access databases that contain account information (possibly for database maintenance). In order to
give customers access to cash, customers may be allowed to withdraw cash up to a certain amount that may
be less than their usual daily withdrawal limit, but may still exceed the amount of available money in their
account, which could result in fraud.[87]
[edit]Card fraud
ATM lineup
A big queue at an ATM in Masalli,Azerbaijan
In an attempt to prevent criminals from shoulder surfing the customer's PINs, some banks draw privacy areas
on the floor.
For a low-tech form of fraud, the easiest is to simply steal a customer's card. A later variant of this approach is
to trap the card inside of the ATM's card reader with a device often referred to as a Lebanese loop. When the
customer gets frustrated by not getting the card back and walks away from the machine, the criminal is able to
remove the card and withdraw cash from the customer's account.
Another simple form of fraud involves attempting to get the customer's bank to issue a new card and stealing it
from their mail.[88]
Some ATMs may put up warning messages to customers to not use them when it detects possible tampering
The concept and various methods of copying the contents of an ATM card's magnetic stripe on to a duplicate
card to access other people's financial information was well known in the hacking communities by late 1990.[89]
In 1996 Andrew Stone, a computer security consultant from Hampshire in the UK, was convicted of stealing
more than £1 million (at the time equivalent to US$1.6 million) by pointing high definition video cameras at
ATMs from a considerable distance, and by recording the card numbers, expiry dates, etc. from the embossed
detail on the ATM cards along with video footage of the PINs being entered. After getting all the information
from the videotapes, he was able to produce clone cards which not only allowed him to withdraw the full daily
limit for each account, but also allowed him to sidestep withdrawal limits by using multiple copied cards. In
court, it was shown that he could withdraw as much as £10,000 per hour by using this method. Stone was
sentenced to five years and six months in prison.[90]
By contrast, a newer high-tech method of operating sometimes called card skimming or card
cloning involves the installation of a magnetic card reader over the real ATM's card slot and the use of a
wireless surveillance camera or a modified digital camera to observe the user's PIN. Card data is then cloned
onto a second card and the criminal attempts a standard cash withdrawal. The availability of low-cost
commodity wireless cameras and card readers has made it a relatively simple form of fraud, with comparatively
low risk to the fraudsters.[91]
In an attempt to stop these practices, countermeasures against card cloning have been developed by the
banking industry, in particular by the use of smart cards which cannot easily be copied or spoofed by
unauthenticated devices, and by attempting to make the outside of their ATMs tamper evident. Older chip-card
security systems include the French Carte Bleue, Visa Cash, Mondex, Blue from American
Express [92] and EMV '96 or EMV 3.11. The most actively developed form of smart card security in the industry
today is known as EMV 2000 or EMV 4.x.
EMV is widely used in the UK (Chip and PIN) and other parts of Europe, but when it is not available in a
specific area, ATMs must fallback to using the easy–to–copy magnetic stripe to perform transactions. This
fallback behaviour can be exploited.[93] However the fallback option has been removed by several UK banks,
meaning if the chip is not read, the transaction will be declined.
In February 2009, a group of criminals used counterfeit ATM cards to steal $9 million from 130 ATMs in 49
cities around the world all within a time period of 30 minutes.[94]
Card cloning and skimming can be detected by the implementation of magnetic card reader heads and
firmware that can read a signature embedded in all magnetic stripes during the card production process. This
signature known as a "MagnePrint" or "BluPrint" can be used in conjunction with common two factor
authentication schemes utilized in ATM, debit/retail point-of-sale and prepaid card applications.[citation needed]
Another ATM fraud issue is ATM card theft which includes credit card trapping and debit card trapping at
ATMs. Originating in South America this type of ATM fraud has spread globally. Although somewhat replaced
in terms of volume by ATM skimming incidents, a re-emergence of card trapping has been noticed in regions
such as Europe where EMV Chip and PIN cards have increased in circulation.[95]
[edit]Related devices
A Talking ATM is a type of ATM that provides audible instructions so that persons who cannot read an ATM
screen can independently use the machine. All audible information is delivered privately through a
standard headphone jack on the face of the machine. Alternatively, some banks such as
the Nordea and Swedbank use a built-in external speaker which may be invoked by pressing the talk button on
the keypad.[96] Information is delivered to the customer either through pre-recorded sound files or via text-to-
speech speech synthesis.
A postal interactive kiosk may also share many of the same components as an ATM (including a vault), but
only dispenses items relating to postage.[97][98]
A scrip cash dispenser may share many of the same components as an ATM, but lacks the ability to dispense
physical cash and consequently requires no vault. Instead, the customer requests a withdrawal transaction
from the machine, which prints a receipt. The customer then takes this receipt to a nearby sales clerk, who then
exchanges it for cash from the till.[99]
A Teller Assist Unit may also share many of the same components as an ATM (including a vault), but they are
distinct in that they are designed to be operated solely by trained personnel and not the general public, they do
not integrate directly into interbank networks, and are usually controlled by a computer that is not directly
integrated into the overall construction of the unit.
Electronic funds transfer or EFT is the electronic exchange or transfer of money from one account to
another, either within a single financial institution or across multiple institutions, through computer-based
systems.
The term is used for a number of different concepts:
Cardholder-initiated transactions, where a cardholder makes use of a payment card
Direct deposit payroll payments for a business to its employees, possibly via a payroll service
bureau
Direct debit payments, sometimes called electronic checks, for which a business debits the
consumer's bank accounts for payment for goods or services
Electronic bill payment in online banking, which may be delivered by EFT or paper check
Transactions involving stored value of electronic money, possibly in a private currency
Wire transfer via an international banking network (generally carries a higher fee)
Electronic Benefit Transfer
In 1978 U.S. Congress passed the Electronic Funds Transfer Act to establish the rights and liabilities of
consumers as well as the responsibilities of all participants in EFT activities in the United State
Debits and creditsFrom Wikipedia, the free encyclopedia
(Redirected from Debit)
This article has multiple issues. Please help improve it or discuss these issues on the talk page.
It may be confusing or unclear for some readers. Tagged since April 2009.
It is in need of attention from an expert on the subject. Tagged since April 2009.
It may require general cleanup to meet Wikipedia's quality standards. Tagged
since April 2009.
It has been suggested that Debits and Credits (IFRS) be merged into this article or section. (Discuss)
This article is about the bookkeeping concept of debits and credits. It should not be confused with the
financial concepts of debt and credit, or with credit cards. For additional uses, see Debits and credits
(disambiguation).
This article uses terms related to the American system of accounting known as GAAP (Generally
Accepted Accounting Principles). The article still applies when working with the European accounting
system known as IFRS (International Financial Reporting Standards) - Note: some terms may differ
e.g. Revenue (GAAP) is Income (IFRS). An alternative article with IFRS terms is available see: Debits
and Credits (IFRS).
Debit and credit are formal bookkeeping and accounting terms. They are the most fundamental
concepts in accounting, representing the two sides of each individual transaction recorded in any
accounting system. A debit indicates an asset or an expense transaction, a credit indicates a
transaction that will cause a liability or a gain. A debit transaction can also be used to reduce a
credit balance or increase a debit balance. A credit transaction can be used to decrease a debit
balance or increase a credit balance. Debit and credit form the basis of the double-entry
bookkeeping system. Every debit and credit value are recorded in ledgers and from these
ledgers financial reports can then be prepared.
Contents
[hide]
1 Introduction
2 Origin of the terms debit and
credit
3 Operational Principles
4 Debit and Credit principle
o 4.1 Examples
5 'T' Accounts
6 References
7 External links
[edit]Introduction
Debits and credits are a system of notation used in bookkeeping to determine how and where to
record any financial transaction. In bookkeeping, instead of using additions '+' and subtraction '-'
symbols, a transaction uses the symbol DR (Debit) or CR (Credit). In double-entry
bookkeeping debit is used for asset and expense transactions and credit is used for liability, gain
and equity transactions. For bank transactions, money received in is treated as a debit transaction
and money paid out is treated as a credit transaction. Traditionally, transactions are recorded in two
columns of numbers: debits in the left hand column and credits in the right hand column. Keeping
the debits and credits in separate columns allows each to be recorded and totalled independently.
Where the total of the debit value amounts is lower than the total of the credit value amounts, a
balancing debit value is posted to that nominal ledger account. That nominal ledger account is now
"balanced". An account can have either a credit value balance or a debit value balance but not both.
A debit can also be used to reduce the balance on a liability, gain and equity account. This has the
effect of reducing a credit balance by the value of the debit transaction. The balance in a nominal
that is normally expected to hold a debit balance may change from a debit balance to a credit
balance.
A credit can also be used to reduce the balance on an asset or expense account. This has the
effect of reducing a debit balance by the value of the credit transaction. The balance in a nominal
that is normally expected to hold a credit balance may change from a credit balance to a debit
balance.
In some cases such as fixed assets, all debit transactions will be recorded in one nominal account
and all credit transactions will be recorded in a contra nominal account, with the exception when an
asset is disposed of. The purchase of an asset will be recorded in a fixed asset account (debit
transaction) and the depreciation of the fixed asset (credit transaction) will be recorded in a contra
nominal ledger account, fixed asset depreciation.
[edit]Origin of the terms debit and credit
While the actual origin of the terms debit and credit is unknown, the first known recorded use of the
terms is Venetian Luca Pacioli's 1494 work, Summa de Arithmetica, Geometria, Proportioni et
Proportionalita (translated: Everything About Arithmetic, Geometry and Proportion). Pacioli devoted
one section of his book to documenting and describing the double-entry bookkeeping system in use
during the Renaissance by Venetian merchants, traders and bankers. This system is still the
fundamental system in use by modern bookkeepers.[1]
In its original Latin, Pacioli's Summa used the Latin words debere (to owe) and credere (to entrust)
to describe the two sides of a closed accounting transaction. When his work was translated, the
Latin words debere and credre became the English debit and credit. The abbreviations Dr (for debit)
and Cr (for credit) likely derive from the original Latin.[2]
[edit]Operational Principles
Real Accounts
In real accounts any increment in assets held by the entity is reflected by debiting the relevant
asset account and depletion by crediting the asset account.
If any asset account is debited then it is on account of increment in the value or acquisition of
that liability or owner's equity which decreases the resources held by the entity.
As the total resources held by the entity cannot indigenously increment themselves the depletion
has to be matched with a fall in resources within the entity.
Personal Accounts
In Personal Accounts debiting the personal account of any external entity increases the value of
the monies receivable from that external entity thus augmenting the resources of the
accounting entity.
Similarly crediting the personal account of any external entity reduces the value of monies
receivable from that entity thus reducing the resources of the accounting entity.
Nominal Accounts
Nominal Accounts are accounts which arise only after commencement of the accounting period
and are closed at the end of the accounting period.
Nominal accounts represent incomes and expenses which accrue during the accounting period
and the net result of the total incomes and expenses accruing during the accounting period is
absorbed in the profit and loss account as the profit or loss for the accounting period which is
then transferred to reserves or shareholders funds or owners equity in accordance to the
ownership.
In Nominal Accounts the Expense accounts whenever debited are done as the Expense
incurred represents the Goods and/or Services acquired for consumption by the entity and
hence are temporary increments in the resources of the accounting entity.
In Nominal Accounts the Income accounts are credited as the Income earned is a result of
goods or services provided by the accounting entity which is a depletion of the resources of the
accounting entity used for earning that income.
Cross-Application over Different Types of Accounts
The principles apply uniformly to all combinations of accounting entries involving
different types of accounts based on varying circumstances.
Real Account DebitedPersonal Account
DebitedNominal Account Debited
Real Account Credited
Acquisition of an Asset in Cash - Machinery Account Debited, Cash Account Credited
Sale of an Asset on Credit - Buyer's Account Debited, Machinery Account Credited
Amortisation or Depreciation of an Asset - Depreciation Account Debited, Machinery Account Credited
Personal Account Credited
Acquisition of an Asset on Credit - Machinery Account Debited, Seller's Account Credited
Transfer of a Debt Receivable to another - New Debtor's Account Debited, Old Debtor's Account Credited
Accrual of Expenditure - Electricity Account Debited, Electricity Company's Account Credited
Nominal Account Credited
Capitalisation of Expenditure - Machinery Account Debited, Research and Development Account Credited
Sale of Goods on Credit - Buyer's Account Debited, Sales Account Credited
Inter head transfer of Expenditure - New Expenditure Head Debited, Old Expenditure Head Credited
Simple Thumb Rules to remember which accounts to credit and which to debit:
Personal accounts: Debit: the receiver; Credit: the giver
Real/Asset Accounts: Debit: what comes in; Credit: what goes out
Nominal/Expense Accounts: Debit: all expenses/losses; Credit: all income/gains
[edit]Debit and Credit principle
Each transaction consists of debits and credits, and for every transaction they must be equal.
For Every Transaction: The Value of Debits = The Value of Credits
The extended accounting equation must also balance: 'A + E = L + OE + R'
(where A = Assets, E = Expenses, L = Liabilities, OE = Owner's Equity and R = Revenues)
So 'Debit Accounts (A + E) = Credit Accounts (L + R + OE)'
Debits are on the left and increase a debit account and decrease a credit account.
Credits are on the right and increase a credit account and decrease a debit account.
[edit]Examples
An overdraft occurs when some one withdraws from a bank account and they exceed the
available balance. In this situation a person is said to be "overdrawn".
If there is a prior agreement with the account provider for an overdraft protection plan, and the amount
overdrawn is within this authorized overdraft limit, then interest is normally charged at the agreed rate. If
the balance exceeds the agreed terms, then fees may be charged and higher interest rate might apply.
Contents
[hide]
1 Reasons for overdrafts
2 United Kingdom
o 2.1 Overdraft protection in the UK
2.1.1 Amount of fees
2.1.2 Legal status and controversy
3 United States
o 3.1 Overdraft protection in the US
3.1.1 Ad-hoc coverage of overdrafts
3.1.2 Overdraft lines of credit
3.1.3 Linked accounts
3.1.4 Bounce protection plans
o 3.2 Industry statistics
o 3.3 Transaction processing order
o 3.4 Opt-in regulation
4 See also
5 References
[edit]Reasons for overdrafts
Overdrafts occur for a variety of reasons. These may include:
Intentional short-term loan - The account holder finds themselves short of money and
knowingly makes an insufficient-funds debit. They accept the associated fees and cover the overdraft
with their next deposit.
Failure to maintain an accurate account register - The account holder doesn't accurately
account for activity on their account and overspends through negligence.
ATM overdraft - Banks or ATMs may allow cash withdrawals despite insufficient availability of
funds. The account holder may or may not be aware of this fact at the time of the withdrawal. If the
ATM is unable to communicate with the cardholder's bank, it may automatically authorize a
withdrawal based on limits preset by the authorizing network.
Temporary Deposit Hold - A deposit made to the account can be placed on hold by the bank.
This may be due to Regulation CC (which governs the placement of holds on deposited checks) or
due to individual bank policies. The funds may not be immediately available and lead to overdraft
fees.
Unexpected electronic withdrawals - At some point in the past the account holder may have
authorized electronic withdrawals by a business. This could occur in good faith of both parties if the
electronic withdrawal in question is made legally possible by terms of the contract, such as the
initiation of a recurring service following a free trial period. The debit could also have been made as a
result of a wage garnishment, an offset claim for a taxing agency or a credit account or overdraft with
another account with the same bank, or a direct-deposit chargeback in order to recover an
overpayment.
Merchant error - A merchant may improperly debit a customer's account due to human error. For
example, a customer may authorize a $5.00 purchase which may post to the account for $500.00.
The customer has the option to recover these funds through chargeback to the merchant.
Chargeback to merchant - A merchant account could receive a chargeback because of making
an improper credit or debit card charge to a customer or a customer making an unauthorized credit or
debit card charge to someone else's account in order to "pay" for goods or services from the
merchant. It is possible for the chargeback and associated fee to cause an overdraft or leave
insufficient funds to cover a subsequent withdrawal or debit from the merchant's account that
received the chargeback.
Authorization holds - When a customer makes a purchase using their debit card without using
their PIN, the transaction is treated as a credit transaction. The funds are placed on hold in the
customer's account reducing the customer's available balance. However the merchant doesn't
receive the funds until they process the transaction batch for the period during which the customer's
purchase was made. Banks do not hold these funds indefinitely, and so the bank may release the
hold before the merchant collects the funds thus making these funds available again. If the customer
spends these funds, then barring an interim deposit the account will overdraw when the merchant
collects for the original purchase.
Bank fees - The bank charges a fee unexpected to the account holder, leaving insufficient funds
for a subsequent debit from the same account.
Playing the float - The account holder makes a debit while insufficient funds are present in the
account believing they will be able to deposit sufficient funds before the debit clears. While many
cases of playing the float are done with honest intentions, the time involved in checks clearing and
the difference in the processing of debits and credits are exploited by those committing check kiting.
Returned check deposit - The account holder deposits a check or money order and the
deposited item is returned due to non-sufficient funds, a closed account, or being discovered to be
counterfeit, stolen, altered, or forged. As a result of the check chargeback and associated fee, an
overdraft results or a subsequent debit which was reliant on such funds causes one. This could be
due to a deposited item that is known to be bad, or the customer could be a victim of a bad check or
a counterfeit check scam. If the resulting overdraft is too large or cannot be covered in a short period
of time, the bank could sue or even press criminal charges.
Intentional Fraud - An ATM deposit with misrepresented funds is made or a check or money
order known to be bad is deposited (see above) by the account holder, and enough money is debited
before the fraud is discovered to result in an overdraft once the chargeback is made. The fraud could
be perpetrated against one's own account, another person's account, or an account set up in another
person's name by an identity thief.
Bank Error - A check debit may post for an improper amount due to human or computer error, so
an amount much larger than the maker intended may be removed from the account. Same bank
errors can work to the account holder's detriment, but others could work to their benefit.
Victimization - The account may have been a target of identity theft. This could occur as the
result of demand-draft, ATM-card, or debit-card fraud, skimming, check forgery, an "account
takeover," or phishing. The criminal act could cause an overdraft or cause a subsequent debit to
cause one. The money or checks from an ATM deposit could also have been stolen or the envelope
lost or stolen, in which case the victim is often denied a remedy.
Intraday overdraft - A debit occurs in the customer’s account resulting in an overdraft which is
then covered by a credit that posts to the account during the same business day. Whether this
actually results in overdraft fees depends on the deposit-account holder agreement of the particular
bank.
