Banking products based on smart cards

Bank payment cards were originally created as a retail product aimed at the holder – an individual. And now all over the world, payment cards for banks are one of the most important areas of retail business. At the same time, the marketing goals of the business may be different. In the General case, depending on these purposes it is possible to distinguish three main directions of the use of payment cards:
to work with the Bank’s clients – natural persons;
to work with legal entities and their employees in the framework of salary projects;
cards can be offered to corporate clients as an additional service for paying Executive expenses (corporate cards).

Salary projects, as you know, appeared in Russia among the first. The main number of cards were issued within the framework of these projects. According to the Central Bank of the Russian Federation at the end of 2004, 90% of cards issued in Russia are salary cards, i.e. they are not used as payment instruments, but only for receiving cash. Both at the initial stage of the history of card business development in the country, and now salary projects are aimed at:
attracting additional resources in the form of balances on card accounts of employees of the enterprise where the salary project is implemented;
securing a large client-a legal entity – to the Bank, locking in even larger cash flows of the client (if the project is implemented at an enterprise that already has a current account with the Bank);
attracting a new client-a legal entity with the prospect of transferring it to the settlement and cash services (if the company does not yet have a Bank account).
Therefore, payroll can be considered as independent projects to bring additional resources to the accounts of individuals – employees, and how applied projects through implementation of which could be drawn on settlement and cash servicing of new clients – legal entities.

The purpose of corporate cards that allow the company’s management to pay for so – called representative expenses with their help can be designated as an additional service to a profitable client-a legal entity in order to increase the customer’s “loyalty” to the Bank.
We will classify payment cards used by banks for conducting retail business according to a number of essential features in terms of both the functional characteristics of the card and the card business.
First, Bank payment cards can be divided based on the presence of a personal account – into cards with an account and cards without an account.

The bulk of Bank cards are linked to a specific personal account on the Bank’s balance sheet, which, according to accounting rules, reflects all payments for card operations – whether they are the operations themselves, the Bank’s Commission for their execution, or interest accrual on the balance, if there is one in the card service rates.

Cards with an account can also be classified using two additional criteria: the type of account and its maintenance mode. According to these characteristics, cards with an account can be divided into two main classes:
debit cards;
credit card.
As for debit cards, the type of personal card account for them is a current account, payments on the card are made within the free balance on the account, and overdraft is not allowed (although in principle it is possible). Credit cards are a little more complicated. In General, credit cards can be divided into three categories:
the estimated or the so-called charge chrome card*(23) (a type of personal card account is a current account, but the account management that allows us to make calculations not only within the available balance, but within the permitted overdraft on the account, the amount of which is stipulated in the agreement or tariffs of the Bank, the debt must be repaid monthly by the cardholder in full);
revolving credit (a type of personal card account and loan, but a strict requirement monthly repayment loan debt in full is missing);
revolving overdrafts (the type of personal account is a current account with an overdraft assumption, there is no requirement to pay off the loan debt in full on a monthly basis).

When considering cards with an account, it is appropriate to define two main concepts – “available balance” and”credit limit”.

The available balance is the amount within which transactions can be made with the payment card at the time when the transaction is supposed to be made. Thus, the available balance is a variable value. It is reduced by the amount of transactions performed with the card, by the amount of the Bank’s commissions, and increases, for example, if the Bank has accrued interest on the balance on the card or returned funds for a disputed transaction by the client.

The credit limit is the maximum amount of credit card debt that can occur (in the case of revolving credit cards), or the maximum allowed overdraft (in the case of settlement or revolving overdraft cards). Thus, the credit limit the difference from the available balance is the amount fixed in the agreement between the Bank and the client,
it remains unchanged until the Bank or customer signs a new agreement or makes changes to the existing one. At the same time, of course, card transactions may exhaust the credit limit, and transactions will not be possible until the debt is repaid.
as an explanation, we will give examples of how the available balance is calculated for various cards with an account, and how it is related to the credit limit for credit cards.

For a debit card, the available balance is equal to the free balance on the card account (i.e., minus the amount of card transactions blocked on the card account). For a payment card, the available balance is equal to the amount of the free balance on the card plus the credit limit (i.e. the allowed overdraft). For revolving credit-the” unselected ” amount of the credit limit at the time of calculation. For revolving overdraft – free balance plus credit limit.

Cards without a personal account are also quite common banking products. As a rule, these are prepaid non-name cards. In the case of such cards, the Bank may act as a distributor of the card, providing additional information services to customers under an agreement with the issuing company. The distributing Bank first accumulates the funds received from the client on the transit account, and then transfers them to the company’s account under an agreement with the issuing company.
I must say that cards with an account can also be non-named, although most of them are still named (an example of a non-named card with a personal account can be Visa Instant Issue, Maestro Prepaid).
A special case is a card with a chip, implemented as an electronic wallet. The chip card-e-wallet also has a personal account, but its maintenance mode differs from the personal account mode of traditional cards. A regular card itself does not contain information about the account status, it is a tool for accessing the current account (or a tool for processing a payment document for later debiting the transaction amount from the account – in the case of an unauthorized operation). Accordingly, when the Bank transfers funds to the card account to which the regular payment card is linked, no transfer is made to the Bank card itself. Another thing is an e-wallet card: at the time of its replenishment, the balance on the personal account is reduced by the amount that the card was credited to. So electronic cash does appear on the card, which makes it possible and safe (in terms of overdraft on the account) to authorize transactions in offline mode.
Like any product intended for retail sale, payment cards are aimed at the mass market. Therefore, the card products offered by payment systems and companies are as standardized as possible. Each payment system has card products focused on three main customer segments : the mass client (Standard class cards), the wealthy client (Gold class), and the elite client (Infinite and Platinum type cards). In addition, there are special products for corporate clients (Business card class). In recent years, due to the development of the Internet and e-Commerce, there are cards designed for use in this area.

Banks that are members of payment systems (not only international, but also Russian) create their standard products based on standard card products of payment systems. For each of these products, as a rule, unified tariffs for production and maintenance are approved, standard customer agreements, transaction schemes are developed, and so on. It should be noted that full standardization of card products by banks is hardly possible. Let’s take, for example, such a direction of the card business as salary projects. What Commission will be charged to the company for maintaining card accounts, and will it be charged at all? Of calculating what the interest rate will be accrued on balances of card accounts? Will there be an ATM installed on the territory of the enterprise, or will the salary of employees of the enterprise be issued at a Bank branch? All these parameters of the salary project are often set for each enterprise separately, depending on the significance of the project for the Bank.

New banking products based on smart cards

Smart cards allow the Bank to implement unique financial products that are important both for improving the efficiency of the financial sector of the country’s economy and for improving the well-being of the population, including its most socially vulnerable segments, so we decided to devote a separate Chapter to banking products based on smart cards.

You can implement several banking products based on smart cards and adapt them to the customer. These products can be promoted in the following five main market segments.

Large and medium-sized amounts segment

Here, it is advisable to offer a banking product based on smart cards to customers who need rapid interregional movement of medium and large amounts, which is widespread in our country. For example, a client deposits money in Khabarovsk in the morning, gets on a plane, and withdraws it in Moscow in the evening. Or money is deposited to the client’s account in the region, and then they promptly withdraw it in another city. Such operations are practiced when buying shares from individuals, regularly paying for services and goods (including apartments) in other regions. To successfully operate in this segment, the Bank needs a network of regional branches, but it is also possible to attract regional banks*(26).

Direct sales company distributors segment

this segment includes customers-distributors of various companies who regularly pay for the purchase of products from the company. Experience shows that cosmetic companies (“daughters” of Western companies) that have a wide network of distributors in Russia work well on smart cards in this segment*(27). In addition, travel, computer, pharmaceutical and other companies can be connected to this segment of payments using smart cards. In terms of security, efficiency and ease of service, smart cards are out of competition in this field of payments.

Salary project

Here, smart cards make it possible not only to receive cash (for which the first e-wallet of the card is used), but also to pay for lunch in the dining room (the second e-wallet) and purchase goods in the company’s stores (the third e-wallet). In some businesses, one of the e-wallets is used for issuing consumer credit to employees. In addition, the same cards can be used in the enterprise access control and accounting system.

Social program

Currently, targeted social programs exist and are being developed in almost all regions of Russia. At the same time, social card projects that use smart card technologies bring good results in their implementation. The new legislation on replacing Federal benefits with monetary compensation has not reduced interest in various social cards, since most of these projects are developed on the basis of programs provided by regional administrations (the project “social card of Muscovites” *(28), etc.). As banking practice has shown, smart cards containing several e-wallets are very suitable for such targeted social programs. A specific example of effective use of smart cards can be programs for providing free medicines in pharmacies. The following scheme applies: the city administration transfers funds intended for this purpose to a transit Bank account. Those categories of citizens who are entitled to free medicines are issued cards, and funds for the purchase of medicines are entered into the first e-wallet as needed (when presenting a prescription). Pharmacies have smart card service terminals that the customer uses to pay for medicines using their smart card. At the end of the day, information about purchases is sent to the transaction processing center (tsot), where it is transmitted to the branch after processing. After processing the information received from pharmacies about purchases, money is transferred from this transit Bank account to the accounts of specific pharmacies. To implement this scheme, contracts are concluded between pharmacies, the local administration and the Bank. According to these agreements it is possible some kind of overdraft on a transit account for a few days. After some time (as experience shows), the turnover of pharmacies increases significantly, and they reduce the trade mark-up. In addition, a prescription database is being created that allows you to fully track when, to whom, and which doctor prescribes which medications, thereby eliminating possible abuse. Such joint programs, which involve banks, administration and public service structures, make it possible to implement targeted benefits, and in contrast to similar programs of insurance companies, they work only with real customers.
The second and third e-wallets of the same smart card can be used to transfer benefits that are assigned to privileged categories of citizens: single mothers, large families, and veterans etc. (a total of 28 categories), which are purchased in special stores at discounted prices. In these stores (as in pharmacies), equipment is installed and payment for goods and services is organized using smart cards received by beneficiaries. To implement this program, it is necessary to conclude a four-party agreement between the Bank, the administration, the trade enterprise and the employment Department of the regional government. In this case, people receive real targeted benefits, and money is diverted from the markets and gets into the turnover of the city’s trade*(29).

E-Commerce

Smart card payment technology is very promising for e-Commerce (especially for the B2B sector)*(30), with the following advantages:
microprocessor cards provide a significantly higher level of security. They are not only better protected from forgery and theft, but are also able to generate session encryption keys, which are used in the system, starting from the client location, to protect all transmitted information
confidential information processed: Bank details, card parameters, amount of payments, customer’s last name, personal identification number, etc. When using dynamic authentication methods, it is impossible to fake all the information entered on the card when it is released. This guarantees all participants of the transaction security of operations;

the availability of inexpensive card readers for working with smart cards, which can be connected to any personal computer, makes working with them accessible to a wide range of both legal entities and individuals. These card readers can work with any type of smart cards, which makes it possible to use them for microprocessor cards of international payment systems;

you can use a smart card to differentiate access to the resources of an online platform or e-store;
payments in a system that uses smart cards are made within the existing regulatory field of Bank payment cards, in contrast, for example, to the “electronic money”, network money, etc.used in some payment systems for Internet Commerce, which do not currently have a legal basis.

When using corporate payment cards, the buyer (legal entity) does not need to reserve the amount for purchases on the electronic trading platform – the purchase payment is made based on the limit set by the Bank for such a card. In schemes based on other payment means, before making purchases on such a platform, the buyer must divert funds or hold them in special accounts belonging to, for example, a trading platform, etc.
Payments in the system are made online. At the same time, funds are guaranteed to be credited to the seller’s account within the specified time frame (day to day, after 3 hours, etc.), it is possible to conduct a flexible tariff policy and implement special financial schemes.

The scheme of organization of computations for the electronic Commerce based on smart cards
The customer contacts the supplier to obtain data about the services provided, form a package of services (the buyer’s basket), and receive an electronic invoice for making a transaction to pay for services.
The supplier uses the customer’s shopping cart data to create an invoice and a link to the payment system component for making a payment using the customer’s smart card.
The client uses the corresponding wallet of their card to start the session for paying for the service. The account data is transmitted to the card software, and the card generates a session data protection key for transmission to the Internet payment system.
Encrypted and signed data is transmitted to the Internet payment system.
The online payment system monitors the signature data and decrypts the client’s request. Client request data is passed to the application server, which implements the business logic of the current request. After processing, the system generates a response for the client’s card, which is encrypted and signed with the session key used to transmit the card request.
The supplier can use its technology card to access information about transactions made in the system based on orders made in this store (6, 7, 8, 9). Request and response data are encrypted and signed with the card’s session key.
Transaction data is transmitted to the acquiring Bank.
The notice of payment.
In General, the launch of Internet platforms will allow banks to provide their clients with a new type of service for Russia – online payments in the B2B e-Commerce sector. Thus, participants in THE B2B e-Commerce segment in Russia will have an additional opportunity to improve the efficiency of their business via the Internet.