Credit and debit card companies have radically changed the entire facet of the payment process. Earlier, cash was the only means of transaction, but increasing fraud and safety-related concerns (theft, damage, etc.) have instilled the need for a safer and more transparent payment. This is when credit and debit cards, net banking and UPI payments rose in popularity.
This is why the government has disallowed cash transactions above a certain limit. These cards also provide many benefits to their users in the form of offers, rewards, discounts and cashback. Thus, it is the need of the hour to raise our awareness and update our knowledge about the various transactions we enter into by using these cards.
Did You Know? Unlike a cash transaction, the origin of these transactions can be traced; thus, frauds like money laundering have been reduced considerably.
What is a Credit Transaction?
Before defining a credit transaction, let us first understand what a transaction means in terms of accounting. A transaction is an event that occurs when the buyers and sellers agree to exchange goods, services or financial assets in return for money. Commonly, bookkeepers record transactions in two types- cash basis and accrual basis.
A cash accounting system is generally used in small businesses where income and expenses are only recorded when cash is received or paid for the same. For example, A sells a computer to B in March, and B settles the payment in April. If A follows accounting on a cash basis, he would recognise this sale only in April.
The majority of businesses follow this method of accounting. For example, A sells a computer to B in March and receives payment for the same in April. In the accrual accounting system, A would recognise and record this transaction in March. The entire foundation of the accrual system of accounting is based on credit transactions.
A credit transaction is an event between two parties where one party (known as a creditor or lender) supplies goods, money or services to another party (known as a debtor or a borrower), and the latter party agrees to pay him at a future date.
Example of Credit Transaction
Taking our previous example forward, when A sells a computer to B and B agrees to pay A at a future date, A is considered to be a creditor and B is the debtor. This is a classic credit transaction and it is the backbone of the accrual form of accounting.
Importance of Credit Transactions
Credit transactions have been pivotal in transforming and evolving the business culture. Let us briefly discuss the reason why:
- The convenience of buying and selling enables consumers to purchase ahead of their ability.
- Credit facilities boost and enable the incorporation of new enterprises that effectively use this ability.
- Production can be carried out on a large scale because businesses can purchase goods in bulk due to credit availability.
- Credit money helps in keeping prices at a stable position by regulating demand and supply.
- Credit money helps in improving the standard of living of people.
What is Meant by an Original Credit Transaction?
Credit card companies such as MasterCard and Visa offer various kinds of transactions. A normal credit transaction goes through a normal authorization and batching process where the funds are not immediately reflected in the recipient’s account. Its processing is similar to that of payment but in reverse. Because of this reason, the funds take several days to arrive.
Unlike a normal credit transaction, the OCT “pushes” the funds straight into the account associated with a specified credit, debit or prepaid card number if the user has enabled the fast fund transfer facility. The funds are shown faster, even though this is limited on the issuer bank’s part. Sometimes, an OCT transaction is reflected in as fast as thirty minutes.
Visa and MasterCard provide this kind of fast and real-time payment service facility. They have made payouts and refunds convenient and have facilitated disbursements to a considerable extent.
How are OCTs Processed?
Visa and MasterCards implement OCT transactions through VisaDirect and MasterCard MoneySend. There are following two prerequisites that are needed to be complied with by the merchants for undergoing an OCT:
- An issuing bank that recognises Visa Direct or MasterCard MoneySend
- A payment gateway which can handle an original credit transaction
After meeting these requirements, the merchant has to input the cardholder’s credentials and then they can send an OCT to reflect on the account immediately. Merchants prefer OCTs because they can find their usage for a variety of purposes like issuing refunds, paying out game winnings or rewarding point redemptions in cases of payments to vendors.
In most cases, OCTs put the funds back into the user’s account significantly faster than a credit transaction, with no requirement of signing up for a P2P service on the customer’s part.
Enumerate the cases where an OCT is used.
Original credit transactions can prove useful in portals with a large clientele or supplier base. These can be used to supplement already well-established payment methods for immigrant transfers. OCTs are slowly replacing the wire transfer method to facilitate these transactions.
Are OCTs subject to Chargebacks?
The only drawback of an OCT transaction, however, is chargebacks. This could happen when the cardholder’s account is not configured to accept fast funds. It is a complete opposite of a typical chargeback, but that doesn’t ensure that it is not harmless. It will still attract a chargeback fee, which consequently increases chargeback rates.
The only remedy for chargebacks is to ensure that a card is authorised to receive OCTs. Merchants need to question payment processors and see if this could be determined before processing a transaction. They could also take additional steps to research if they operate in regions that restrict these original credit transactions and identify the major issuers that don’t accept them.
Another important thing that should be kept in mind is that while entering the credentials of OCTs manually, it shall be double-checked to ensure that the data entered is correct because OCTs do not follow the common authorisation step. It may be possible that the transaction could be processed to a misstated account number.
The OCTs have provided the merchants with a flexible new option for providing refunds and other payments. The services offered by master card's money send and visa direct have facilitated real-time credit transactions and changed the outlook of the whole business sector. These are beneficial to merchants because they serve the customers seamlessly and lead to positive experiences. It however, comes with its con and impacts chargebacks to some extent. Proper planning and thorough research, however, can avoid these costs.
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