Someone has taken your credit card. You call the number you found in your travel guide or in the local newspaper. You provide your details and you cancel your card. You make it stop. In a few minutes, it should be moved to the stop-list that all authorization centres around the world can access. From then on, no one will be able to use your card without your permission. You can breathe easy. The threat is gone.
But is it?
It certainly isn't. To figure out why, we should first look at the complicated process.
In general, calling the authorization centre of the bank that gave you the card is the best and safest thing to do (the issuer bank). Calling the number in the news is not the best option because it connects the cardholder to a "volunteer" bank that helps all of the card's issuers. Some service groups, like the International Air Passengers Association (IAPA), do the same thing.
The "catering bank" takes the call, writes down the cardholder's information, and puts together a fax with the instruction to cancel the card. After that, the cancellation fax is sent to the bank that issued the check. The clearing and payments associations of all the banks that issue a certain card put out special manuals with information about all the banks that issue it. Europay International is made up of all the banks in Europe that give out Mastercards, Eurocards, and a few other smaller cards (EPI). Here's the first problem: the catering bank often gets the name of the person who gave the check wrong. Many banks have the same name or are branches of the same network. There can be banks with the same name in Prague, Budapest, Frankfurt, or Vienna, for example. If the wrong bank gets the fax that cancels the card, the card won't be cancelled until it's too late. By the time the mistake is found, the card has usually been used too much and the cardholder has run out of money.
Also, if you take the indirect route and call an intermediary bank instead of the issuing bank, you will have to wait, which could cost you money. When the fax is sent, it might not be needed anymore.
If the card has been misused and the cardholder's bank or credit card account has been charged for fake purchases or money withdrawals, the cardholder can get these charges back. He has to be able to point to them and say in writing that he didn't do anything to them. This starts a process that is called "chargeback."
A chargeback is a payment system dispute about a transaction. The cardholder can start a dispute when he gets his statement and doesn't agree with one or more of the items on it, or the issuing bank can do it for technical reasons (usually at the behest of the cardholder or if his account is overdrawn). A technical reason could be the wrong signature or no signature at all, the wrong date or no date, important information missing from the sales vouchers, etc. Even though "No Refund, No Cancellation" is written on many sales vouchers, refunds and cancellations happen every day.
For a chargeback to happen, the card issuer must start a clear dispute process. It can only do this once it has found out why the transaction isn't valid. A chargeback can only be started by the bank that issued the card. The cardholder himself has no say in this matter, and he can't look at the chargeback rules and regulations. He can only complain to the person who gave him the ticket. This is an unusual situation in which the account name doesn't have access to the rules that affect the balances and require transactions that result in debits and credits in the bank account (owner). The issuer may decide that a chargeback is the best way to fix the problem, but this is up to them.
So, the following order of events happens quite often:
The cardholder gives his card to a shopkeeper (aka: an acceptor of payment system cards).
The merchant can ask for a transaction authorization either electronically (through a Point of Sale/Electronic Fund Transfer device) or over the phone (voice authorization). If the transaction is worth more than a certain amount, the merchant has to do it. But in other situations, this might be a policy that must be followed or that should be followed.
If the transaction is approved, the merchant writes down the authorization reference number and gives the goods or services to the cardholder. In a face-to-face transaction, which is different from a phone or internet/electronic transaction, the cardholder must sign the sale slip. Then, he has to compare the cardholder's signature to the sample signature on the back of the card. If the signatures on the card and the slip don't match or if they're not there at all, the transaction isn't valid. The merchant will then give the cardholder a receipt, which is usually a copy of the voucher that has been signed.
Every so often, the merchant gathers up all the receipts and sends them to his bank (the "acquiring" bank).
The acquiring bank pays the merchant based on the transaction vouchers, less the credit card company's commission. Some banks use credit lines to pre-finance or re-finance credit card sales vouchers (cash flow or receivables financing).
Through its connection to the right network, the acquiring bank sends the transaction to the payments system (VISA International or Europay International) (VisaNet, in the case of Visa, for instance).
The company that makes the credit card (Visa, Mastercard, or Diners Club) gives credit to the acquirer bank.
The credit card company sends the transaction to the bank that issued the card, and the issuer's account is automatically deducted.
The issuing bank takes money out of the account of the cardholder. It sends monthly statements or statements based on transactions to the cardholder.
The cardholder pays the bank that gave them the card based on the statement (this is automatic, involuntary debiting of the cardholders account with the bank).
Some credit card companies prefer to work directly with cardholders in some areas. In this case, they send the cardholder a monthly bill that they have to pay directly by money order or bank transfer. The credit card holder will have to give the credit card company a security deposit, and his spending limits will be closely tied to the level and quality of the security he gives. A person's credit history and an approval process are almost always needed to get a card.
