Introduction

Electronic and digital payment systems have transformed modern banking and commercial transactions across the world. One of the most common and widely used methods of electronic banking is the use of Credit Cards, which facilitate the transfer of funds electronically without the physical exchange of cash or paper instruments.

Credit card transactions fall within the broader concept of Electronic Funds Transfer (EFT), where money is transferred electronically from one bank account to another through computer-based systems with minimal manual intervention.

Electronic banking generally includes:

1. Automated Teller Machine (ATM) transfers;
2. Direct deposit payments and withdrawals;
3. Telephone initiated transfers;
4. Wire transfers through international banking systems such as SWIFT;
5. Electronic bill payments through online banking;
6. Transfers resulting from credit and debit card transactions.

In the United States, the Electronic Fund Transfer Act of 1978 defines EFT as any transfer initiated through an electronic terminal, telephonic instrument, computer, or magnetic tape to authorize a financial institution to debit or credit an account, excluding transactions originating through paper instruments such as cheques.

Among all forms of EFT, credit card transactions have become one of the most popular methods of electronic banking worldwide.

Nature of a Credit Card

A credit card is a payment instrument issued by a financial institution enabling the cardholder to purchase goods and services on credit with an undertaking to repay the issuer together with any applicable charges and interest.

The system operates on the basis of an agreement between the cardholder and the issuing institution, usually a bank or financial institution. Merchants accepting the card agree to treat it as a substitute for cash.

Common international credit card systems include:

1. Visa
2. MasterCard
3. American Express

The popularity of credit cards has increased significantly in Sri Lanka due to:

1. Convenience in day-to-day transactions;
2. Increased security in comparison to carrying cash;
3. Reward schemes and promotional benefits offered by issuing institutions;
4. Expansion of electronic commerce and online purchasing.

Guidelines for Credit Cards in Sri Lanka

The Central Bank of Sri Lanka (CBSL) is the authority responsible for maintaining the national payment system and ensuring the safety, efficiency, and stability of electronic payment mechanisms.

In order to regulate payment card services, the CBSL introduced the Service Providers of Payment Cards Regulations No. 1 of 2009 and the Credit Card Guidelines No. 01 of 2010.

These regulations and guidelines govern:

1. Issuance of credit cards;
2. Duties of issuing institutions;
3. Consumer protection mechanisms;
4. Security standards applicable to electronic payments;
5. Settlement and payment systems relating to card transactions.

Issuance and Usage of Credit Cards

When a credit card is issued, the issuing institution and the cardholder enter into a contractual arrangement under which the cardholder is permitted to purchase goods and services on credit.

Simultaneously, the issuing institution enters into separate agreements with merchants enabling merchants to accept the card as a mode of payment.

When a cardholder makes a purchase, the cardholder agrees to repay the issuer for the amount spent together with agreed charges.

Consent to the transaction may be given by:

1. Signing a receipt;
2. Entering a Personal Identification Number (PIN);
3. Providing electronic authorization online;
4. Verbal authorization over the telephone in Card Not Present (CNP) transactions.

Electronic verification systems connected to Point of Sale (POS) terminals enable merchants to verify within seconds whether:

1. The card is valid;
2. The cardholder has sufficient credit limit available.

The information required for verification is usually obtained from the magnetic stripe or electronic chip embedded in the card.

Monthly Statements and Repayment Obligations

Issuing institutions periodically send statements to cardholders indicating:

1. Purchases made;
2. Outstanding balances;
3. Interest and charges payable;
4. Minimum payment due.

Many banks now provide electronic statements through online banking systems.

The cardholder is required to pay at least the minimum amount due before the specified due date. Failure to do so may result in:

1. Interest charges;
2. Penalty charges;
3. Late payment fees;
4. Suspension or cancellation of the card facility.

Some financial institutions provide automatic payment facilities through direct deductions from bank accounts to prevent defaults.

Where the full outstanding balance is paid within the stipulated period, interest charges are generally waived. However, where only part payment is made, interest may be charged on the entire outstanding balance from the date of each transaction.

Lost, Stolen, or Misused Credit Cards

Where a credit card is lost, stolen, or fraudulently used, the cardholder must immediately inform the issuing institution.

Upon notification, the issuer may:

1. Suspend the card;
2. Cancel the card;
3. Block further transactions electronically.

Delay in informing the issuer may expose the cardholder to further unauthorized transactions occurring before suspension or cancellation takes effect.

Specific Features of Credit Card Transactions

A credit card transaction possesses several unique legal characteristics.

Underlying Contractual Structure

Credit card transactions are based on an underlying contractual structure involving three separate relationships:

1. The agreement between the issuing institution and the merchant;
2. The agreement between the issuing institution and the cardholder;
3. The contract of sale between the merchant and the purchaser.

Under the first agreement, merchants agree to accept the credit card as payment while the issuer agrees to reimburse the merchant.

Under the second agreement, the cardholder agrees to repay the issuer for all sums charged through the card.

The third agreement is the actual contract for the sale of goods or services between the buyer and seller.

The legal framework governing credit card transactions was explained in Re Charge Card Services Ltd [1989] Ch 497.

Law Relating to Credit Card Actions in Sri Lanka

Since credit card transactions involve electronic and financial transactions, several laws become applicable in relation to recovery proceedings arising from defaults.

The principal laws governing recovery include:

1. Civil Procedure Code;
2. Debt Recovery (Special Provisions) Act No. 2 of 1990 as amended by Act No. 9 of 1994;
3. Payments and Settlement Systems Act No. 28 of 2005.

Regular Civil Procedure Actions

Where a cardholder defaults in payment, the issuing institution may institute a regular civil action under the Civil Procedure Code.

The action may be filed in the District Court within whose jurisdiction:

1. The defendant resides;
2. The cause of action arose; or
3. The agreement between the parties was executed.

The action proceeds under ordinary civil procedure where the defendant is called upon to file answer and contest the claim.

Where judgment is entered against the defendant and payment is not made, the judgment creditor may execute the decree by seizure and sale of the debtor’s property.

Debt Recovery (Special Provisions) Act

Apart from regular procedure, lending institutions may institute proceedings under the Debt Recovery (Special Provisions) Act introduced to expedite the recovery of debts due to banks and financial institutions.

Definition of Debt

A “debt” under the Act includes a sum of money arising from banking or financial transactions evidenced in writing and due to a lending institution.

Accordingly, credit card facilities granted by banks fall within the definition of debt under the Act where:

1. The transaction arises from banking business;
2. The liability is evidenced in writing;
3. The principal amount exceeds Rs. 150,000.

Summary Procedure and Decree Nisi

Proceedings under the Debt Recovery Act are conducted under summary procedure.

Where Court is satisfied that a prima facie case exists, Court may enter a decree nisi against the defendant at the initial stage before hearing the defendant.

However, the decree nisi becomes effective only if the defendant fails to appear and show cause against it.

The defendant must:

1. File objections together with documentary evidence;
2. Obtain leave to appear and show cause;
3. Seek permission to adduce oral evidence where necessary.

Judicial Interpretation

In Bandara v. People’s Bank [2012] B.L.R. Vol XIX Part II, p. 366, Anil Gooneratne J. observed that the Debt Recovery Act is a special statute introduced to expedite litigation relating to debt recovery and therefore the statutory procedure must be strictly followed.

The Court emphasized that a defendant seeking to contest proceedings must first obtain leave to appear and show cause according to the procedure laid down in the Act.

Once leave is granted, the defendant may adduce evidence against the decree nisi after furnishing security as required by the Act.

Conclusion

Credit cards have become an integral component of modern electronic banking and commercial transactions in Sri Lanka. While they provide convenience, efficiency, and enhanced financial accessibility, they also create legal obligations between cardholders, merchants, and issuing institutions.

Sri Lankan law provides a comprehensive framework governing credit card transactions through banking regulations, electronic payment regulations, the Civil Procedure Code, and the Debt Recovery (Special Provisions) Act.

Where defaults occur, issuing institutions are empowered to recover monies either through ordinary civil procedure or through the expedited mechanisms available under debt recovery legislation. Consequently, both cardholders and financial institutions must ensure strict compliance with contractual obligations and statutory requirements governing electronic financial transactions.

Source: Hulftsdorp Law Journal 2020

By Mr. Kaushalya Nawaratne – Attorney-at-Law

Former Secretary, Colombo Law Society (2015–2017)
Former President, Colombo Law Society (2017)
Former Secretary, Bar Association of Sri Lanka (2018)
Chief Legal Advisor, Commercial Law Reforms Committee of the Ministry of Justice (2020)