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12.1 INTRODUCTION
Credit cards are innovative ones in the line of financial services offered by
commercial banks. The idea of credit card was first developed by a Bavarian Farmer,
Franz Nesbitum Mc Namara, an American businessman who found himself without cash
at a weekend resort founded Diner's card in 1950. Right from that time, the commercial
banks and non-banking companies in USA adopted the idea of credit card to develop
their business. Barclays Bank was the first bank to introduce credit card in 1966 in
Britain. The credit card business got momentum in sixties and a number of banks entered
the field in a big way.
Credit card culture is a old hat in western countries. In India, it is relatively a new
concept that is fast catching on. The present trend indicates that the coming years will
witness a burgeoning growth of credit cards which will lead to a cashless society.
12.2 CONCEPT OF A CREDIT CARD
A credit card is a card or mechanism which enables cardholders to purchase
goods, travel and dine in a hotel without making immediate payments. The holders can
use the cards to get credit from banks upto 45 days. The credit card relieves the
consumers from the botheration of carrying cash and ensures safety. It is a convenience
of extended credit without formality. Thus credit card is a passport to, "safety,
convenience, prestige and credit".
12.3 TYPES OF CREDIT CARD
According to the purpose for which the credit cards are used, they can be
classified into three main categories:
1. Credit Card
It is a normal card whereby a holder is able to purchase without having to pay cash
immediately. This credit card is built around revolving credit principle. Generally
a limit is set to the amount of money a cardholder can spend a month using the
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card. At the end of every month, the holder has to pay a percentage of outstanding.
Interest is charged for the outstanding amount which varies from 30 to 36 per cent
per annum. An average consumer prefers this type of card for his personal
purchase as he is able to defer payment over several months.
2 Charge Card
A charge card is intended to serve as a convenient means of payment for goods
purchased at member establishments rather than a credit facility. Instead of paying
cash or cheque every time the credit card holder makes a purchase, this facility
gives a consolidated bill for a specified period, usually one month. Bills are
payable in full on presentation. There are no interest charges and no preset
spending limits. The charge card is useful during business trips and for
entertainment expenses, which are usually borne by the company. Andhra Bank
card, BOB cards, Can card, Diner's Club card etc. belong to this category.
3. In-Store Card
The in-store cards are issued by retailers or companies. These cards have currency
only at the issuer's outlets for purchasing products of the issuer company. Payment
can be on monthly or extended credit basis. For extended credit facility interest is
charged. In India, such cards are normally issued by Five Star Hotels, resorts and
big hotels.
New Types of Credit Cards
1. Corporate Credit Cards
Corporate cards are issued to private and public limited companies and public
sector units. Depending upon the requirements of each company, operative Add-
on cards will be issued to persons authorised by the company i.e., directors,
secretary of the company. The name of the company will be embossed on Add-on
cards along with the name of the Add-on cardholder. The main card is only a
dummy card number in the name of the company for the purpose of billing all the
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charges. The transactions made by Add-on cardholders are billed to the main card
and debits are made to the Company's Account.
2. Business Cards
A business card is similar to a corporate card. It is meant for the use of proprietary
concerns, firms, firms of Chartered Accountants etc. This card helps to avail of
certain facilities for reimbursement and makes their business trips convenient. An
overall ceiling fixed for this card is also based on the status of the firm.
3. Smart Cards
It is a new generation card. Embedded in the smart card a microchip will store a
monetary value. When a transaction is made using the card, the value is debited
and the balance comes down automatically. Once the monetary value comes down
to nil, the balance is to be restored all over again for the card to become
operational. The primary feature of smart card is security. It prevents card related
frauds and crimes. It provides communication security as it verifies whether the
signature is genuine or not. The card also recognizes different voices and
compares with the recorded original voice. It is used for making purchases without
necessarily requiring the authorization of Personal Identification Number as in a
debit card. Smart card is an electronic purse which attempts to prove to be a
panacea for all problems associated with traditional currency. In India, the Dena
Bank launched the Smart Card in Mumbai.
4. Debit Cards
Credit cards have proliferated during the last couple of years in all countries and
have became an acceptable alternative to paper currency. The developed countries
like USA has moved a step further. Debit card, an electronic product has become
more and more popular in these countries.
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Just like credit card, the debit card holder can present the card to the merchant,
sign sales slip and forget about it, The purchase amount is automatically deducted or
debited to the account of card holder electronically and would appear in the monthly
statement of account. The debit card programme requires the customer to open an
account with the bank which is not generally required in case of a credit card.
This system requires a terminal known as the Point of Sale Terminal at every point
of purchase. The customer, on making the purchase, inserts the card which has a
magnetic strip at the back, into the blot of the machine, while the merchant enters the
value of the transaction. The customer meanwhile, keys in the Personal Identification
Number which is known only to the card holder and the bank. The machine places an
automatic call, checks the balance in the account and reduces the balance to the extent of
the transaction value. The merchant's account, in turn, is credited for all his transactions
on the next day.
Differences between Credit Card and Debit Card
1. The credit card is a ‘pay later’ product whereas a debit card is a 'pay now product'.
2. In the case of credit card, the holder can avail of credit for 30 to 45 days whereas
in a debit card the customer's account is debited immediately.
3. No sophisticated telecommunication system is required in credit card business.
The debit card programme requires installation of sophisticated communication
network.
4. Opening a bank account and maintaining a required amount are not essential in a
credit card. A bank account and keeping a required amount to the extent of
transaction are essential in a debit card system.
5. Possibility of risk of fraud is high in a credit card. The risk is minimised through
Personal Identification Number in debit card programme.
5. ATM Card
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An ATM (Automatic Teller Machine) card is useful to a card holder as it helps
him to withdraw cash from banks even when they are closed. This can be done by
inserting the card in the ATM installed at various bank location.
12.4 PARTIES TO A CREDIT CARD
There are three parties to a credit card, the card holder, the issuer and the member
establishments.
1. Issuer : The banks or other card issuing organisations.
2. Cardholders : Individuals, corporate bodies and non-individual and non-
corporate bodies such as firms
3. Member Establishments: Shops and service organisations enlisted by
credit card issuer who accept credit cards.
The member establishments may be a business enterprise dealing in goods and
services such as retail outlets, departmental stores, restaurant, hotels, hospitals, travel
agencies, petrol bunks etc.
Member establishments have to pay a certain percentage of discount on the credit
card transactions to the issuer. Some organisations charge a specified sum as service
charge. For instance, Indian Railways levy a service charge of Re.1 per ticket in addition
to the fare.
Member Affiliate : There is one more party to the credit card, in the case of tie up
arrangement, called Member Affiliate.
The issuer, may sometimes, enter a tie up arrangement for issuance of credit cards
with other organisations. Such organisations are called Member Affiliates. In such cases,
the organisations which have tie up arrangements also issue cards of the issuer to their
clients. Credit cards issued by Member Affiliates contain the name and logo of the
Member Affiliate on the face of the card, besides name and logo of the issuer. This
arrangement enlarges the scope and operations of the credit card.
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Many banks have tie up arrangement with Master Card International and Visa
International. These organisations allow cardholders of one bank to use their cards in
Member Establishment of another bank. The bank in whose fold the member
establishment falls, called the Acquiring Bank, pay the amount to the merchant less his
discount and the transaction is routed through either Master card or VISA who act as the
clearing agencies. Master Card or VISA route the transaction through their network to the
issuing bank which in turn makes payment to the acquiring bank. The issuing bank gets a
percentage of the merchant discount as stipulated by the either Master Card or Visa.
12.5 PROCEDURE AT THE TIME OF PURCHASE AT MEMBER
ESTABLISHMENTS
When a card holder intends to make purchases he presents his credit card for
payment. The member establishment scrutinizes the card with reference to the following:
1. The validity period of the card has not expired.
2. The card has not been hot listed as per the latest 'hot list'/ warning bulletin.
Whenever bank receives information about card lost/withdrawn/ cancelled
it issues a warning letter. The hot list gives the latest list of invalid cards
and supersedes all warning bulletin.
3. The signature of the card holder tallies with the specimen signature on the
credit card.
4. The card has not been tampered within any manner.
On being satisfied with the validity of the credit card, the merchant proceeds in the
following way:
1. Obtain the impression of the card with the help of the imprinter.
2. Obtain cardholder's signature in the space provided and check whether
signature tallies with the signature on the card.
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3. Prepare a chargeslip in triplicate giving all details. Give one copy to the
consumer, keep one copy for records and forward one copy to the bank.
Procedure for reimbursement
The following procedure is followed for reimbursement to member
establishments:
1. The merchant can claim reimbursement from the designated branches of
bank.
2. All transactions emanating during the day are consolidated in the
Summation Sheet cum BAR in triplicate.
3. The summation sheet cum BAR in duplicate along with the Bank's copy of
the chargeslip should be submitted to the designated branch for
reimbursement.
4. Reimbursement should be obtained within 30 days from the date of
chargeslips.
5. The banks after deducting commission credit the amount of claim to the
Member Establishment's Account or pay by D/D as earlier agreed.
Facilities offered to card holders
The various facilities offered to cardholders are described below:
1. Making purchase/availing of services at any of the member establishments.
2. Cash withdrawals at any of the branches of the issuer/member affiliate of
the issuer to meet emergent requirements.
3. Add-on facility for family members. The spouse or children are entitled to
use the card for making purchases.
4. Free credit period ranging from 15 to 45 days.
5. ATM facility at selected centres.
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6. Wide range of insurance facilities are available which include personal
accident insurance, cover for accidental death, baggage insurance, purchase
protection cover against risk of fire, strike, theft etc. during transportation
and concessional premium rates for personal accident insurance and medi-
claim.
12.6 BENEFITS OF CREDIT CARDS
Credit cards confer a number of advantages on cardholders, issuers and member
establishments. The benefits of credit cards to various parties are given below:
(a) Card Holders
1. Credit cards are simple to operate and easy to carry. The holders are relieved
from the risk of carrying cash or cheque book with them.
2. A card is a convenient method of payment for goods and services. The holders
have the option to purchase goods and services and pay conveniently at a later
date in manageable instalments compatible with their household budgets.
3. Owing to revolving nature of credit, the customer can take advantage of it as
and when he pleases within the overall limit.
4. Cash can be obtained at any branch of the issuer. The ATM facility is extended
to cardholders who need not stand in queues and spend time unnecessarily at
banks. By just inserting a card into an ATM, the holder can withdraw crisp
new notes at any time of day or night.
5. Overdraft facility is given to card holders who are entitled to spend more than
their actual limit. The amount of overdraft depends on the holder's past credit
rating.
6. The purchasing power of the card holder increases to the extent of credit limit
given in the card. If wisely used by consumers, credit cards can provide them
extra money interest free. All that one has to do is to settle the bill in time.
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7. Credit cards provide a certain degree of prestige to the holder. The status which
one gets is not only because of his membership in a credit card organisation but
because the card at once makes him great in a part of wider phenomenon. Visa,
American Express and Master Card are all prestigious international
organisations spread over 50 to 60 countries and their affiliated cards being
acceptable in thousands of establishments all over the world.
(b) Issuers
1. Credit cards offer high profit for the banks. They get commission or discount,
usually 2.5 per cent, on sale through credit cards. An interest charge of 1.5
per cent is made on a1l outstandings. Thus, a single transaction through
credit card, assuming the customer does not repay within the stipulated
period will fetch income of 5 per cent to the bank which works out as much
as 60 per cent per annum; miles ahead of the prime lending rate of many
banks. As more and more take advantage of the credit facility the credit card
service becomes more profitable.
2. Where the card is issued to non-account holders, it may help to get new
customers.
3. A credit card system helps control bank cost as it reduces the number of
cheques issued by the customers.
(c) Member Establishment
1. The merchant has guarantee of payment and his account is credited
immediately on submitting the chargeslip into his bank. No bad debt arises in
credit card transactions.
2. A good cash flow is established because of the speedy settlement of bills by
banks.
3. The acceptance of card in lieu of cash reduces security risk.
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4. Member establishments are able to offer credit facility to their customers
without setting up their own credit arrangements.
5. More and more people accept the practical advantage of credit cards and turn
to suppliers who accept the cards in settlement. This helps increase the
volume of business to member establishments.
12.7 DEMERITS OF'CREDIT CARDS
The credit card is not risk-free and all players associated with it have to face an
element of risk associated with it.
(a) Card Holders
1. The card holders are burdened with service charge, annual fee, membership
fee, etc. A high rate of interest is charged for delayed payment. A minimum of
5-10 per cent on monthly purchases apart from the additional charges are to be
paid in case the consumers postpone the payment beyond the stipulated credit
period. According to a recent survey, 65% of card holders are ignorant about
the high interest charged on outstanding balance.
2. Credit cards tempt the holders for more purchases beyond their income and
repaying capacity.
(b) Issuers
1 The cost involved in the credit card business is high which include cost of
plastic card to be imported, cost of information, cost of placing and marketing
cards, cost on staff to monitor processing of applications and to carry out credit
checks on applicants etc. Unless the number of card holders and the volume of
business is high the credit card business will not be a profitable one.
2. The menace of frauds perpetuated by holders of bogus cards and sometimes in
collusion with the member establishments is the major problem for the issuers.
3. The average utilisation of credit card is only 20 per cent to 30 per cent in India.
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The under utilisation of this facility erodes the profitability of banks.
(c) Member Establishment
1. The commission to be paid to the issuing banks/credit card organisation is
heavy.
2. Some banks make delay in payment due to lack of adequate system and
trained personnel which affect the cash flow of the member establishments.
12.8 CREDIT CARD BUSINESS IN INDIA
Credit cards are relatively new to India. Andhra Bank and Central Bank of India
introduced credit cards in 1981. As of now there are more than a dozen major banks,
Indian and Foreign, which have entered this line of business, besides some non-banking
institution. Since the plastic money has today become as good as legal tender more
people are using them in their day-to-day activities.
The features of credit cards issued by major banks are described below:
1. Andhra Bank
Andhra Bank introduced Andhra Bancard in 1981 having linkage with VISA and
Japan Credit Bureau International Cards. It has now a membership around
1,00,000 and member establishments around 5400 allover the country with annual
billing is Rs.120 crores.
Features of Andhra Bancard
1. Open to non-account holders also.
2. Individuals with assured income of Rs.12,OOO per annum are eligible to
get the card.
3. Credit is allowed free of charge if the account is settled within15 days from
the date of settlement.
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4. Service charge of 2.5 per cent per month is collected on the unpaid balance
amount.
5. Advance facility of Rs.1,000 is allowed twice a month at places other than
the card holders' domicile.
6. The cash advance handling charges are levied at 3% of the amount availed
as advance.
7. The card is valid for two years and renewed thereafter periodically.
8. Membership fee and annual subscription is charged for individual
members, add-on cards and corporate cards at the prescribed rates.
9 Fatal accident insurance coverage by air travel upto Rs.50,000 is available
to classic cardholders.
10. It is tied up with the world wide Master Card system.
2. Central Bank
The Central Bank issued Central Card in 1981. It has a membership of 1,00,000
and member establishments around 10,000 with annual billing of Rs.65 crores.
Features
1. It is open to those having savings or current account with sufficient balance and
satisfactory dealing with the bank.
2. The cards are issued to individuals with and without add-on facility.
3. Free credit is allowed for three weeks after which interest is charged.
4. Service charge of Rs.50 per annum is levied if not utilised atleast for Rs.2,000
during the period.
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3. Bank of Baroda
Bank of Baroda introduced BOB Card in 1985. Its membership is around 2.8 lakhs
and member establishments are approximately 15,000. It has an annual transaction of
about Rs.120 crores.
Features
1. Open only to account holders with well conducted accounts for atleast two years
and having an annual income of Rs. 75,000 or more.
2. The facility is extended to family members. Rs.100 per annum for each add-on
member is charged.
3. Cash advance facility not exceeding Rs.5,000 is allowed for a period of 15 days.
4. Introduced BOB CARD EXCLUSIVE offering certain exclusive benefits to the
card holders.
4. Canara Bank
CAN CARD, Canara Bank's credit card was launched in August 1987.
Features
1. Can Card is issued to customers as well as non-customers of the bank.
2. Cash withdrawals upto 20% of the card limit is allowed.
3. Add-on facility is given to family members of card holders. Add on cards provide
all benefits including insurance coverage of main card holders except cash
withdrawals.
4. Valid for one year initially subject to renewal after expiry.
5. It is basically a charge card with no facility for payment of bills in installments.
6. Bills are sent once in a month and holders are given a time upto 15 days from the
date of bill for payment.
7. Right from the date of issue of the card, the holder is covered by insurance against
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the risk of death due to accident upto Rs. one lakh.
8. Under CAN COMFORT Scheme, insurance cover against the risk of death or
injury due to accidents for amounts ranging from Rs.One lakh to Rs.10 lakhs is
available. It also offers a variety of medi-claim plans to cover hospitalisation
expenses.
5. Bank of India
Bank of India introduced INDIA GARD in 1988 and Taj Premium Card in 1990 in
association with Taj Group of Hotels. Both these cards are affiliated to Master
Card International.
Features
1. Issued to account holders having a well run account for about two years.
2. The membership fee is Rs. 100 per annum plus services charge is 15%.
3. Add-on-facility for a maximum of two members is available at a cost of
Rs. 50 per head.
4. Cash upto Rs. 3000 a month can be withdrawn from any of the branches.
5. Free flight insurance coverage upto Rs. 1,00,000.
12.9 FUTURE PROSPECTUS
There are around four million credit card holders in India. Over 80,000
establishment in the country accept credit card. The credit card market is worth about
Rs. 1,900 crores. The credit card industry is growing at an average rate of 35 per cent per
year. Despite the impressive pattern of growth, India as a market is in a fairly nascent
stage with credit card penetration amounting to just 15% of the customers. Compared to
other countries in the region, India's card holders-base is relatively small.
With the economic growth gradually out-pacing population growth and with a
large number of affluent middle class, the potential market that India holds is immense. It
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is estimated that in the next ten years India will have a credit card population second to
USA. According to few top banking professionals, the credit card business will grow by
over 100% every year for the next five years.
To realise the potential in the credit card market the following suggestions are made :
1. Reduce the membership and annual subscription fees.
2. Encourage member establishments to accept credit cards for routine items also.
3. Make the features of cards convenient to middle class people.
4. Enhance the cash withdrawal limits.
5. 80% of the card holders are in metropolitan areas. So, workout strategies to
popularise the credit card among people in semi urban and rural areas.
12.10 SUMMARY
The unparalleled growth of the services industry accompanies by the development
in economic, social, cultural and technological spheres have contributed to the emergence
of credit cards. Credit cards provide convenience and safety to the buying process.
Besides, they enable an individual to purchase certain products/services without paying
immediately. The buyer need only to present the credit card at the cash counter and to
sign the bill. Credit cards are considered as a good substitute for cash and cheques. The
reason for their popularity has now shifted from being recognized as a status symbol to
being a convenience and security with worldwide acceptance. Indian banks have enters
the credit card business in a big way during the last few years. Selling goods on credit
basis, depending upon the credit credibility of the consumer has been the practice of the
merchants from time immemorial. Such a system helped both the consumer and the
seller/creditors. In this context, credit cards have been introduced as a viable means of
dealing goods on credit with an aim to expand sales and thereby built a strong customer
base.
