6 Credit Cards

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Credit Cards


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Introduction

A credit card system is a type of a retail transactionsettlement and credit system, using a small plastic card

issued to users of the system. A user is issued a credit card after an account has been

approved by the credit provider (usually a bank) withwhich the user would be able to make purchases frommerchants accepting that credit card up to a pre-

established credit limit. When a purchase is made, the user would indicate his

consent to pay, by signing a receipt with a record of thecard details and indicating the amount to be paid.

Issuer agrees to pay the merchant and the credit card

user agrees to pay the card issuer.


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History

The history of credit cards actually started way back in the 18thcentury. From the 18th century until the early part of the 20th century,tallymen sold clothes that the purchasers could pay for in small weekly

payments. They kept a tally (thus the name tallymen) of what people had bought

on a wooden stick. One side of the stick was marked with notches torepresent the amount of debt and the other side was a record ofpayments.

The system of credit took a real turn in 1914, when Western Union, inthe interest of good customer service, gave some of their more

prominent customers a metal card to be used in deferring paymentsinterest freeon services used. This system became known as MetalMoney.

Then another company realized the value of making goodwill gesturesto their customers. In 1924, General Petroleum Corporation issued thefirst metal money specifically for gasoline and automotive services.They offered this first to their employees, then to select customers and

then, because the system seemed to work so well, to the generalpublic.


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History

The Ford Motor Company played a large part in creating the consumercredit business. Ford recognized that not all Americans had enoughsavings to buy a Model T. Even those who did have enough might not

want to put their whole life-savings into just a car. So, Small LoanCompanies or Finance Companies began making their first car loans.

After seeing these trends of increased travel and spending among thosewho held charge cards, banks became interested in credit cards andonline banking.

Since they were in the business of lending money, they saw the potentialof gaining income by charging interest on credit cards.

The Diners Club produced the first general purpose charge card followedshortly by American Express.

In 1958, Bank of Americas BankAmericard, marketed all across California,was the first card to offer its cardholders payment options, where theycould pay the debt in full or they could make monthly payments while thebanks charged interest on the remaining balances.

By the mid 1970s, the credit card industry started exploring internationalwaters. But the name America caused some problems. So, in 1977,BankAmericard became VISA. Then in 1979, MasterCharge followed suitand changed its name to MasterCard.


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Leaders in Credit Card Industry

Visa International

MasterCard American Express

Discover

Diners Club


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Theme of Credit Card

Credit Card is an instantaneous credit facility (loan) pre-approved by the issuing authority (bank) to the credit cardholder.

At the time of purchase from merchants, the cardholder signs aconsent slip. This is the authorization to the merchant to getmoney from the bank on behalf of the cardholder as also its aninstruction to the bank to pay the merchant.

The bank pays the merchant and bills periodically to thecardholder. The cardholder is expected to pay certain minimum

percentage (or more) of the bill compulsorily within the specifiedperiod.

This is the free credit period (no interest (ie) APR is payable)but the amount unpaid and rolled over to the next billing cycleattracts interest rate (APR) as decided by the bank.

Most users are supposed to pay an annual fee as card

membership fees.


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Visual Features of Credit Card

Size

Front Side Printed & Embossed Back Side


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Traditional Types of Credit Card

Credit Card

Charge Card Debit Card

ATM Card


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New Types of Credit Card

Global / International Card

Smart Card Corporate Credit Card

Co-Branded Card

Online Card Photo Identity Card

Mini Card


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Interest Rates (APRs)

Multiple APRs purchases, cash advances

and balance transfers Tiered APR

Penalty APR

Introductory APR


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Eligibility to get a Credit Card

Income Criteria Gross Income of Rs.60000 p.a. and above(Individual) & Paid Up Capital of Rs.3 lakhs and above(Company/Firm)

Documents to be Submitted Latest Salary Slip / Form 16 orITR copy (Individual) & Latest Balance Sheet, P&L Account,Board Resolution (Company/Firm) plus Photograph and

Address Proof of all applicants

Besides this, the issuers carry out credit check through theiragencies to check various other factors like civil and criminal

court judgments against applicant, previously declined creditcard or loan applications, defaults on payments of any kind,mortgage arrears, previous cancellations of credit cards by acredit card issuer, too many credit card applications, etc.

Thus, it is important to maintain a good credit rating whereverpossible as it may count in the eligibility check for any financial

purpose.


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Parties to a Credit Card

Issuer

Cardholder Merchant Establishments

Payment Networking Organizations


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Role of Payment Networking

Organizations

Cardholders travel and use card anywhere. Itis not feasible for each player (bank) toestablish worldwide clearing network forpayments to merchants and to get billinginformation for cardholders.

Rather, it is cheaper to be member of bigclearing systems like Visa and MasterCard.

The advantages are Brand Image,Worldwide Acceptance, Worldwide ClearingNetwork and Assistance in Risk Managementand Dispute Management.


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Credit Card Process


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Benefits of Credit Cards to

Cardholders

Convenience

Spot Credit Easy Payments

ATM Cash

Reward Points and Discounts Privileges

Other Loans and Insurance

Balance Transfer


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Demerits of Credit Cards to

Cardholders

Cost

Overspending Habitual Borrowing

Fraud Risk


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Benefits of Credit Cards to Issuers &

Payment Networks

Profit (Issuers & Payment Networks)

New Customers Brand Image (Issuers & Payment Networks)

ATM Sharing Fees


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Indian Credit Card Market

With the growing consumer spending, changing spending patternand surging trend of online shopping, the Indian credit cardsmarket is expected to grow at CAGR of nearly 25% between 2008-

09 and 2011-12. However, the market has been hit by the ongoing global financial

crisis and double-digit inflation. With the delinquency rate goinghigh in the country, banks and card issuers are likely to remainhesitant in issuing new credit cards.

The credit card business is a low-margin, high volume business.Thus, given the low income per card and the high initialinvestments by the bank, large volumes in terms of cards issuedand the transactions financed are required to make the operationsprofitable.

In the last few years, spending pattern has changed drastically inIndia. Now, people more frequently use plastic money (like creditand debit cards) for paying their day-to-day expenses. Traveling,

dining and jewelry are the top three purchases that Indians makethrough credit cards.


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Utility payments is another segment where more payments arebeing made through plastic money since the last two years. Inthe last two years, the number of customers paying theirelectricity and water bills through credit cards has risen thoughthe overall customer base is still small.

According to Visa Internationals latest data, average Indiancardholder uses his card 9.3 times, spending about Rs.14700every year.

A number of card owners do not use their cards & almost 2030% cards are inactive (less than one usage every quarter).

An important fact observed is that it is only in the past few yearsthat the Indian customer is beginning to accept Credit. TheIndian culture doesnt promote credit and it is this outlookchange which is the most important development for the creditcard industry.


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As on February 2011, there were 211.86 millionDebit Cards & 18.13 million Credit Cards issued in

the Indian market. Debit Cards Issuance:-

PSU Banks - 154.79 million

Private Sector Banks - 53.05 million

Foreign Banks - 4.02 million Credit Cards Issuance:-

PSU Banks 3.03 million

Private Sector Banks 9.30 million

Foreign Banks 5.80 million

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