A Study of competition in the credit card market

Submitted to: Dr VENKATRAJA B

Group 8
Section B
Gaurav gupta 18071
Sahana BL 18081
Aditya M Rao 18091
Karthik G 18101
Sumanth Sharma R18111
Table of content

Contents
ABSTRACT................................................................................................................................................ 3
INTRODUCTION ....................................................................................................................................... 4
EVOLUTION AND GROWTH OF CREDIT CARDS ....................................................................................... 4
CREDIT CARD ........................................................................................................................................... 5
Parts of a Credit Card .............................................................................................................................. 6
Credit Card cycle ..................................................................................................................................... 8
Credit Card Payments: ............................................................................................................................ 9
Types of credit cards ............................................................................................................................. 10
Credit card industry in India.................................................................................................................. 11
Credit card providers in India:............................................................................................................... 13
Supply and Demand in credit card market: .......................................................................................... 15
Market analysis of credit card market among competitors: ................................................................ 16
 ABSTRACT

A credit card is a small plastic card issued to users as a system of payment. It allows its holder
to buy goods and services based on the holder's promise to pay for these goods and services.
The issuer of the card creates a revolving account and grants a line of credit to the consumer
(or the user) from which the user can borrow money for payment to a merchant or as a cash
advance to the user. The use of sophisticated technologies particularly by the foreign banks has
sizeably increased the expectations of customers. In the years to come, more sophistication in
the information technologies is expected. This is likely to bring about a radical change in the
marketing of banking services. In an age of electronic banking, the manually operated public
sector commercial banks would find it difficult to survive. This makes it essential that even the
public sector commercial banks promote the use of technologies. It is high time that they
innovate their marketing efforts and continue to keep their market share high. Of course, the
RBI was obstructing the development processes by regulating business conditions but at the
same time, the policy makers working with negative attitudes. An attitudinal change in the
boardrooms is thus a crying need of the hour. The policy makers have no option but to make
the working conditions conducive vis-à-vis the services internationally competitive. The
perception of customer satisfaction is to be reviewed in the face of changing level of
expectations of customers. In addition, the social orientation needs an intensive care since the
principles of social marketing are also required to be conceptualized. The banking and other
service generating organizations have thought that their services are not engineering a
foundation for value degeneration. They in addition to the generation of profits have also to
search ways for users satisfaction and social orientation.

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 INTRODUCTION

Credit card originated in the United States during 1920s when individual companies
such as hotel chains and oil companies began issuing them to customers for purchases made at
their business units. The use increased after Second World War. Diners Club introduced the
first universal credit card that can be used at variety of stores and businesses. In 1958, the
American Express company established another universal card called ‘Don’t leave home
without it’. It is only after such developments; bank credit came into existence. Under the credit
card scheme, an individual can get a credit card from a bank with a specified credit limit as
determined by the bank based on one’s income. The bank in turn will enter into a contract with
different shopping establishments all over the country, covering almost every aspect of human
necessity, right from hotels, and restaurants to departmental stores, petrol retail outlets, cloth
shops, rail and air travel agencies and jewellery shops to sell goods on the basis of the credit
card. The card holders can buy goods from the affiliated member merchant establishments by
producing his/her card and signing sales bills/charge slips produced before him/her. The charge
bills/sales bills, evidencing purchases made by the card holders are transmitted by the shopping
establishments to the banks which pay it, and the bank in due course, collects the amount from
the card holders after deducting the commission. The card holders have the option to settle the
monthly statement in full or take credit and pay a specified minimum every month.

EVOLUTION AND GROWTH OF CREDIT CARDS

The word credit comes from Latin, meaning "trust". Credit was first used in Assyria,
Babylon and Egypt 3000 years ago. The bill of exchange - the forerunner of banknotes - was
established in the 14th century. Debts were settled by one-third cash and two-thirds bill of
exchange. Subsequently, paper money came into existence only in the 17th century. The first
advertisement for credit card was placed in 1730 by Christopher Thornton who offered
furniture that could be paid off weekly.

Tallymen sold clothes in return for small weekly payments from the 18th till the early 20th
century in which a record on a wooden stick with notches of what people had bought was
maintained to represent the amount of debt and payments. A shopper's plate - a "buy now, pay
later" system was introduced in 1920’s in USA to be used only in shops. According to
Encyclopaedia Britannica “The use of credit cards originated in the United States during the 1920s
when individual firms, such as oil companies and hotel chains began issuing cards to customers
for purchases made at company outlets and their use increased greatly after world war II.”

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 CREDIT CARD

A credit card is a payment card that is issued to the customers so that the customer or
a card holder can pay the merchant for goods and services, based on cardholder’s issue or
agreement to the card issuer that he would repay the amount used with some interest or
additional charge for the amount used.

The card issuer usually the bank creates a revolving account and grants a line of credit
in which the card holder can use the card to make the payment or use the money as credit.in
credit card system the card holder can pay the amount in particular period of time if not paid
he will be charged with a particular interest for the credit.

Technical specification:
Credit card general doesn’t vary for companies as it is almost same with a size
specification of 85.60 mm × 53.98 mm (3.370 in × 2.125 in) and rounded corners with a radius
of 2.88–3.48 mm.

Credit cards will be almost of the same size of other cards like debit and other payment
cards.

The card number's prefix is considered as the Number, which helps to understand which
bank it belongs to. The first six digits are for MasterCard and Visa cards. The next nine digits
are the individual account number, and the final digit is a validity check code.

Credit cards have a magnetic stripe in the back and recently the credit cards are
embedded with a computer chip in the card so that the it can be more secured credit cards also
has card expiration date and the date that is issued.

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 Parts of a Credit Card

Figure 1: Parts of a credit card

Hologram: This is a 3D image, usually in gold, that verifies a real card from a counterfeit.

Issuing Bank: This is the bank that sponsors the card. If there is no issuing bank, this part will have
the card name or a blank spot.

Card Number: This is a 16-19-digit number that represents the line of credit on the card. Every card
number is unique, and it acts as the ID for the credit card. (Think about your driver’s license number
for reference.)

Issue Date: This is the date that the card was created. Not all credit cards have this.

Expiration Date: This is the date that the card will no longer be valid. You must get a new card
before this day, or you will not be able to access your account until a new card comes in.

Card Brand: This is like the issuing bank, but it represents the credit card company that
manages the card. Examples include Visa, MasterCard, Discover, and American Express.

Cardholder: This is the full name of the person or business that owns the card. If the card is
for a specific person in a business, it may include both the first and last name of the person and
the business name.

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Help Line: The customer service number for the card brand or the issuing bank, depending on
the card.

Magnetic Strip: This is a strip of information that a card machine reads to identify one card
from another. (Think about a CD player reading the numbers on the back of a CD.)

Signature Box: This is the area you are supposed to sign so no one else can use your credit
card.

Verification: This is a code that further identifies a credit card. It contains the last four digits
of the card number, followed by three or four numbers. Those numbers make up the card
verification value (CVV), which is also known as the CID for American Express, the CVV2
for Visa, and the CVC2 for MasterCard. You will probably only need this when you’re making
payments by phone or online.

Card Number: This is the reverse of the 16-19-digit number form the front of the card.
Sometimes this is faded, but you will still be able to see the indentions for the numbers.

Disclaimer: This is a note from the issuing bank or credit card company ensuring that you
know the agreement associated with the card.

Bank Address: This is the address someone should release the card to in the event that you
lose it. It also acts as an address you can send mail inquiries to. Some banks will add an email
address or website to this line for further contact information.

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 Credit Card cycle

We could make a whole book about credit card processing, but we’ll try to keep this simple.
When you swipe a credit card, your account information is passed through several companies
in a matter of seconds. The basic steps of the process are as follows:

Step 1 – Authorization

This is the only step that happens while you are at the register. The merchant you make a
purchase through will send your credit card information to an acquirer, which is the messenger
between the merchant and the credit card company. The acquirer sends the request to an issuer
or a set of issuers, which would be the credit card company and/or the issuing bank. If the issuer
says you have enough money in your account, it will give the acquirer permission to run the
card. Then the acquirer will give approval to the merchant.

Step 2 – Batching

At the end of the night, a merchant will gather all the transactions from the day and put them
into a “batch.” This batch is re-sent to the acquirer, who then passes the information through
to the issuers. This is all done so the merchant can get money from the credit card companies
and banks.

Step 3 – Clearing

Once the issuers assess the batches, they will take out whatever their fees are and send the rest
of the money to the acquirer. This step is called “clearing” because the issuers have to clear the
funds to send out. Most of these funds will ultimately go to the merchant.

Step 4 – Funding

This is the last step of the process, where the merchant finally gets its money. The acquirer will
take out a small portion of the money to cover its expenses, and then it will send all the rest to
the merchant. At this time, your credit card is officially charged for the purchase, and you
should see the money clear your account.

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 Credit Card Payments:

When processing is complete, you will get a charge on your credit card account that you have
to pay back. This will probably be removed from your balance right away, but it may not show
up on your credit card statement until several days later. This is the “bill” for your credit card,
which highlights all your transactions and payments for the month.

Most credit card companies will offer several ways to make payments. You could:

– Pay online

– Pay over the phone

– Pay through the mail

– Pay at a store or bank

– Pay with another card (through a balance transfer)

– Pay through an auto-debit (where the company takes money directly from your bank
account or pay check)

You will at least need to make a minimum payment for every month that you have a balance
on your card. If you do not owe any money, you obviously won’t have to pay anything. If
you fail to make your payments on time or you simply cannot make your payments all at
once, you will have to pay several extra fees beyond the minimum payment. Your minimum
monthly payment will vary in value based on your credit card, but it is usually 2% of the
balance or $15 (whichever is higher).

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 Types of credit cards

Types of credit cards depending on the financial status of the person or customer the person
can choose one of the card some of the card types are:

• Standard Credit Card

• Premium Credit Cards

• Charge Cards

• Limited Purpose Card

• Charge Cards

• Secured Credit Cards

• Prepaid Credit Cards

• Business Credit Cards

• Reward Credit Cards

• Student Credit Cards

• Travel and Entertainment Credit Card

• Zero Percent Interest Credit Cards

Cards are also divided Based on the franchise they linked with:

• Proprietary Card- A bank issues such cards under its own brands.

Example is SBI card,

• Master Card- This card is issues under MasterCard International.

• VISA Card – this card is issued when the bank has tie up with VISA international.

• Domestic Tie-up Card- it is issued by bank’s who has tie up with domestic brands.

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 Credit card industry in India

India has a population of over 125 Crores or 1.25 Billion.

India has a Credit Card user base of 2.50 Crores or 25 Million; which means only 2% Indians
use Credit Cards today. This is as per 2016-17 data released by the Reserve Bank of India.

As per Credit Card Industry sources, this number will go up to 5% by 2020, mainly due to the
Demonetization impact and various attractive schemes being launched by Banks. This means,
over 4 Crores or 40 Million new Cards are going to be issued in next 4 years. Indian Credit
Card industry is therefore poised to grow at a whopping 25% Year on Year.

No wonder that almost all Indian banks are now aggressively focusing into this segment of
the Banking Industry. Now let’s look at the Market Share of major players.

Top 3 banks, HDFC Bank (30%), ICICI Bank (15%) and SBI Cards (15%) together control
60% of the total market. Other important players are Citi Bank (9%) and Axis Bank (8%).
Global Banks like Standard Chartered, HSBC and American Express are running far behind
their Indian counterparts or Citi Bank.

The Dark Horse in the Industry is however YES Bank, which through a very aggressive
marketing campaign wants to become number 4 largest Credit Card player by 2020. They are
targeting a market share of 15% (or 10 Million Cards) in 4 years from its current base of just
1%. SBI Cards is also targeting the 2nd slot with support from its subsidiary banks.

So, what is going to be the final score line?

HDFC Bank à SBI Cards à ICICI Bank à YES Bank?

Only time will tell. But till then this is going to be the biggest battle in our Banking Sector.
One more interesting fact is that, HDFC Bank with a market share of 30% has over 52% of
the total card outstanding against its name, as per latest RBI release. This is unusual to their
nature. Is it because of their new-found aggression or they are following the path of self-
destruction? This too can only be answered by time.

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 Considering only the credit card market, here is the graphical representation of numbers of
cards added for each month between 2017-2018

Card usage spiked during the months of November 2016, December 2016 and January 2017,
following the demonetization of Rs 500 and Rs 1000 notes. The unavailability of cash forced
cardholders to use them. But since February 2017, both debit card and credit card usage have
been range-bound

The number of transactions using credit cards at POS terminals or swipe machines grew by
24% year-on-year,

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 Credit card providers in India:

• Axis Bank

• Bank of Baroda

• Canara Bank

• Corporation Bank

• HDFC

• ICICI Bank

• Indian Overseas Bank

• Kotak Mahindra.

• Punjab National Bank

• SBI

• Syndicate Bank

• Union Bank of India

• Vijaya Bank

Foreign banks who provide credit cards in India are:

• ABN Amor

• American Express

• ANZ

• Barclays Bank

• Citibank

• Diners Club

• HSBC Bank

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Considering the topic 6 credit card providers in India the survey and market share is as follows:

The credit card market share Is as follows where the major market share was held by HDFC
with 28% market share.

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 Supply and Demand in credit card market:

As we know according to law of demand as price increases the demand for the product
decreases and as price decreases demand increases. This applies in the case of credit card
market.

Considering law of supply which states that as the price increases the supply increases and
when price decreases the supply of goods decreases.

Here is one of the examples of the credit card market with respect to supply and demand. (all
the data is approximate not related to any company or real time.) Here when the interest rate
decreases anything more than 13% there will be high demand which creates a shortage.in this
case as demand is more the company can increase the interest rates accordingly depending on
the demand.

To reduce this RBI puts on price ceiling so that none of the company reduces than that price.
Which is also called as base rate.

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 Market analysis of credit card market among competitors:

The competition in the credit card market can be analysed considering the following
characteristics. They are:

1. The product i.e. the credit card offered to all the customers are the same.
2. The entry and exit in to the market is easy that the company willing to enter can enter
and if they cannot sustain in the market they can sell their shares and can exit the market.
3. The buyers and sellers have the perfect information of the product i.e. the credit card in
this market.
4. All the banks are the price takers as the BASE RATE is fixed by RBI.

These characteristics state that the market is perfect competition. But as the number of banks
is increasing, the competition the competition has changed between the credit card market in
India especially. Here are some of the characteristics:

• As it was mentioned in perfect competition the advertisement and service should not be
there but as competition has increased banks started to differentiate its products.
• This made the product differentiated compared to other cards. These cards can also be
differentiated by different type of cards offered such as gold cards, platinum cards etc.
• In this context the credit card companies make promotion to the product and after the
card is issued the service is also provided by the bank.
• One bank itself cannot take any decision in case of changing the interest rate etc. As
there are substitutes in the market.
• The price charged, and output cannot be determined as the usage of card varies with
person to person.

Sources of credit card market:

• It requires a huge capital investment to enter in to credit card market.

• In credit card market there will be customers who will be loyal to bank or organization.
• It can be a government franchise or a private franchise.
• Everyone in this market tries to keep the market price low to attract the customers.

With all the points mentioned below the credit card market competition especially in India is
more oligopolistic than perfect competition.

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Reference

(n.d.).

adv. (n.d.). Retrieved from 360financialliteracy:

http://www.360financialliteracy.org/Topics/Credit-and-
Debt/Credit-Cards/Advantages-and-Disadvantages-of-Credit-
Cards
med. (n.d.). Retrieved from media mania:
https://www.medianama.com/2017/07/223-india-credit-cards-
debit-cards-may-2017/
ms. (n.d.). Retrieved from market share: Deal4loans.com
pr. (n.d.). Retrieved from all project reports:
http://allprojectreports.com/MBA-Projects/Finance-Project-
Report/credit-debit-cards-hdfc-bank-project-report.htm
wiki. (n.d.). Retrieved from wikipidea:
https://en.wikipedia.org/wiki/Credit_card

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