CHAPTER 2: CURTAIN RAISER OF CREDIT CARDS

2.1 WHAT IS 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 this card to get credit from banks up to 45
days .the credit card relieves the consumers from the botheration of
carrying cash and ensures safety. It is a convenience or extended credit
without formality. Thus credit card is a passport to safety, convinenience
and credit.
The idea of credit card was first developed by a Bavarian farmer, Franz
Nesbitum Mc Namara. Barclays bank was the first bank to introduce
credit card in 1966. Credit cards and its various types are commonly
known as plastic money.

Credit cards have created a new consumer culture. Barbara enrenreich

would tell,” the paradox of consumer culture is that projected by
advertising which urges people to buy, to indulge themselves. The other
is do not spend, save and not indulge yourself. Credit cards hold out the
key to how one can, have the cake and eat it too. In essence credit cards
give an answer to the above paradox. You can indulge and save at the
same time .you buy on your card for which only a delayed payment is
required. The delayed payment for a purchase in essence is an
investment. Sometimes cash draw on credit cards are used for making
investments which otherwise might have slipped off your hands .credit
cards thus create both consumption and investment culture at the same
time. This is one’s propensity to consume and invest are enhanced by

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credit cards. Credit cards thus help create a new social, financial and
business culture.

Credit card culture is an old hat in western countries. In India, it is

relatively a new concept that is fast catching in. The present trend
indicates that the coming years will witness a burgeoning growth of credit
cards will lead to a cashless society.

In India, where cash is king and paper work is a by ward for business,
two by three inch pieces of plastic called as plastic money are slowly but
surely making inroads. It has been said that India will be largest card
market in the coming years. The industry growth is estimated to grow by
30-40 percent a year.

2.2 DEFINITION
A credit card can be defined as,
“A Card Establishing The Privilege Of The Person To Whom It Is Issued
To Charge Bills At Certain Restaurants, Airlines, Hotels, Gas Stations,
Etc.”-
According to the Webster’s new world college dictionary.

2.3 TYPES OF CREDIT CARDS

The various types of cards or plastic money available in India are of
many types.
According to the purpose for which credit cards are used, they can be
classified into three main categories:

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1. CREDIT CARDS
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 this card. At the end of every month, the holder
has to pay a percentage of outstanding. Interest is charged for the
outstanding amount.
An average customer prefers this type of card for his personal purchases
as he is able to defer payment over several months.

2. CHARGE CARD

This card is essentially different from a credit card in the sense that the
customer pays his bill in full at the end of each month. This card is
mainly used for travel and entertainment needs and for official and
personal expenses. Charge cards like diners club have no present credit
limit. Charges are approved based on initial financial data provided at the
time of application and splendid and payment pattern over a period of
time. Charge cards are traditionally seen as a more exclusive option for
card members and offer a range of additional benefits such as higher level
of travel accident insurance complimentary access to airport lounges in
India and worldwide.

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 made 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.

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 NEW TYPES OF CREDIT CARDS

1. CORPORATE CARD-
This card is issued to company employees and used to charge company
expenses. The company takes the responsibility for expenses of this card
and hence it is given to selected level of employees of the organisation.
These cards are issued to private and public limited companies and public
sector units. Depending upon the requirements of each company,
operative add-on cards are issued to the persons authorised by the
company. The name of the company will be embossed on add-on cards
along with the name of the cardholder. The main card is only a dummy
card number in the name of the company. The transactions made by add-
on cardholders are billed to the main card.

2. CHEQUE CARDS-

This card enables the holder to withdraw cash by using cheques from any
branch of the bank located within the country. It basically enables the
identification of the customer and provides a certain degree of guarantee
against the cheque being dishonoured.

3. DEBIT CARDS-
The debit card differs from a charge card or credit card. Every time the
cardholder makes a payment the funds get automatically deducted from
their personal bank account.atm card like citicards of Citibank are
actually debit cards. The debit card programme requires the customer to
open an account with the bank. This system requires a terminal known as
the point of sales terminal at every point of purchase. The customer, on

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making purchase, inserts the card which has a magnetic strip at the back,
into the slot of the machine, while the merchant enters the value of
transaction. The customer enters the pin. The machine places an
automatic call, checks balance and reduces balance to the extent of
transaction.

4. SMART CARDS-
It is a new generation card. Smart card contains an integrated circuit(IC)
with a microprocessor that works as its brain. It is a micro computer built
into a small card loaded with a certain amount of money by a bank or
institution. Unlike the credit cards which are used first and paid after a
particular time, the cash transactions using a smart card are reduced on
the spot till the fixed amount loaded in it are replenished. These cards are
pre-paid, small value payment cards which can be used for any purpose
ranging from a daily newspaper vendor to a departmental store or a
telephone call. The primary feature of smart card is its security. It
prevents the card related fraud and crimes .it provides communication
security as it verifies
Whether signature is genuine or not. The card also recognises different
voices and compares with the original recorded voice.

5. BUSINESS CARDS-
A business card is similar to a corporate card. It is meant for the use of
proprietary concerns, firms, and 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.

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 6. ATM CARD-
Going forward into 21st century, changing needs of customers, merchant
establishments and financial institutions, merchant establishments and
financial institutions will lend themselves to the growth of payment
systems market. The explosive pace of new technology enabled to
increased customer service like ATMs, by using this card the customer
gets access to cash, with the ATMs the customers are assured of access to
their funds without having to go to a bank and stand in a queue. These
cards are very common now a days, which allows withdrawal facilities
beyond banking.
An ATM(automated 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.

7. VIRTUAL CARD-
There is always a fear in the minds of credit card holders what their credit
card numbers might get into the hands of some unscrupulous persons who
could siphon away whatever they can. For those who don’t want to part
with their credit card number to merchant website, the solution is to go
for a virtual card .a virtual card is a card that can be generated by
anybody at any time provided he has already registered his name in the
bank’s website. What is even better, one can also set monetary limits for
each card-usually limited to the value of the item he intends to purchase.
This card simply lapses after use. It cannot be revised.

8. PRE-PAID CARD-
The most common version on the prepaid card is the telephone card. Such
as Japan’s hugely popular NTT phone card. The card is pre-programmed

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to a set- value and the customer can continue to use it till this stored value
is spent.

9. GLOBAL CARD-
Global card enables you to use your card even when you are overseas.
You can spend in dollars or any other foreign currency and still settle the
dues in your local currency. Here the credit limit will be based on travel
quota entitlement. A global/international card enables a user to use the
card even when he is overseas. A person can withdraw cash up to US$
500 against this card. A bank can issue a single card which can be used
throughout the world- the global card. The limits of money that can be
spent in foreign currency are determined by RBI based on certain norms.

10. PHOTO-IDENTITY CARD-

Credit cards of this type carry a photo printed on the card-front .this is a
security against misuse of the card. It is also a fancy. If cardholder
chooses to print a family photo or any other picture, some issuers allow
the same.

11. MINI CARD-

Some issuers have issued credit cards which are smaller in size as
compared to regular credit card. These are especially add-on cards to
dependents of the main card-holder. Mini cards can be used for purchases
but not on ATMs for cash withdrawals.

2.4 FACILITIES OFFERED TO THE CARD HOLDERS

1. CONVINIENCE: it is very convenient to carry a card as compared to
cash. Its acceptance is better than cheques. Risk of theft is less and if
stolen, stoppage and recovery is better than cash and cheque. It is even

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more convenient for unplanned purchases and needs as one may not carry
enough cash every time.

2. SPOT CREDIT: As and when needed, credit is available. It’s pre-

negotiated (decided) credit limit which can be availed of whenever
desired. Credit is free of interest till first immediate billing cycle. This
improves the purchasing power.

3 .EASY PAYMENTS: minimum balance payments for each bill is a

must .over and above this it is cardholder’s ability and willingness to pay
for each card bill.

4. ATM CASH: cash can be withdrawn from ATM centres as and when
required. This is very important feature in countries like India where cash
usage is more as compared to other modes of payments. Thus card
improves liquidity and credibility of the cardholder.

5. REWARD POINTS AND DISCOUNTS: these are additional benefits

provided by the issuer for usage of card. Reward points can be converted
to discounts and gifts as per the catalogue of the issuer.

6. PRIVILEGES: access to VIP lounges at the airport and star hotels is an

additional privilege for the card holder.

7. OTHER LOANS: bankers provide personal loans, car loans, etc. With
some priority and ease if cardholder’s payment history is good.

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8. BALANCE TRANSFER: Bankers encourage cardholders to transfer
their outstanding dues to other issuer’s cards to their bank card. This
transfer is again at a concession rate of interest.

9. INSURANCE: most bankers insure the life of cardholder at

concessional rate and assign insurance proceeds towards outstanding bills
on the card. In case of eventuality, insurance proceeds meet banker’s
outstanding dues and remainder amount is paid to the heirs of the
cardholder.

2.5 PARTIES TO THE CREDIT CARD

2.1 diagram showing parties of credit card

A CARD-
ISSUER
R

T
CARD-
I HOLDER

E
MEMBER-
S
ESTABLISHMENTS

(source: researcher)
There are three parties – the card-issuer, the card-holder and the seller of
services and products. (Member establishments)

1. Issuer – the banks or finance organisations are issuers of the cards.

2. Cardholder- individuals, corporate bodies and non-individual and non-
corporate bodies such as firms.

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3. Member establishments- shops and service organisations enlisted by
credit card issuer who accepts credit cards. The member establishments
may be a business enterprise dealing in goods and services such as retail
outlets, departmental stores, restaurants, hotels, hospitals, travel agencies,
petrol bunks, etc.
There is one more party to the credit card, in case of some tie up
arrangement called as the member affiliate or payment networking
organisations.

Payment networking organisations – cardholders travel and use card

everywhere. It is not feasible for each banker to establish worldwide
clearing network for payments to merchants and to get billing
information for cardholders. It is cheaper to be a member of big clearing
systems. Many banks have a tie up arrangement with MasterCard or visa
card. Discover and diner’s club are other popular networks.
These organisations allow the cardholders of one bank to use their cards
in member establishments of the other bank. The banks 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 either through
the MasterCard or the visa who acts as the clearing agencies. The
member affiliates provide the following advantages:
1. Brand image: customers prefer these brands and hence sale of
cards is more.
2. Worldwide acceptance by the merchants.
3. Payment transactions clearing network worldwide.
4. Assistance in risk management and dispute management.

2.6 MERITS

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Credit cards confer a number of advantages on cardholders, issuers and
member establishments. The benefits of credit cards to the various parties
are as follows:
A.TO THE CARDHOLDERS

1. The cardholder can purchase goods and services at a large number

of outlets without cash and cheques. The card is useful in emergencies
and saves embarrassment.
2. The risk factor of carrying and storing cash is avoided. It is
convenient for him to carry the card and he has trouble free travel and
makes purchases without carrying cash or cheque.
3. A month’s purchase can be settled with a single remittance, thus,
tending to reduce bank and handling charges.
4. The cardholder has a period of free credit usually between 30 to 50
days of purchase.
5. Credit can be availed with minimum formality.
6. The credit card saves trouble and paperwork.
7. The cardholder has the option of taking extended credit.
8. The cardholder has convenience for making a single payment for
purchases made during the month rather than making payments by
various means.
9. Credit card is considered as a status symbol.
10. It also extends facilities like insurance cover, discount on
purchases, free travel booking, etc.

A. TO THE MERCHANT ESTABLISHMENTS

1. Sales increases because of the increased purchasing power of

cardholder due to inbuilt credit available to the credit cardholder.

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2. Credit card ensures timely and certainty of payments.
3. Sellers or suppliers no longer have to send reminders of
outstanding debts.
4. The accounting system becomes systematic since sales receipts are
routed through banking channels.
5. Development of prestigious clientele base.
6. Avoids all the cost and security problems involved in handling
cash.
7. The losses through bad debts are reduced and additional liquidity is
achieved.
8. As customers are well educated, understanding, the problems of
customers are reduced.

B. TO THE BANK

1. The system of credit card provides opportunity to bank to attract

new potential customers.
2. It provides additional customer services to the existing clients and
enhances customer satisfaction.
3. Better network of cardholders and increased use of cards means
higher popularity and image for the banks.
4. It increases the customer base for the banks.
5. More use by the cardholder and consequently increased turnover
improves national business growth and consequently the growth of
banking habits in general.
6. Saving of expenses on cash holding that is stationary, printing and
manpower to handle clearing transactions will considerably be reduced.

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7. It brings high net worth customers into the bank’s fold by
introducing various types of credit cards like gold card, executive card
etc.
8. It brings new customers from various merchant outlets which
accepts credit card against sale of goods and services.
9. It creates brand name and popular image for the bank.
10. Large-scale use of credit cards and shops, etc. Accepting them
helps to increase deposit base of the bank.
11. It increases interest income of the bank when card users avail of
loan facility to settle the bills.
12. It minimises credit risk of the bank as most of the cardholders
availing of credit facility must have been financially screened by the
bank.
13. It increases the chances of relationship banking and thereby
retaining the customers.

2.7 DEMERITS

The credit card is not risk free and all players associated with it have to
face an element of risk associated with it.

1. THE CARD HOLDERS-

1. The cardholders are burdened with service charge, annual fees,
membership fees, 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

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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.

2. ISSUERS-
1. The cost involved in credit card business is high which includes
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, etc. Unless the number of card
holders and the volume of business are 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 issuers.
3. The average utilisation of credit card is only 20 per cent to 30 per
cent in India. The underutilisation of this facility erodes the profitability
of banks.

3. 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.

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