Department of Business & Industrial Management

Veer Narmad South Gujarat University

Assignment Work on Subject:

Management of Financial Institutions and Services

Topic: -
Credit Card

Guided by: -
Prof. Foram Modi Mam

Prepared by: -
SHIRGAR MUDAASAR MUSHTAQ
Division MBA (Evening), 4th Semester
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
several banks entered the field in a big way.

Credit card culture is an 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.

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".
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 card. At the end of
every month, the holder must 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 can 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
authorized 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 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 become an acceptable alternative to paper
currency. The developed countries like USA have moved a step further.
Debit card, an electronic product has become more and more
popular in these countries. 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

minimized through Personal Identification Number in debit card
programme.

5. ATM Card

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.

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 organizations.

2. Cardholders: Individuals, corporate bodies, and non-individual and

non-corporate bodies such as firms.

3. Member Establishments: Shops and service organizations 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 must pay a certain percentage of discount
on the credit card transactions to the issuer. Some organizations
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 organizations. Such organizations are called
Member Affiliates. In such cases, the organizations 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.

Many banks have tie up arrangement with Master Card

International and Visa International. These organizations 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.
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.

3. Prepare a charge slip 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 charge slip should be submitted to the designated branch
for reimbursement.

4. Reimbursement should be obtained within 30 days from the date of

charges lips.

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 centers.

6. Wide range of insurance facilities are available which include

personal accident insurance, cover for accidental death, baggage
insurance, purchase protection covers against risk of fire, strike, theft
etc. during transportation and concessional premium rates for
personal accident insurance and Medi-claim.
BENEFITS OF CREDIT CARDS

Credit cards confer several 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 later 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.

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
organizations 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 charge slip 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.

4. Member establishments can 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.

DEMERITS OF CREDIT CARDS

The credit card is not risk-free and all players associated with it must
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 utilization of credit card is only 20 per cent to 30 per
cent in India. The underutilization 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.

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 all over 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.

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.
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 at

least 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 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 hospitalization 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.

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 ascent
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 many affluent middle classes, the potential market
that India holds is immense. It 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.