Credit Cards

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 Me 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 growth of credit cards which will lead to a cashless society.

Cont
The growth of credit card culture in India has been predominant in the last few years. Credit card is the most popular version of plastic money. The credit cards originated in the United States in the 1930s. Its use was widespread by the 1950s. The Diners Group first brought the credit card to India in 1964. The central bank set up the first credit card operation in the country with the help of master card in 1981. The credit card business is considered to be the most lucrative banking business in India today. There has been also an exponential growth in the debit cards issuance and usage among the people. Today, the debit card segment is highly competitive with almost all the banks offering debit cards in association with international or master card. Between 2002 and 2005, the number of households using an ATM or debit card grew from 47% to 60%. Additionally, debit card transactions now make up the same value of in-store purchases as cash (each around 33% of the total transactions), according to the 2005/2006 Consumer Payment Preferences Study from the American Bankers Association and Dove Consulting.

What is 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 Cards:

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. 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 has to pay a percentage of outstanding. Interest is charged for the outstanding amount which varies from 30 to 36 per cent per annum. 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 either. 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.

Cont(Types of Credit Cards):

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 of the Add-on cards. The transactions made by Add-on cardholders are billed to the main card and debits are made to the Company's Account. 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. An overall ceiling fixed for this card is also based on the status of the firm. Smart Cards: 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. It provides communication security as it verifies whether the signature is genuine or not.

Cont(Types of Credit Cards):

Debit 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 slot 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. 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.

Difference Between Debit Card & Credit Card:

Sr. No. 1. Points of Differences Payment Debit Card Debit card is a 'pay now product'. Credit Card The credit card is a 'pay later product

2.
3.

Credit Facility
Telecommunication Opening Bank Account Risk

In Debit card the customer's account is debited immediately.

The debit card programme requires installation of sophisticated communication network. A bank account and keeping a required amount to the extent of transaction are essential in a debit card system. The risk is minimized through Personal Identification Number in debit card programme. Own Source

The holder can avail of credit for 30 to 45 days.

No sophisticated telecommunication system is required in credit card business. Opening a bank account and maintaining a required amount are not essential in a credit card. Possibility of risk of fraud is high in a credit card. Consumer loan

4.

5.

6.

Nature of Financing

Parties to 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 nonindividual 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, restaurants, 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.

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 charge slips. 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:

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. 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, risk, strike, theft etc. during transportation and concessional premium rates for personal accident insurance and mediclaim.

Credit Card Cycle:

A cardholder makes a purchase, and presents a credit card to the merchant establishment instead of paying cash. The retailer checks the number on the card against the hot list or warning bulletin provided to him by the bank. This is the authenticity test, which proves whether the cardholder is the genuine owner of the card, or not. The cardholder is also required to sign on the voucher, and the signature has to tally with the one on the credit card. The merchant establishment has to then present the necessary sales vouchers to the bank, which in turn reimburses it for the customer's purchases. The bank charges a commission from the merchant establishment, rates of which vary from bank to bank. After the completion of this procedure, the bank sends a credit statement to the cardholder and receives the money.

Mechanics of Credit Card Operations

1. Contract for Credit Card Card Issuing Bank 2. Issue of Credit Card Card User / Customer 3. Purchase of Goods & Services

Payment on Credit card

7. Clearing & Settlement

4. Charging of Credit card & raising Bill

5. Submission of Bill for Collection

Merchant Bank 6. Payment for Bills Merchant establishment

Cont(Mechanics of Credit Card Operation):

1. Credit purchase Cardholder purchases goods/services and gives the credit card 2. Credit card processing Merchant establishment delivers goods after taking an authenticated credil card and noting the number and taking signatures on certain forms 3. Bill raising Merchant establishment raises the bill for the purchase and sends it to the credit card issuing bank for payment 4. Payment Issuing Bank pays the amount to the Merchant establishment 5. Bill to cardholder Issuing bank raises bill on the credit cardholder and sends it for payment 6. Card payment Credit cardholder makes the payment to the issuing bank

Benefits of Credit Cards:

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 installments 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. 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. 7. Credit cards provide a certain degree of prestige to the holder.

Cont(Benefits of Credit Card):

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 all outstandings. 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.

Cont(Benefits of Credit Card):

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 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.

Demerits of Credit Cards:

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.

Cont(Demerits of Credit Cards):

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 under utilization of this facility erodes the profitability of banks.

Cont(Demerits of Credit Cards):

Member Establishment 1. The commission to be paid to the issuing banks/credit card organization 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.