Indian financial markets are witnessing an era of financial innovations. Since the liberalisation of the economy there has been a tremendous growth in the variety of financial products backed by huge volumes. Plastic money (i.e. Credit cards) is one of the leading financial products. The growth of the card industry is robust viz. from 2.3 lakh cards in December, 1992 to 75.0 lakh till April 20031. The consumer awareness levels and annual volumes are also growing sharply. Card profitability is also attracting new players in the industry. In India, the commercial banks form the core of the credit card business. The credit card issuers play a vital role in shaping the structure of the credit card business. In spite of industry attractiveness, there are daunting problems faced by the card issuers which has lead to shunting down of card operations by some banks an d some more in pipeline.The attempt in this article is to provide a framework of the credit card economics of the suppliers’ side of the credit card business with a special focus on profitability and pricing aspects of the credit card business. The article has been divided into three sections. First section deals with the card issuers’ revenue model. Second section attempts to throw light on the pricing mechanics and the last section deals with the problems of the card issuers in India with a focus on vital issues like card defaults, losses due to frauds and threats posed by emerging substitutes.</sec><sec id="sec002"><title>Card Issuers’ Economics

IJFR

Indian Journal of Finance and Research

0971-0566

Indian Financial Management Association

ijfr-13-1and2-003

RESEARCH ARTICLE

Financial economics of credit card issuers in India

Gupta

P.K.

Dr.

Ph.D.(Finance), FICWA, FCS, CFA, LII, Assistant Professor, Lal Bahadur Shastri Institute of Managment, Delhi

1–72003

131and23141

Indian financial markets are witnessing an era of financial innovations. Since the liberalisation of the economy there has been a tremendous growth in the variety of financial products backed by huge volumes. Plastic money (i.e. Credit cards) is one of the leading financial products. The growth of the card industry is robust viz. from 2.3 lakh cards in December, 1992 to 75.0 lakh till April 20031. The consumer awareness levels and annual volumes are also growing sharply. Card profitability is also attracting new players in the industry. In India, the commercial banks form the core of the credit card business. The credit card issuers play a vital role in shaping the structure of the credit card business. In spite of industry attractiveness, there are daunting problems faced by the card issuers which has lead to shunting down of card operations by some banks an d some more in pipeline.The attempt in this article is to provide a framework of the credit card economics of the suppliers’ side of the credit card business with a special focus on profitability and pricing aspects of the credit card business. The article has been divided into three sections. First section deals with the card issuers’ revenue model. Second section attempts to throw light on the pricing mechanics and the last section deals with the problems of the card issuers in India with a focus on vital issues like card defaults, losses due to frauds and threats posed by emerging substitutes.</sec><sec id="sec002"><title>Card Issuers’ Economics

The basic elements of revenue and expense that determine the economics of a bank credit card-issuing programme are interest income, interchange income, membership fees, other fees and income, including exception processing fees, cost of funds, card losses in the form of defaults, stolen cards, card frauds etc. and expenses relating to servicing, processing and marketing bank credit cards.

Revenues

The revenues of the credit card issuers include the following:

Interest income– The interest income accounts for a major portion of the total revenues. The interest on credit cards is generally calculated by Average Daily Balance (ADB) method, which applies the interest rate² to the average daily balance of the account over the billing period. One of the popular variations of ADB method is ‘ADB including new purchases’. Some banks also follows ‘ADB excluding new purchases’, ‘Two-cycle ADB including new purchases’ and ‘Two-cycle ADB excluding new purchases’³.

Interchange income- It is the percentage of the value of merchant sales that the acquirer/merchant is required to pay to the issuer. Whenever credit card draft is presented by the acquirer or merchant to the card issuer, it is discounted by some percentage⁴. Interchange/discount rates are determined by settlement systems viz. MasterCard and VISA.

Annual membership fee- It is the fee that the credit cardholder pays to the card issuer for the right to carry and use the credit card. It has been observed frequently during the study that this fee is reduced or waived for an initial period as a tactic to attract new cardholders.

Other fees and income- It represents charges and revenue generated by miscellaneous activities. Cash advance fees, balance transfer fees, credit insurance and revenue from selling merchandise fall under this category. Exception processing fees are miscellaneous charges levied against a cardholder for not following the rules of the cardholding agreement. These charges are often called nuisance fees and are levied for such infractions as late payments, exceeding one‘s credit line or dishonour of a cheque/draft.

Expenses

The expense side of a bank credit card issuing operation includes the following:

Cost of funds – It is the largest single expense item associated with a credit card programme. It is defined as the interest rate, which the card issuer pays to finance the outstanding balances in the bank credit card portfolio. Funds to finance credit card balances come from a variety of sources including customer deposits and borrowings from other institutions.

Losses – These include bad debts and losses due to fraud and costs related to the investigation and prosecution of fraud. Losses are usually expressed as a percentage of outstanding balances.

Servicing expenses – These refer to frontend or “customer-contact” costs and include cost of risk management and customer service activities.

Processing expenses represent the backend costs of the card issuers.

Marketing expenses - These include all costs associated with acquiring new accounts, increasing usage on existing accounts and retaining profitable accounts.

Card Profitability

The credit card profitability is the major area of concern for the card issuers since it is the basis of existence and survival in the credit card business. The bank credit card business has evolved from a loss leader in its infancy to its present status as the most profitable segment of many banks’ business. The returns in the credit card business are predominantly attractive. “Consumer instalment loans can be profitable. One obvious reason is that interest charged on such loans is relatively high compared to rates charged on commercial and real estate loans. A credit card loan for example may have an interest rate of 15% while the commercial loan may have a 10% rate and the real estate an 8% rate. Of course, the size, risk and maturity of each of the loans differ substantially. Another reason for the high profitability is that much of the processing and monitoring work concerning consumer loans (i.e. credit cards) can be automated”.⁵

Measurement of bank credit card profitability is not an easy task since card issuance may add to profitability by attracting consumers to other services provided by it. This makes it difficult to analyse how much of the bank‘s cost is attributable to the credit card business.⁶ In general, banks realise profits if the earnings from a service are greater than expenses incurred to provide the service. Banks realise profits so long as interest earned on assets exceeds interest paid on interest bearing assets.⁷

However, a common measure of bankcard profitability is the return on assets (ROA). Return on assets is defined as the net earnings (operating income) expressed as a percentage of the money outstanding (average total assets)⁸. ROA is also used to compare the relative performance of the card issuing banks⁹.

Profit and Loss Model

The following information is needed to construct a profit and loss model and for the calculation of ROA for a bank credit card issuer programme:

Number of cardholder accounts,

Average daily balance per cardholder account (i.e. average outstandings) in Rs.,

Annual percentage rate (APR),

Rollover rate (%) i.e. percentage of outstandings to be paid at least in a billing cycle,

Rupee merchant sales (total in Rs.),

Interchange rate (%),

Annual membership fee (in Rs.),

Other income (in Rs.),

Cost of funds rate (%),

Servicing costs (% of outstandings),

Processing expenses (% of outstandings),

Marketing costs (per account)/marketing cost (% of outstandings),

Credit and fraud losses (% of outstandings).

Within the help of the above information, the profit and loss model can be presented as follows:

Profit and Loss Statement

Items	Total (in Rs.)	Percentage of out-standings

Revenues
Interest income (Interest rate x average outstandings)
Interchange income (rupee merchant sales x interchange rate x average outstandings)
Annual membership fee
Other income
Total
Expenses
Cost of funds (cost of financing % x investment in receivables)
Servicing Costs (servicing expenses % x average outstandings)
Processing Costs (processing expenses % x average outstandings)
Marketing Costs (marketing expenses % x average outstandings or Marketing Cost per account x number of accounts)
Losses (total credit and fraud losses % x average outstandings)
Total
Net Earnings before Taxes (A*)
Return on Assets (B*)	A*	B*

As credit card profitability continues to be squeezed by aggressive acquisition strategies and fierce competition, the card issuers are looking for new sources of revenue generation. Acquisition costs are soaring while the industry‘s after-tax return on assets (ROA) continues to decline in the past few years. Average ROA to card issuers is less than 2 per cent in India.¹⁰ Most of the industry experts expect that the profitability will squeeze in the coming years. The profitability of public sector banks has been seriously hit in view of the mounting bad debts. The foreign players are more subject to problems of card frauds.

Contrary to this in developed countries the margins have improved substantially. The after-tax return on average assets for credit card banks in United States in 1998 was 2.84 per cent.¹¹

The profit and loss model for the card issuers presented above suggests that the major sources of revenue income are the annual fees and the service charges i.e. the interest charged from the customers for use of finance facility. On both the fronts, the card issuers in India are worried. The annual fees charged from the credit cardholders are not sufficient to cover the costs and card issuers are being dragged down due to fierce competition prevailing in the market.

Also, most of the players feel that people prefer to pay as early as possible thereby reducing the card outstandings and affecting the revenues in terms of service charges. The administrative costs are high considering the low card volumes in comparison to the developed countries.

The transaction fees charged from customers via merchant establishments do not yield attractive returns vis-à-vis costs unless the card usage is sufficient. Some of the banks like HSBC, Citibank etc. have also entered into acquiring business. According to experts, the returns in the acquiring business also can even turn into negative or unprofitable. A typical distribution of the transaction fees charged from customers at merchant establishments illustrates that on a spending of Rs. 100 spending by the cardholder at merchant outlet, Rs. 2.00 goes to the acquirer (the bank which pays the merchant for card spending). Of this, Rs. 1.10 is pocketed by the card-issuing bank (it is Rs. 1.60 at a manual outlet), which shares a fixed amount with the payment networks (Visa/MasterCard). The acquirer gets 90 paise. Therefore, the earnings especially for the card issuers and acquirers are lower keeping in view the costs and fees and the risk involved. In addition, the set-up costs are also high. Rentals on Electronic Data Capture (EDC) terminals set up by Equifax India are nearly Rs. 1,000 per month. EDC terminals cost, on an average, Rs. 25,000 a piece. HSBC, Citibank and Amex are the only banks, which have set up EDCs on their own. The administrative costs of EDC terminals are also high. Therefore, possibility of earning profits exists only if average spending is very high. While the discount (commission) rate in India is the same as abroad, the cost of funds is much higher. Discount rates, fee and interest rates are also affected by competition.

Card Pricing

Apart from profitability aspect of credit card operations, considerable attention has been paid by the card issuers on credit card pricing and how it has been changed in recent years. Analysis of the trends in credit card pricing reveals that interest rates are the most important component of the pricing of credit card services. Credit card pricing, however, also involves other elements including annual fees, fees for cash advance, rebates, minimum finance charges, over-the-limit fees, and late payment charges. In addition, the length of the “interest-free” grace period, if any, influences significantly on the amount of interest that consumers have to pay when they borrow on their credit cards.

Card pricing directly affects Bank‘s profitability because (1) prices paid by the customers generate income and (2) prices influence the volume of sales.¹² The elasticity of card usage is responsive in some cases but inelastic in some others. For example, a reduction in the transaction charge, service charges etc. affects the card usage volumes directly. However, in cases of withdrawal of cash for emergency, the finance charges are unimportant.¹³ The pricing aspect of credit cards is crucial in Indian context because of the credit-averse nature of Indian population. However, surprisingly, the RBI intervention into the matter is negligible. During the study, it was observed that there are no interest rate directives of RBI in relation to credit card business.¹⁴ The deregulation of interest rates is a welcome feature in the Unites States, but in India it requires a careful consideration.

The effective interest rates on credit cards presently range from 34.49–41.75 per cent and have little float for downward adjustment since cost of funds and risk premium are very high. Even though some consonance can be established between the commercial bank rate and the APR of the issuers in India, yet the pricing is not consumer friendly vis-à-vis its counterparts in the developed countries. In United States the average credit card interest rate was 15.63 per cent and the cost of funds equivalent to a one-year Treasury bill rate plus 0.75 per cent was 5.97 percent¹⁵, which indicates a spread of 9.66 per cent. Assuming annualised return on treasury bills at 7.1 per cent, the spread in India varies between 27.39–34.65 per cent.

Inspite of the downfall in the interest rates on various loan products, the card issuers have not changed the interest rates on credit cards. According to an expert, “To understand why these rates have not been moving, it is useful to break up the credit card business into two parts. One is the income side and the other is the expense side. On the income side the main revenue, for the card-issuing bank, comes in the form of fees. For instance, joining fees and annual fees. But the trend in recent months has been to waive joining fees and reduce the annual fees to attract consumers to their fold. This wipes out a significant amount from the income stream of these companies. This leaves the fees earned on card usage and the interest fees. With a low usage per card by customers and a large number of customers using the cards as a charge card even these avenues have been hit. But on the cost side there are expenses galore. Apart from administrative costs in case of a new customer coming through an intermediary, there are charges to be paid for getting the customer. At the same time the bank issuing the card often gives away gifts in the form of gift vouchers for shopping or even gold”.¹⁶ According to experts, the banks, which have reduced the interest rate, are bleeding heavily and it is not a profit-making proposition. It may be appropriate to quote that American Express had reduced the interest rate on credit card to below 2 per cent per month as against industry rate of 3 per cent per month, which is also a mystery.

The interest free period offered on various types of credit cards varies from 30–52 days in India. In case of BOB Gold cards this period is Nil. In contrast, the cardholders in developed countries generally enjoy a credit period of 25–30 days. Perhaps the strategy of the card issuers is to enhance virtually the payment cycle and cash upon the service charges. In addition, credit period is also perceived as a means to attract customers or to induce people to buy cards. Citibank and Amex are not charging any entry fees for gold and classic cards. However, it has been observed during the study that the prospective customers do not consider this criterion while buying a card. The important criteria are the annual fees and the service charges.

In United States, the Federal Reserve Board collects information on credit card pricing through two surveys of credit card issuers viz. (1) the average nominal interest rate and (2) the average computed interest rate. The former is the simple average interest rate across all accounts while the latter is the average interest rate paid by those card users who incur finance charges. These two measures can differ because some cardholders are convenience users who pay off their balances during the interest-free grace period and therefore, do not typically incur any finance charges. The Federal Reserve Board also collects detailed information on the pricing features of the largest credit card plan of a sample of issuers through the Survey of Terms of Credit Card Plans. Also, compared to India, pricing practices in the credit card market especially in United States have changed significantly over the past several years. Many card issuers who offered programmes in the past, with a single interest rate, now offer a broad range of card plans with differing rates depending on credit risk and consumer usage patterns. Moreover, many issuers have also moved to variablerate pricing that ties movements in their interest rates to a specified index such as the prime rate. However, such a concept is yet to evolve in India.

Card Issuers’ Problems

The dark side of the card business is more significant for the card issuers compared with the attractions associated with the business. “Both credit card defaults and frauds rise during recession and decline during growth periods. Many lenders simply factor into their pricing as a part of doing business”.¹⁷

The card issuers in India specially the public sector players, are seriously facing problems of card defaults while the foreign players experience more the problems of card frauds. It was observed that public sector players who came into the business in early stages, say, 1992–1997 have persisting bad debts/Non-performing Assets (NPAs) in their financial statements.¹⁸ The main reason for such a situation is lack of careful consumer analysis. In fact, the cards were sold to masses without concern whether the potential customer has the ability to pay for it or not. Also, card frauds for foreign players occur significantly at ATMs. This section deals with the problems of card defaults and frauds and their implications for the card business.

Card Defaults

Credit Cards are a form of open-ended loans requiring the borrower to pay off the loans over an indefinite period of time. Credit card debt is an unsecured line of credit and repayment of dues depends primarily upon cardholders’ capacity to repay. The greatest risk associated with the card business is the default risk. Defaults tend to increase with the size of the loan, with longer-term maturities, and are inversely related to the value of the collateral relative to the size of the loan. Bank credit card loans had a delinquency rate of 3.04 per cent in 1997 in the U.S.¹⁹ The highly competitive environment in this business has provided customers with opportunity to hold more than one credit card from different banks with the intention to pay only minimum monthly payments on outstanding balances. Relaxed underwriting standards, aggressive solicitation programmes, inadequate account management, increased credit risk etc. may have lead to overdues and non-performing assets in credit card portfolios of banks.

Experts also feel that the phenomenal growth of credit cards, coupled with the lack of awareness among its users can cause havoc in personal finances and the country‘s economy. According to Abhijit Das, “The card business is a high risk, high volume and low margin in nature. Since margins can be as low as 0.1 per cent, there is often a tendency to push up volumes at any cost, resulting in defaults.”²⁰ According to Ujjal K. Basu Roy, a HSBC‘s official, “With the slowdown in the economy and the aggressive plans of existing credit card majors like Citibank, Standard Chartered Bank, HSBC, ICICI Bank and State Bank of India (SBI) and new entrants like ABN AMRO Bank and HDFC Bank, managing portfolio delinquency and bad debt is going to be a major challenge for credit card issuers”.²¹

The percentage of credit lost because of defaults in India is around 4 per cent.²² “Default rates are higher in the credit card business given its unsecured nature. It stands at about four to six per cent in India, but can go as high as eight per cent in individual cases.”²³

The role of RBI, especially in the initial phases of the development of the card industry in India, particularly upto 1998, was absent. The lack of appropriate monitoring by the RBI and improper credit recovery system have led to 15 nationalised banks piling up doubtful debts worth Rs 137.15 crores in calendar 1998 in the credit card business alone.²⁴

Leading the pack of defaulters is Central Bank of India, Bank of Baroda, Bank of India, Dena Bank, Bank of Maharashtra, Corporation Bank, Oriental Bank of Commerce, Canara Bank, Andhra Bank and Union Bank of India. Due to ineffective credit recovery system and lack of any initiative to recover the amounts, Central Bank of India, Andhra Bank, Bank of India, and Canara Bank have suffered the most from the credit card defaulters. The banks, which have been marginally, affected due to non-repayment of bills are - Punjab and Sind Bank, Syndicate Bank, and Union Bank of India. According to analysts, in the absence of individual credit rating and a credit history for individuals, appraisal is largely a hit-or-miss affair. This can have serious consequences, particularly given the fact that legal recovery processes take an inordinate amount of time.

Indian Journal of Finance and Research suffered the most from the credit card defaulters. The banks, which have been marginally, affected due to non-repayment of bills are - Punjab and Sind Bank, Syndicate Bank, and Union Bank of India. According to analysts, in the absence of individual credit rating and a credit history for individuals, appraisal is largely a hit-or-miss affair. This can have serious consequences, particularly given the fact that legal recovery processes take an inordinate amount of time. A survey conducted by the RBI in 1999 revealed that as on 30^th September 1998, 28,349 credit cardholders had not repaid dues worth Rs 25.08 crores within five months after the payments were made by banks, 18,837 card holders had not repaid dues to the tune of Rs 24.54 crores after six months from the date of payments made and about 49,707 cardholders had not repaid dues amounting to Rs 113.59 crores even after one year from the due date of the payment.²⁵ The credit card defaulters' list is rising even as the total number of credit cardholders is growing. In order to recover the bad debts, the nationalised banks have taken steps like appointing recovery agents to track down defaulters and sending reminders to card holders about their existing liabilities. According to bankers, some banks have also taken legal action against the defaulters. Alarmed over continuous default, some nationalised banks have taken a lesson from the foreign banks like Citibank and Standard Chartered Bank as they adopted arm-twisting techniques and hired agents to recover blocked funds. In some cases, banks have in desperation sought the help of the employers of defaulters to track defaulters down and if they are not responsive, suits have been filed against them. Properties of some defaulters have also been attached. The RBI has directed banks to draw up specific action plans to reduce the incidence of defaults in the credit card business and closely monitor the recovery of outstandings²⁶.

In order to recover the bad debts, the nationalised banks have taken steps like appointing recovery agents to track down defaulters and sending reminders to card holders about their existing liabilities. According to bankers, some banks have also taken legal action against the defaulters. Alarmed over continuous default, some nationalised banks have taken a lesson from the foreign banks like Citibank and Standard Chartered Bank as they adopted arm-twisting techniques and hired agents to recover blocked funds. In some cases, banks have in desperation sought the help of the employers of defaulters to track defaulters down and if they are not responsive, suits have been filed against them. Properties of some defaulters have also been attached. The RBI has directed banks to draw up specific action plans to reduce the incidence of defaults in the credit card business and closely monitor the recovery of outstandings.²⁶

RBI has emphasised the need for the banks to observe code of ethics formulated by the Indian Banks’ Association while engaging recovery agents for collection of credit card overdues. Card issuing banks have also been advised to clearly spell out the fees/charges to the cardholder at the time of applying the credit card, if not done so far. In particular, banks are advised to bring to the notice of the cardholder, the rates of interest to be charged in case of delays and default in payments, besides the membership/renewal fees. Total credit card business in India is to the tune of Rs. 7,000 to Rs. 8,000 crores with 3 million cardholders, including the outstanding credit in the range of Rs. 1500 to Rs. 2000 crores. According to a conservative estimate the total defaults till the end of 2001 will not be less than Rs. 200 crores.²⁷

RBI has also advised banks to become members of one or more credit information bureaus and also take advantage of the existing negative file projects in order to maintain the selectivity of customers in their credit cards business to guard against defaults. It has further advised banks to take measures to set up internal control systems to combat frauds.

Card Frauds

As the use of bank credit cards and the value of bank credit card transactions have increased, so too have the incidences of fraud. The amount of money lost due to fraud in the bankcard industry has grown dramatically since the early 1980s.

The American Bankers Association, Visa International, MasterCard International and other financing institutions in the credit card business have undertaken many steps to help franchisee institutions to prevent credit card frauds. Even in the face of these efforts, the criminals are continually scheming ways to beat the system. Since fraudulent card transactions involve intelligent and innova tive people, the problem of card frauds is hard to tackle for the card issuers.

Sources of Fraud Losses

The major sources of fraud losses are:

Fraudulent Applications – which result in accounts being set up and cards being issued to criminals who have adopted the identity of real person or convinced as a bogus identity. According to 1995 Bankcard Industry Report published by the American Bankers Association, losses from fraudulent applications in United States accounted for approximately 10 per cent fraud losses.

Account “take-over” schemes – wherein criminals, posing as true cardholders, fool issuers into misdirecting cards, changing personal identification numbers, providing additional cards, and issuing courtesy checks to themselves – all for fraudulent use.

Lost, stolen, and never received cards being used for authorised purchases.

Counterfeit and altered cards – where criminals introduce counterfeit cards into the marketplace.

Collusive merchants – where merchants engage in fraudulent transactions involving stolen or counterfeit cards, mail order/telephone order fraud, or draft laundering.

True cardholder fraud – where the true cardholder attempts to defraud the issuer by claiming legitimate transactions as fraudulent, or situations where the true cardholder conspires with others to perpetrate fraud on account.

Employee fraud – where cards, account numbers, or account information are stolen from a bank credit card centre or a third party processor by their employees

Card Frauds in India

The phenomenal growth of credit cards in India has thrown up a host of problems ranging from increasing card frauds and debt traps that uneducated customers are trapped in, to other long-term macro-problems like the possibility of decreased savings rate. Credit card frauds are on the rise in India growing at the rate of 35 per cent to 45 per cent per annum.²⁸ An interview with the official of Citibank revealed that on average 8 to 10 cases of card frauds are reported in the country every day, and more than 6 per cent of the total purchases made through cards end up as bad debts.

According to a research study conducted by Credit Card and Management Consultancy (CCMC), the average loss through credit card frauds to a suffered customer in India is Rs. 60,000 per annum while the average amount on an ATM fraud is Rs. 30,000. The CCMC is of the opinion that the average time taken by a credit card holder to realise that fraud has taken place is about four to five days and in the case of an ATM cardholder it is two to three days. As realisation is not immediate, tracking fraudsters becomes more difficult.²⁹ According to CCMC, “With a total of 5 million credit, debit and ATM cardholders in India; it is relatively easier and more profitable to steal with plastic money than with any weapon.” CCMC has also launched a customer awareness guide that explains 10 major types of card crimes and provides over 70 tips for protection, including Internet fraud prevention.³⁰

However, the solace for the Indian holders of the plastic cards is that UK and US are no better than India. Plastic money frauds have reached epidemic proportions in the United States that sees around US $ 1 billion frauds per annum and the United Kingdom, with frauds of about US $ 73 million in 1998.31

Card issuers during the interview opined that they often receive complaints on credit card frauds, which are mostly bogus and only few are found to be genuine. Probing into the complaints is not always tracing the source of the fraud. They also frequently advise customers to inform any unaccounted for transaction or card loss promptly so that the card can be de-activated.

According to an industry expert, “Card crimes education is largely ignored by banks and card issuers. For both, the focus is primarily on credit card/retail lending marketing and sales to garner additional accounts or card numbers, but not on addressing customer concerns on critical issues such as card frauds. The bigger a bank or card issuer is in terms of its card base, the more vulnerable is that bank or card issuer and its card customers to large-scale card crimes.” KPMG, a global consultancy organisation in its ‘India Fraud Survey Report 2001‘ has reported that frauds in India are on the rise and financial sector in India in 1999 has suffered losses mainly on account of misappropriation of funds, false statements, and ATM and credit card frauds.

Credit card issuers have also acknowledged that since the marketing outfit was mostly outsourced, little was done in the initial stages to educate customers on the dangers associated with credit and ATM cards. While they are claiming that regular interaction is initiated subsequently through direct mails, no one could provide concrete evidence of warning users against possible fraud. Hence, there is a need to protect the industry from this syndrome otherwise there is a possibility that the product may not survive in the long run.

Threats of Substitutes

The credit card industry in India is under heavy pressure from the emerging substitutes and so are the card issuers. In fact, the success of the bank credit cards has led the card issuers to come with new financial innovations.³² Top in the list of the substitutes are the smart cards and debit cards. Opinions about the future of debit cards are mixed. According to Dalal Street Investment Journal quotation - “Debit Card will represent a fairly dramatic restructuring of the consumer payments industry, and in time to come, while spending on credit cards will be higher than that on debit cards, the number of transactions may be more on debit cards”.³³ However Advertising & Marketing (A&M) says, “Debit Card will grow at the expense of Cheques and will not cannibalise Credit Cards”.³⁴ The debit card base in India till March, 2000 was 3,00,000 cards which went upto 4,90,000 cards till the end of September, 2000 reflecting an increase of 65 per cent in just six months. The average usage for debit cards is 1.75 times a month as compared to credit cards for which it is 0.92 times a month.³⁵

The two main starters of debit cards in India are - HSBC and Citibank. The HDFC Bank International Debit Card is available to their customers in Mumbai, Delhi, Kolkata, Chennai, Bangalore, Hyderabad, Pune and Ahmedabad. It can be used at over 235 ATMs in India and over 530,000 ATMs across the globe. Citibank Suvidha debit card is accepted at more than 3,000 establishments in India and can be used as an ATM Card at more than 463,000 ATMs worldwide.³⁶ Today more than 60 million people have debit cards that carry the logos of the two major payment card companies.³⁷ An industry expert, writes, “Because credit cards require an expensive and complicated telecom infrastructure and computerised verification systems to operate, and given the state of our telecom infrastructure, credit cards will remain a big city phenomenon for many years to come,”³⁸ He further says, ”Both MasterCard and Visa International have already witnessed a huge rise in their debit card bases in the Asia-Pacific region. After 25 years in the region, MasterCard has built up a credit card base of 80 million, whereas its debit card base, in just four years, has touched 37 million. Visa too, in less than 18 months, built up a base of 48 million debit cards.”

Smart cards form part of the next stage of monetary evolution, after commodity money (like shells), gold and paper. Smallvalue purchases and payments could spur the use of cash substitutes like smart cards, rather than credit cards. An argument favouring the spread of smart card says, “There are more mundane factors-the amount of time and effort that almost 100 million people waste trying to pay for electricity, LPG or fuel could be eliminated if they could electronically deposit the money into a gas or electricity company‘s account. The potential is enormous.” 39 According to Frost & Sullivan, the Indian smart card market could swell to 3 million by 2005. “One-fifth of India‘s money is held in cash. Such a high level of cash sloshing around has four effects:

Huge damaging of currency notes takes place.

Consumers lose interest on cash idling at home.

Enormous strain on the RBI, which has to print, store and distribute large sums of cash across the country. From 1992–93 to 1996–97, the cost of printing notes and minting coins has gone up by 30 per cent. In addition, the cost of storage and distribution are very high.

Banks do not have a mechanism to deploy all this money effectively. If banks and consumers could find some common ground, this could resolve the issue of funds being put to productive use. “

Experts believe that some Rs. 30,000–35,000 crores of funds would be freed for the banking system by issue of smart cards, which banks could use to create credit, which in turn will provide a boost to the economy. It is an established fact that the growth in the real economy is closely related to the availability of consumer credit. Unlike a credit or a debit card, a smart card transaction need not be made online, which suits the Indian landscape with its low telephone penetration. Moreover, its ease and safety have led to wide global acceptance. In about six years, the worldwide volume of smart cards has increased five-fold to 1.9 billion cards. An average credit card transaction in India is worth Rs. 1,000–1,200. The cost of conducting one such transaction is Rs. 15–20. Naturally, buying a cup of coffee worth Rs. 5 using a credit card wouldn‘t be worth the while.

Banks in Europe generally issue smart cards, but in U.S., the non-banks also issue these. Smart cards have not yet been introduced in India widely but in an experimental stage in India. SBI and Canara Bank are involved in a project in Mumbai conducted by IIT at Powai.⁴⁰

In the light of the above, it can be established that debit cards and smart cards may appear to be viable options for the Indian consumers. In such a scenario, the card issuers have to think again on their business model and introduce innovative offering else they will suffer heavily from the emerging giants.

Notes1Based on RBI reports.2The interest rate is calculated by multiplying the APR with the Roll over rate.3

Gitman

Lawrence J.

Joehnk

Michael D.

Personal Financial Planning, The Dryden Press, 1996.,pp. 308-309.4

Johnson

H.J.

Financial Institutions and Markets, Prentice Hall, 1993, p. 349.5

Fraser

D.R.

Gup

B.E.

Kolari

J.W.

Commercial Banking, South-Western College Publishing, 2001, p. 286.6

Hubbard

R. Glenn

Money, The Financial System and the economy, Addison Wesley Longman Inc., 1997,p. 325.7

Johnson

H.J.

Financial Institutions and Markets - A Global Perspective, McGraw Hill Inc., 1993, p. 235.8

Horngren

C.T.

Sundem

G.L.

Stratton

W.O.

Introduction to Management Accounting, Prentice Hall of India Pvt. Ltd., 2001.p. 717.9

Lynch

Richard M.

Williamson

Robert W.

Accounting for Management Planning and Control, Tata McGraw Hill Publishing Company Ltd., 1983, p. 419.10Based on personal interviews with officials of the card issuers.11Debtors Exercise Restraint While Credit Card Issuers Expand Marketing, Lines of Credit, And Profitability, Consumer Federation Of America, 1999.12

Pejjulo

M.A.

Marketing Financial Services, Macmillan India Ltd., 1998,pp. 173-174.13Based on personal interviews with experts and the cardholders.14

Bhole

L.M.

Financial Institutions and Markets - Structure, Growth and Innovations, Tata McGraw Hill Publishing Company Ltd.,1999,p. 516-517.15

Joseph F.

Sinkney

Jr.

Commercial Bank Financial Management – In the Financial Services Industry, Prentice Hall International Inc, 1998, p. 476.16

Pandy

Arnav

Falling rates touch everything but credit cards,

www.economicchallenger.com/archive/jul_sep_2001/conference.htm

Koch

T.W.

MacDonald

S.S.

Bank Management, The Dryden Press, and 2000.p. 730.18

Machiraju

H.R.

Indian Financial System, Vikas Publishing House Pvt. Ltd., 1999, pp. 3.17-3.19.19

Fraser

D.R.

Gup

B.E.

Kolari

J.W.

Commercial Banking, South-Western College Publishing, 2001, p. 285.20

Das

Abhijit

The Big Bank Entry, The strategist,

www.bsstrategist.com/98nov17/story3.htm

.21

Ujjal

Roy

Basu

Defaults may spoil the party for credit card issuers, MONEY MATTERS December 03, 2001,

www.financialexpress.com/fe20011203/matter3.html

.22

www.ee.iitb.ernet.in/uma/~shan/ccrm.html

23Ujjal

Roy

Basu

op.24

Rathore

Pratibha

Public sector banks pile up Rs 137cr bad debts in credit cards business, March 29, 1999,

www.expressindia.com/net_express/business.html

Kapoor

Pragati

Venu

M.K.

“PSU bank card defaults to hit Rs. 163 cr”, The Economic Times, 3rd June 1999,p. 1.26www.rediff.com, The Rediff-Budget Standard Special 2001–2002.27

www.discoveryindia.com/news/bstory1.html

.28

Mehta

Dewang

India loses the ‘global leader of tomorrow‘,

www.tendertimes.com/newspages/newarchive/news130401k.htm

.29Credit card fraud on rise in India, www.news.sawaal.com/11-Apr-2001/Business/45.htm.30Ibid.31

Mehta

Dewang

op. cit.32

Mishkin

F.S.

The Economics of money, banking and financial markets, Addison Wesley Longman,Inc., 1998,p. 257.33

www.infoindia.com/cardconsult/media.html

.34Ibid.35

Cherian

George

Cash is now old economy, gives way to debit cards, The Econmic Times, 28th September2000.36

www.indiainfoline.com/pefi/news/debi.html

.37

indiainfo.myiris.com/cards/cardArt.php

Gala

Bakul

Are Credit Cards Really Viable?, www.businessworldindia.com/archive/200515/mktg5.htm.39

Prasad

Shishir

Smart cards: future of money,

www.businessworldindia.com/archive/200515/mktg5.htm

Avdhani

V.A.

Marketing of Financial Services, Himalaya Publishing House, 2002, p. 151.