Plastic Society with Credit Cards: An Asian Perspective
Trends and Issues in the so-called “Cashless Society”
Aparna Mathur
Credit Card Industry: A Background
The new era of plastic currency seems to be here to stay with the rapidly growing mobile
middle class. In India, people are being drawn to this new plastic money culture. A credit
card has blessed & facilitated the middle class with the power to chase and often
purchase their dreams, which are generally beyond their means. Plastic money refers to
the substitution of the currency at the time when the transaction of buy & sell is taking
place, by usage of a card, normally made of hard plastic representing such substitution.
One of the main reasons for this kind of substitution is the postponement of payment i.e.
currency.
A credit card can be viewed as a payment tool which enables the card holder to purchase
goods or services without parting with immediate cash & make one-time payment at the
end of a specified period (known as the billing cycle, which is usually a month) with a
provision for spreading this payment over several easy installments. In this way, it
enables the cardholder to postpone their payment by usage of card availing credit from
the issuer of the card, say a Bank or Non-Banking Finance Companies (NBFC). Thus,
credit card is essentially a “Pay Later Mechanism”. Thus, the credit card system serves
two objectives. The first one is to facilitate credit purchases and offering the privilege of
paying later, and the second is to avoid the necessity of carrying currency with its
inherent risk and inconvenience by providing the cards which are very easy to hold and
carry.
* The writer specializes in Finance & Marketing. She is a regular contributor to various Journals. The
writer is also a Guest Lecturer at various colleges & Institutes affiliated to different Indian Universities.
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Growth in India:
In India, the credit card culture was formally introduced almost 25 years ago. Since 1982,
the Indian credit card market witnessed a rapid growth with an increasing number of
banks offering credit card facility. The wave of credit cards entry set the banking industry
– a vital sector of a society – into a new motion with ample scope of getting new accounts
and more deposits from other clients. Further development took place as more
establishments were willing to accept them in place of cash, and more consumers found
the concept to be a convenient mode of making payments with no need to carry cash. In
India, the credit card business boomed in the 1990s.The number of credit cards in
circulation has increased from 76 lakh in 2003, to over 1.55 crore by March 31, 2005.
The total expenditure through credit cards went up to Rs 20,555 crore during 2004-05.
The no. of credit card holders is increasing day by day. State Bank of India (SBI) Cards
& Payment Services Ltd., the only non-banking finance company (NBFC) issuing credit
cards in India, now has 3 million cardholders to its credit. While the credit card industry
is growing at 35% in India, SBI Cards is growing at 70% annually. Recently, it overtook
Citibank and became the second largest credit card issuer, led by ICICI Bank that has
over 5million cards in the market. SBI Cards, a joint venture between SBI and GE
Money, has nearly $100million under its portfolio per month. The company offers other
benefits such as “city-affinity” on its cards for use in the metros. The credit card market
in India, according to American Express, is growing at 20-25 per cent per annum. From
half-a-million cardholders in 1992, the population is at a whopping nine million today.
Also, the total billings on cards are estimated at over Rs 10,000 crore, growing at 20 per
cent per annum.
According to the HSBC Credit Card Launch Case study done by Katy Merchant, The
credit card market in India is about 3 million with a value turnover of around Rs.2500
crore. The market is expected to grow by 30% p.a. This would still be a very low
penetration of a potential market of 60 million cardholders. The credit card business is a
low-margin, high volume business. Thus, given the low income per card and the high
initial investments by the bank, large volumes in terms of cards issued and the
transactions financed are required to make the operations profitable.
According to Visa Internationals latest data, average Indian cardholder uses his card 9.3
times, spending about Rs.14, 700 per year. A number of card owners do not use their
cards and almost 20 – 30 % cards are inactive (less than one usage every quarter).
With the rapidly increasing consumer needs, the credit card industry has a lot of potential.
Banks from the public sector as well as private sector are coming forward & are
competing with the well established foreign players in this industry. In a country of
11million card holders, where plastic money constitutes only 1% of the total personal
consumption, there is surely more to come. Along this line only, the issuers of credit
cards have begun to offer much more than just credit to their customers like music
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system, executive diaries, subscription to business magazines & journals, etc. Customers
are getting additional benefits with the use of affinity credit cards. Affinity Cards are
issued by the sponsor banks especially for a particular section of people who take pride in
the vocation or alma mater making them periodically donate some amount to improve the
cause they love. Some of the banks are:
American Express Nectar - earn extra Nectar points
Virgin Credit Card - spend reward points on goodies in the Members Shop
Breakthrough Breast Cancer - a very worthy charity's affinity credit card
Manchester Utd FC - using this affinity credit card could win you an exclusive prize
Examining the credit card as an augmented product reveals that it does not provide just
the facility of revolving credit but it enables the consumer to enjoy supplementary
services in the form of additional benefits like the facility of add-on cards, free accident
insurance coverage for self as well as for spouse, and others. The flexibility to pay a
small amount every month at every purchase and pay the balance later with some interest
added has given the cardholder the freedom to spend and not worry about money. To
cope with the increasing competition & to survive in the credit card industry, many
Indian banks have started offering additional facilities to their credit card holders such as
free personal accident insurance, cash withdrawal facility, temporary increase in credit
lines, add-on facility for dependents who are majors, leveraged investment facility, etc.
The additional features’ being offered is changing the credit card in to a new avatar,
called the convenient card.
The Indian credit card market is not even yet near saturation. There is still more to come
in credit card market.
Credit Card Industry in Asia: A Comparison
Plastic society is spreading rapidly not only in India but in other Asian countries also. In
South East Asia, over the last two decades, the increase in the use of credit cards as a
transactional medium is a notable change in consumer financial services. Credit card as a
payment instrument device has become an attractive & propitious proposition to
consumers. They now serve as a payment instrument in lieu of cash for many routine
purchases, widely used and accepted, offer a revolving credit line without the need for
collateral & also provides convenient access to other banking services.
Touching on its credit card circulation, Bank Islam is expecting the number of its credit
card holders to increase to 450,000 by June next year from 250,000 currently. (According
to MD, Zukri, 17 May, 2007).The bank currently holds 1.5 percent market share of the
credit card market.
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Consumers in emerging markets have discovered the credit card - with a vengeance. In
China, where credit cards were unknown not long ago, plastic transactions have hit a
staggering US$200 billion per year. In terms of number of transactions, the Chinese
market is only fourth-largest, while Brazil and South Korea record much higher card
usage. However, examining the value of transactions as opposed to the number of
transactions, China is undoubtedly the largest, with more than $200 billion, while Brazil
comes third, with $74 billion spent on credit cards. According to a report China, Brazil,
Chile, India and Thailand as set to become the hottest markets for card issuance.
Malaysia, China and India have witnessed the most interesting recent developments as
regards infrastructure.
To increase the subscriber base, recently, Citibank & Air Asia tied the knot in Malaysia
& launched their co-branded Citibank Air Asia credit card which enables the customer to
earn free flights through a rewards programme when they shop at over 25 million outlets
worldwide. With every Ringgit (Malaysian currency) spent with their Citibank Air Asia
credit card for any purchase, cardholders will earn an Air Asia point. They will also be
able to enjoy special privileges such as access to low fare seats during sales exclusive to
Citibank Air Asia cardholders as well as minimum 24 hours priority booking ahead of the
general public.
With adequate risk management & regulatory controls credit cards business can be
profitable. Unlike corporate loans where margins can be razor thin and a single big bad
loan can cripple the unfortunate lender, banks are able to charge 18% per annum on credit
card debt, way above the rates they charge for other types of consumer lending. High
fixed overhead expenses imply that card issuers need to issue a large volume of cards to
hopefully creditworthy heavy card users to maintain profitable operations. Though a card
loan amount is usually relatively small, credit card loans earn the credit card issuer about
three-quarters of its revenue in the form of interest earnings. The balance comes from
interchange fees charged on the merchant.
However, in their bid to boost market share in the face of intense competition, credit
card-issuing banks are increasingly making easy the availability of credit, possibly to
ever-riskier customers. This increases the risk that some borrowers will become over
extended, especially during periods of financial stress. In addition, increased competition
can often lead to account management practices that increase the risk profile of the credit
card portfolio.
Issues and challenges to the Credit Card Industry:
Implications:
Credit card industry is growing at a very fast pace everywhere. But in their race they are
forgetting that they are giving rise to defaults & manipulations all together. Credit card
has changed the consumer behavior extensively. Nowadays credit card has become a
fashion orientation symbol. People are now more towards impulsive buying than being
frugal. They are buying blindly, things which are of no use to them & also beyond their
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paying capacity just because of the fact that with credit cards they can delay their
payments.
The bad practices & increased cases of cloning of credit cards are on a rise as people
want to defer their payments & sometimes want to evade them. People are using credit
cards more as a borrowing tool than a payment mechanism. This sudden rush in
borrowing has prompted concerns that consumer debt may spiral out of control,
especially in China, Thailand and South Korea. In South Korea, household debt grew
20.3 percent in 2001. In Thailand, the National Economic and Social Development Board
have warned that the rapid growth in consumer lending, particularly through the use of
credit cards, could jeopardize the country's future economic stability.
Credit-card fraud is a problem that exclusively concerns emerging card markets.
According to a report, the no. of consumers tend to use credit card beyond their paying
ability is increasing. With over 100 million credit cards issued to the public around the
end of 2002 (Kim 2002), consumer bankruptcies have erupted in recent years and there
are grave concerns that the number will significantly increase as credit card debts mount
up and distress more consumers financially. Deregulation by emerging-markets
governments and simplification of the credit-card application process have resulted in
consumers taking advantage of the new lines of credit open to them, borrowing up to
their full credit.
One of the other challenges credit card issuers face is generating a sufficient volume of
profitable accounts while, at the same time, being selective in granting accounts and
credit lines to maintain an acceptable level of credit risk. The issuing bank manages these
risks by issuing cards only to those with a risk profile it is comfortable with and then
setting reasonable account limits. Banks are more likely to issue credit cards to relatively
high-income individuals as there is greater likelihood that they will promptly repay their
debts and have low default rates, besides having greater prospects of extensive card use.
In a bid to lure customers, credit card companies have started unethical practices, in the
absence of any regulatory framework. Most credit card-issuing banks, in violation of the
spirit of basic banking principles, have been sending unsolicited cards to customers.
Many customers are billed for cards lost in transit and unauthorized used by someone
else. Moreover, propriety demands that additional cards be issued only on the request of
customers and not otherwise. Many credit card issuers levy charges without seeking the
consent of customers. For instance, Citibank, the largest issuer of credit cards in India,
has been unilaterally levying a host of charges like Suraksha Credit Shield Premia,
transaction Handling Charge and Suraksha Personal Accident Premia
Credit Card Industry in India: The Role of RBI.
The card users’ privacy has been violated by poor orientation of the marketing agents, the
Direct selling Agents(DSAs) and Direct marketing agents(DMAs) engaged by the card
issuers. In their tele-marketing attempts, the marketing agents make repeated and
untimely telephonic calls to prospects as well as clients. The card users are also harassed
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by the recovery agents and this has led to mounting customer complaints.Card users are
also concerned about their privacy being breached since many times personal contact
numbers are passed on to third parties by some unscrupulous elements with the
institutions and their agents.
The existing regulatory mechanism has been found wanting and inadequate to ensure
proper administration of card business, especially that of Credit Cards. This led to the
current scenario of harassment of card users, their rising number of complaints and
grievances, necessitating the Reserve Bank of India to intervene. The Reserve Bank of
India (RBI) has thus issued guidelines for credit card operations in the country. These are
aimed at disciplining & monitoring the credit card market which has been growing at
50% per annum. Henceforth, credit card issuers will have to adhere to these norms which,
among other things, deal with issuance of additional cards, printing of annual interest
rates, enhancement of credit limits, collection of debts, etc. There are more than 1.55
crore credit cards issued in the country, with many people having more than one credit
card.
In legal terminology, a customer is a principal and the bank is his agent. It means that the
bank acts on behalf, and at the behest of the customer. The RBI is trying to restore this
basic banking principle through the new norms. To achieve this, the RBI constituted a
working group on Regulatory Mechanism for Cards. The guidelines are based on this
group’s recommendations. The RBI guidelines refrain banks from issuing unsolicited
credit cards. Banks have also been barred from unilaterally upgrading credit cards and
enhancing credit limits. They will also have to set up a ‘Do Not Call Registry’ (DNCR)
and abstain from calling/ sending SMSs to customers not wishing to receive marketing
calls.
As per the RBI norms in place, credit card issuers will not be able to levy any charge not
explicitly indicated to the credit card holder at the time of issuing the card. This norm,
however, will not cover charges like service tax, or other levies imposed by the
government. Also, credit card issuers will be required to print ‘Most Important Terms and
Conditions’ (MITCs) in Ariel-12 font so that a customer is at least able to read them.
At present, credit card issuers quote monthly interest rates, without explaining the method
of computation of interest charges on revolving credit. Now, the RBI has made it
mandatory for credit card issuers to quote annualised percentage rates (APR). This will
help customers who are more familiar with annual rates. For instance, Citibank has been
levying a monthly service charge, which may go up to 3.35% of the outstanding balance.
This may not mean much to a customer unfamiliar with the dynamics of monthly interest
rates. However, if told that Citibank is levying an interest rate which is as high as 40%, a
customer would think twice before making use of revolving credit facilities. Credit card
companies will also have to provide the method of calculating the APR (separately for
retail purchases and cash advances) with a couple of examples for better comprehension
by customers.
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RBI norms make it clear that card issuers will be fully responsible for all acts of omission
or commission by their agents. This includes sales, marketing and recovery agents. The
intervention of RBI has certainly helped the customer and made him aware of the rules
and regulations to be followed by the banks.
Conclusion:
The plastic currency has opened up a pandora’s box in the form of Credit Cards that adds
to the ease & convenience of transaction settlements at the point of sale to the customers.
There were co-branded Credit Cards with major airlines, star-hotel chains, star travelhouses etc. These marriages of convenience and alliances among the major players of the
economy are evident as an on-going feature in the service sector. Plastic Cards have
evolved as the most sophisticated and savvy product for corporate integration, tie-ups,
alliances and multi-branding of products. This offers enhanced scope for horizontal as
well as vertical growth.
Apart from providing a number of advantages & benefits, it has also a flip side for the
unwary card user. Ignorance of various terms and conditions of Credit Card agreement,
especially the financial/cost implications of credit and irrational use of it can be
detrimental to the interests of the customers. This growth has also increased the chances
of fraud in this industry. Still, instances of frauds can be minimized by being more alert
while using Credit Cards, especially, on the internet. Switching on to Smart Cards and
Photo Cards are a definite plus.
The Government needs to tighten the credit card ownership because the card holders are
not enjoying the benefits in a right way. Credit card should be used as a facility to make
payments & not to get loans. Regulatory action should focus on the control of credit. It is
proper for the government to regulate the issuing of credit both for the protection of
individuals and for wider economic reasons. But such regulation should be confined to
the prevention of excessive rates of interest, ensuring that information given to borrowers
is accurate and complete, and in setting rules for the enforcement of debt collection.
People must realize that they cannot spend beyond their capacity. Ultimately, a credit
card is just a payment tool and not a magic wand. Before the joy of buying a new product
subsides ... . Its payback time, with the high interest added too. In the long run, the
financial sector and the consumer should benefit from new regulations to control credit
card businesses, as the risk of credit default will be minimized. It is not the profitability,
scope, sophistication or utility of the product that is found lacking, but, it is the misuse,
improper administration and regulatory issues that are damaging this multi-dimensional
product.
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