CREDIT CARDS-AN INNOVATIVE FINANCIAL INSTRUMENT IN BANKING

Introduction:

            A credit card is a monetary instrument that enables the cardholder to obtain goods and services without actual payment at the time of purchase. It is also popularly known as plastic money. The value of purchases made by the cardholder using the card is recovered at the end of a specified period, usually a month, called the billing cycle. It can be said that a credit card is basically a "Pay Later" card that is provided to a customer.

 How do credit cards work?

Every transaction made on a credit card involves three parties:

Card Issuer

Cardholder

Trader

 A credit card holder, subsequent to making a purchase or availing a service at a designated trader, presents his credit card instead of paying cash. The trader checks the number of the card against the Hot List provided to him by the Card Issuer, to ascertain the authenticity of the cardholder. The signature of the cardholder on the voucher provided by the trader should tally with the signature on the credit card.

 The trader then presents the sales vouchers to the bank, which reimburses it, after charging commission. At the end of each billing cycle, the value of the transaction is included in the statement mailed to the cardholder.

 Business Associates: The card issuer sometimes enters into a contract with organizations that also issue cards on behalf of the issuer to the clients. The organizations that issue cards are known as Business Associates or Member Affiliates. Cards issued by Member Affiliates are similar to credit cards except for the name and logo of the Member Affiliate besides the name and logo of the issuer. This type of arrangement enlarges the scope and operations of the credit card issuer.

Clearing Houses: The card issuer generally affiliates itself with the clearing house usually, MasterCard International or Visa Card International act as on behalf of the issuer. This enables the cardholder of one affiliate to use his card at the Merchant Establishment of another affiliate. 

 Benefits of credit cards:

1. Credit can be availed for a period of 30-50 days.

2. A cardholder need not have the required amount in his account to the extent of the transaction made.

3. The card carries a predetermined limit up to which the holder can spend.

4. At the end of each billing cycle, the cardholder has to pay a minimum sum of the bill normally 5-10% and the rest can be paid in installments over the next few months/years.On outstanding balance, a nominal rate of 1.5 to 3% per month is charged as interest.

5. Regular use of the credit card by the user earns him additional points that provide the cardholder with discounts on purchases.

 In addition to the above benefits, many problems associated with credit can be avoided through the use of credit cards. In many businesses, particularly in the retail and consumer service fields, credit arrangements for customers are available through the use of these cards. Under these plans, there is little or no commitment of the business's own capital, and the costs and risks of administration and collection are almost entirely the responsibility of the Credit Card Company or bank.

 Credit card service is available from one's regular commercial bank. Receipts from bank credit card purchases can be deposited daily and are immediately credited. The bank assumes all credit risks provided that one follows instructions for approval of credit card purchases. Typically, these instructions require that one checks the validity of the card against a master list of canceled cards and contact the credit service before accepting the customer's card for purchase above a certain limit.

 Credit card services are particularly vital for businesses with a large number of relatively small accounts. They eliminate the need for credit approval, invoice preparation, record maintenance, and collections. They also minimize one's commitment of capital and virtually eliminate the risk of uncollectible accounts. From a marketing standpoint, the availability of instant credit could often encourage a customer to buy immediately, rather than postpone the decision to a later date or bypass it completely.

 Credit cards are most often used for retail accounts. However, they have also been used successfully in selling to small commercial accounts. Businesses such as repair shops, supply firms, and stationery stores, which have a mixture of consumer and commercial accounts, often find it convenient and economical to extend credit card service to small commercial accounts. Benefits provided by credit cards are not limited to the credit facility alone.

 Besides that following are the additional benefits available to the credit card holders, namely,

 Personal Accident Insurance. Credit card issuers have introduced a free insurance cover to the cardholder against loss of life due to accidents.

 Cash Withdrawal Facility. A pre-determined credit and cash limit is provided to the cardholder at Automated Teller Machine (ATM) facilities.

 Increase in Credit. Cardholders with a good credit track record are provided with_t'1 increased credit limit for a short period of time, whenever required.

 Add-On cards: The spouse, parents and children, over eighteen, of the cardholder, are provided with add-on cards on payment of a specified fee.

 Leveraged Investment Facility: This facility enables the cardholders to subscribe to designated equity or debenture issues in the primary market and schemes floated by mutual funds.

 Factors that contributed to the increased uses of credit cards: 

 The perception to own credit cards has changed and cards are being viewed as a convenient substitute to carrying cash and also availing credit for short periods.

 India ranks at the bottom in terms of usage of credit cards when compared to China, Taiwan and Malaysia.

 Usage of credit card picked up only last ten years.

 Indians viewed the cards as a luxury and so, Indian banks were not willing to venture it.

 Over the last ten years, things have changed drastically since the idea of owning a credit card has had its roots in the minds of millions of Indians.

 Enlightened customer has started viewing the card as a convenient substitute to carrying cash.

The change in mindset is clear from the growth, both in terms of absolute numbers and growth rates.

 The importance of having a pie in the credit cards segment was not lost on any bank, and most banks started their credit card operations. Currently, there are more than 20 banks offering credit cards, but the market share of the top five exceeds 75%.

 Credit card is a low-margin but high-volume business.

 The initial investments required by a bank are very high.

 The income per card is low, thereby requiring large volumes in terms of cards issued and the transactions finance to make the operations profitable.

 The bigger businesses and merchants are already acquired by the existing players, so for new banks, braking into this business and convincing a merchant is increasing because the banks are shifting towards lower end merchants.

 Competition in acquiring business, new categories of merchants are coming up.

 The foreign banks have a dominant share due to various reasons like having been in the field for decades, sound operational and financial strength, strong brand recognition etc.

  They were catering to the upper segments and charged high annual fees.

 According to Visa International, an average Indian cardholder uses his card 9.3 times. A number of card owners do not use their cards and almost 20-30% cards are inactive.

 In India, two players dominate the credit cards industry,-Visa and MasterCard and 15 out of 17 banks provide credit card services through Visa or MasterCard.

 Banks adopted a strategy of reaching lower down the income strata by lowering down their eligibility norms, the credit limits are set at lower levels as compared to the foreign banks.

 As a result of this strategy, the credit cards base is widening day by day with the increase of base in B-grade cities.

 Conclusion:

From the above, it is felt that, Credit Card has performed well to the needs of the people. At the time of introduction the people does not welcome it, because it is mostly used for a particular activity only, but today it is boon to all the mankind.In India the entry of Credit Card is success due to the join hand of GE Capital and State Bank of India, no doubt but still Credit Card consciousness is lacking among many people. This is mainly due to the card fee and interest charges. So the immediate need is to take more effective measures so as to make Credit Card attractive. Such an attempt will enable Credit Card to achieve greater heights in banking sector.