CREDIT CARD USAGE IN INDIA

CREDIT CARD USAGE IN INDIA Pooja Bhosale Lecturer in Commerce & Management, CSIT Asha Karbhar (Shinde) Lecturer in Commerce & Management, CSIT INTRODUCTION: There are about 26 million (2.6 crore) card users in India with an average person s wallet containing at least one debit and credit card. However, out of these cards, only 50% are active or in use. Out of the active users almost 80% or about 1.04 million (10.4 lakh) users are not paying any interest on their credit cards, leaving all the issuers with just 260,000 (2.6 lakh) users from whom they can earn some money. A credit card is a payment card issued to users as a system of payment. It allows the cardholder to pay for goods and services based on the holder's promise to pay for them. The issuer of the card creates a revolving account and grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user. The size of most credit cards is 85.60 53.98 mm (3 3 / 8 2 1 / 8 in), and conform to the ISO/IEC 7810 ID-1 standard. Credit cards have an embossed bank card number complying with the ISO/IEC 7812 numbering standard. A growing field of numismatics (study of money), or more specifically exonumia (study of money-like objects), credit card collectors seek to collect various embodiments of credit from the now familiar plastic cards to older paper merchant cards, and even metal tokens that were accepted as merchant credit cards. Early credit cards were made of celluloid plastic, then metal and fiber, then paper, and are now mostly polyvinyl chloride (PVC) plastic. Definition of 'Credit Card': A card issued by a financial company giving the holder an option to borrow funds, usually at point of sale. Credit cards charge interest and are primarily used for short-term financing. Interest usually begins one month after a purchase is made and borrowing limits are pre-set according to the individual's credit rating. RESEARCH METHODOLOGY - Definition:-Procedures used in making systematic observations or otherwise obtaining data, evidence, or information as part of a research project or study [3] There are two types of data collection:- Primary Data:- Secondary Data:- Survey A methodology which can use different instruments such as observation, interview or a written list of questions called a questionnaire. Surveying is the process of conducting a study from representative samples of specific populations. A Commencement of Survey through Internet and RBI bulletin June, 2011. If a questionnaire is used, it may be comprised entirely of closed questions, multiple-response questions, combination of all question styles. Data collected by questionnaire of 100 people on different level that can be used during a survey. 1

Questionnaire This research paper is based on a questionnaire having 25 entirely closed questions, multiple-response questions, and combination of all question styles. Personal reflection - requires the researcher to reflect upon, and evaluate, their own experiences, memories, values and opinions in relation to a specific issue or topic. CREDIT CARD TYPES:- Gold Credit Card:-Gold Credit cards made for higher income groups who also have higher credit rating. It is status symbol and it is considered prestigious. Cash withdrawal limit is higher. Credit limit is higher Provides one Add-on card which can be given to either, spouse, children or parents of the credit card holder Provides many privileges such as travel insurance, reward points, cash back offers etc. Platinum or Titanium Card:-Platinum or Titanium Cards are similar to gold credit cards but they have few more additional benefits. Protections against credit card loss and theft, Protection against online fraud transactions, Protection against sickness and injury by an accident. There is no yearly fee. Silver credit card:- Silver credit cards are standard credit cards available and most of the employed people with 4 or 5 year s experience can own this type of card, Lower membership fees, The applicant need not be a high-salaried person to buy silver card, The interest rate is 0% initially between 6-9 months when transferring account balance from one credit provider to another one. Rewards Credit Card: This card has rewards attached to it on based on usage of the card, for e.g. A card may offer 5% discount on fuel, if it is used to buy fuel and gas, or a card may offer cash back facility if a certain amount is spent through it. Business Credit Card: This card is available for businessmen who have large scale, small scale or medium scale business to look after. This card is highly useful for facilitating businessman s training programs, travel and entertainment programs. Kisan Credit Card:- credit card to provide affordable credit for farmers in India. Prepaid Credit Card: This is directly connected to saving account. The payments from this card can be made until there is balance in the account. Low Interest Rate Credit Cards: This credit card is highly useful as they will have low interest rates. CREDIT CARD PAYMENT PROCESSING--HOW IT WORKS:- This document provides an overview of how online credit card processing works. Credit card payment processing for your store takes place in two phases: authorization (getting approval for the transaction that is stored with the order) and settlement (processing the sale which transfers the funds from the issuing bank to the merchant's account). The flow charts below represent the key steps in the process starting from what a customer sees when placing an order through completing the sale and finishing with the merchant processing the sale to collect funds. 2

Diagram no.1 AUTHORIZATION PROCESS 1. When the buyer clicks the "Checkout" button, they are sent to secure servers to complete the checkout process. The Buyer (cardholder) places an order at the merchant's site by clicking the "Send Order" button on the Review Order page during checkout. 2. Yahoo [5] sends the authorization request to First Data Merchant Services (FDMS), the payment processor. 3. FDMS sends the authorization request to the issuing bank (or credit card association). The authorization request includes: - the credit card number, expiration date, the billing address (used for AVS validation), the CVV number (if entered), and the amount of the order The Issuing Bank (or Credit Card Association): validates the card number and expiration checks the amount of the order against the available credit, checks the billing address provided against the billing address on file, validates the CVV number (if provided) If approved, the amount of the order is reserved from the total of available credit for the cardholder. 4. The Issuing bank (or Credit Card Association) sends the authorization response to FDMS. The authorization response consists of either an approval along with Address Verification System (AVS) and Card Verification Value (CVV) response codes or a decline. 5. Depending on the state of the authorization, the buyer (cardholder) receives instructions or confirmation of the order: o If declined, the buyer (cardholder) is informed and asked to try a different payment method. o If the authorization is approved by the Issuing Bank (Credit Card Associations) then the buyer (cardholder) is taken to the Order Confirmation page. Diagram no.2 3

Settlement process for PayPal (separate authorization and capture):-the merchant signs in to their account and goes to the Order Manager. The merchant reviews the order (including AVS and CVV response codes) for signs of fraud. When ready to complete the sale, the merchant clicks the "Capture Funds" button in the transaction panel of the order. Clicking "Capture Funds" initiates the settlement process. The amount captured is transferred immediately to your PayPal account. ADVANTAGES AND DISADVANTAGES OF CREDIT CARD Like most things, there are advantages and disadvantages to credit cards. Knowing some of these can help you decide if you do or do not want to use credit cards. ADVANTAGES: Purchase Power and Ease of Purchase - Credit cards can make it easier to buy things. If you don't like to carry large amounts of cash with you or if a company doesn't accept cash purchases (for example most airlines, hotels, and car rental agencies), Protection of Purchases - Credit cards may also offer you additional protection if something you have bought is lost, damaged, or stolen. Both your credit card statement (and the credit card company) can vouch for the fact that you have made a purchase if the original receipt is lost or stolen. In addition, some credit card companies offer insurance on large purchases. Building a Credit Line - Having a good credit history is often important, not only when applying for credit cards, but also when applying for things such as loans, rental applications, or even some jobs. Having a credit card and using it wisely (making payments on time and in full each month) will help you build a good credit history. Emergencies - Credit cards can also be useful in times of emergency. While you should avoid spending outside your budget (or money you don't have!), sometimes emergencies (such as your car breaking down or flood or fire) may lead to a large purchase (like the need for a rental car or a motel room for several nights.) Credit Card Benefits - In addition to the benefits listed above, some credit cards offer additional benefits, such as discounts from particular stores or companies, bonuses such as free airline miles or travel discounts, and special insurances (like travel or life insurance.) While most of these benefits are meant to encourage you to charge more 4

money on your credit card (remember, credit card companies start making their money when you can't afford to pay off your charges!) the benefits are real and can be helpful as long as you remember your spending limits. DISADVANTAGES:- Blowing Your Budget -- The biggest disadvantage of credit cards is that they encourage people to spend money that they don't have. Most credit cards do not require you to pay off your balance each month, so even if you only have $100, you may be able to spend up to $500 or $1,000 on your credit card. While this may seem like 'free money' at the time, you will have to pay it off -- and the longer you wait, the more money you will owe since credit card companies charge you interest each month on the money you have borrowed. High Interest Rates and Increased Debt -- Credit card companies charge you an enormous amount of interest on each balance that you don't pay off at the end of each month. This is how they make their money and this is how most people in the United States get into debt (and even bankruptcy.) 1. Credit Card Fraud - Like cash, sometimes credit cards can be stolen. They may be physically stolen (if you lose your wallet) or someone may steal your credit card number (from a receipt, over the phone, or from a Web site) and use your card to rack up debts. The good news is that, unlike cash, if you realize your credit card or number has been stolen and you report it to your credit card company immediately, you will not be charged for any purchases that someone else has made. Diagram no.3 The growth scenario in Electronic Payments:- Debit cards, ever since the numbers have been revealed have gone way above the credit card numbers. The 24 crore (240 million) debit cards out there far outnumber the 1.76 cr. credit cards, a number that has been declining since 2008 January. 5

According to the diagram no. of Credit cards active in India are very less than no. of Debit cards. The popularity and usage of Credit card is very less as compared to Debit cards. Banks have taken large hits on credit card portfolios, and have thus cut issuances. Debit cards are issued by default with most bank accounts now, with core banking systems becoming universal, and the National Financial Switch (NFS) allowing all member bank accounts to inter-transact through ATMs. Debit cards are easier to get, since you need no credit assessment (you can t spend more than is in your account at any given time). Diagram no.4 Even though the no. of active Credit cards is less than that of Debit card, the amount transacted using Credit cards during 2006-11 is more than, Debit cards. It means those users of credit cards use it for high amount purchases. OTHER PAYMENT MECHANISMS: - There are other types of payments. (Focusing on user payments, not inter-bank RTGS, Clearing Mechanisms of using G-Secs as collateral or barter/repo systems) 6

Cash Cheques Electronic Clearing Services (ECS National Electronic Fund Transfers (NEFT)/ Electronic Fund Transfers (EFT) Real Time Gross Settlement (RTGS) Table no-1 Particulars Male Female Credit Card & Debit Card User 20 09 Debit Card User 41 30 Diagram no.5 ----- - According to the diagram no-5 Debit Card Users are large in numbers than Credit Card. Table no-2 Age Group 15-25 25-35 35-45 45-55 55 & Above Annual Income Up to 100000 1 100001-500000 5 13 8 500001-1000000 2 1000001-Above 7

Diagram no 6- Age Group Annual Income According to diagram no-6 age group of 25-35yrs having Rs.100001-500000 annual incomes prefer to use credit card more. Table no-3 Credit Purchase Amount 1000-10000 10001-20000 20001-30000 30001 & More Annual Income Up to 100000 100001-500000 18 2 500001-1000000 4 3 1000001-Above 2 Diagram no-7 8

Most people are having annual income between 100001-500001 and they prefer to purchase on credit up to 1000-10000. Table no-4 for total Sample Particulars Yes No Debit Card popular than Credit Card 82% 18% Features of Debit Card can be brought in Credit Cards? 79% 21% Credit card Stolen/Lost 16% 84% Credit Card Fraud 23% 77% RTGS Users 49% 51% Diagram no-8 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Yes No Debit Card popularity than Cradit Features of Debit to Credit Credit card stolen/lost Credit card Fraud RTGS Users FINDING: According to the diagram no-8 Debit Card and RTGS Users are large in numbers than Credit Card, but more people interested to purchase credit card. Keep track of all your purchases. Don't spend outside your budget. Pay off your balance on all of your credit cards at the end of each month. Don't loan your credit or give out your credit card information to anyone but reliable companies. If you lose your card or wallet, report it to your credit card company immediately. 9

References:- 1. C.S.V. Murthy, E-Commerce,6 th Edition, Mumbai pp 625-664 Bibliography 2. RBI Report 2010-11. 3. http://www.education.com/definition/research-methodology 4. Kothari C R "Research Methodology Methods and Techniques, 2nd Edition, New Delhi. 5. 4. RBI, Money and Banking, June 2011. 6. http://en.wikipedia.org/wiki/credit_card 7. www.google.com 8. www.capitalmind.in 9. www.investopedia.com 10. www.unionbankofindia.com 11. http://www.my3q.com/home2/214/bajajanmol/69717_viewdata.phtml?record=1 12. 11.http://www.cefe.illinois.edu/research/reports/credit%20card%20usage%20of%20c ollege%20students_lsu_092003.pdf 10