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Our society was once upon a time functioning
without money; it is again likely to become moneyless. While ancient
society was confronted with the problems of adjusting mutually
satisfactory rates and basis of exchange, future society, with the
help of computers, electronics and telecommunications, credit cards,
telephone and other modern means of communications, would settle
financial transactions instantly. Money as a medium of exchange will
serve its function. The difference will be that in future coins,
currency notes, cheques, etc., will be dispensed with in favour of
records. India has entered the stage of credit card system and
credit cards are gaining increasing relevance to facilitate
industrial, commercial and agricultural transactions.
Credit was first used in Assyria, Babylon and
Egypt 3,000 years ago. The Bill of Exchange – the forerunner of bank
notes - was established in the 14th century. Debts settled by
one-third cash and two-thirds bill of exchange paper money followed
only in the 17th century.
The first advertisement for credit was placed in
1730 by Christopher Thornton who offered furniture that could be
paid off weekly.
From the 18th century until the early part of the 20th, tallymen
sold clothes in return for small weekly payments; they were called
“tallymen” because they kept a record of tally of what people had
brought on a wooden stick. One side of the stick was marked with
notches to represent the amount of debt and the other side was a
record of payments. In the 1920s shopper’s plate – “buy now, pay
later” system – was introduced in USA. It could only be used in
shops which issued it.
In 1950, Diners Club and American Express launched their charge
cards in USA, the first ‘plastic money’. In 1951, Diners Club issued
the first credit card to 200 customers who could use it at 27
restaurants. With the magnetic strip in 1970, the credit card became
a part of the information age.
The origins of the bank credit card have been traced to John C.
Biggins, a consumer credit specialist at the Flatbush National Bank
of Brooklyn, New York. In 1946, Biggins launched a credit plan
called Charge-It. The programme featured a form of scrip that was
accepted by local merchants for small purchases. After the sale was
completed, the merchant deposited the scrip in a bank account, and
the bank billed the customer for the total scrip issued.
Concept of credit card
Progress in civilisation in its turn has brought out radical changes
in the manner of trading. The need for something intrinsically
useful and easily applicable in everyday dealing is clearly felt.
Cash in the form of currency notes and coins makes up just one form
of the payment system. Development in banking while also giving
inputs to the further development of cash brought about a second
phase in payment namely paper instructions such as cheques and
credit transfers. The requirement for greater flexibility and
convenience has led to electronic payments, and this is where
plastic cards have proved their worth. It allows the card issuers to
limit the sum of money the card-holders wish to spend. The spending
of card-holders who have defaulted on payments or who are over their
credit limit can be restricted until the balances are cleared.
Definition of credit card
A credit card is a credit-token within the meaning of section 14(1),
Consumer Credit Act 1974 of the UK which defines a credit-token as a
card, cheque, voucher, coupon, stamp, form booklet or other document
or thing given to an individual by a person carrying on a consumer
credit business, who undertakes:-
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that on the production of it (whether or not some other action is
also required), he will supply, cash, goods and services (or any of
them) on credit, or
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that were, on the production of it to third party (whether or not
any other action is also required), the third party supplies cash,
goods and services (whether or not deducting any discount or
commission), in return for payment to him by the individual.
In very simple words credit card can be termed as an unsecured
personal loan offered to customers by the banks where the
card-holder could purchase goods and services from authorised
merchant or merchant establishments (MEs) of the bank up to a fixed
limit on credit. Such credit is normally made available for a period
of 30 to 45 days. This is turn helps earn income by way of
commission from its merchant establishments; the scheme provided
large scope for sale and increased turnover with assured and prompt
payment.
In 1951, the Franklin National Bank in New York issued the first
modern credit card. Unsolicited credit cards were sent to
prospective card-holders who were not subject to credit screening
prior to being sent a card. Merchants signed agreements to accept
the cards. When a purchase was made, the card-holder presented the
card to the merchant, who would copy the information on the
merchant’s account at Franklin Bank in the amount of the
transactions, less the discount rate. If a purchase exceeded the
merchant’s floor limit, the merchant was required to call the bank
for approval. Franklin National Bank’s Credit Card programme was
copied by hundreds of other banks in the late 1950s and early 1960s.
The Bank of America issued Bank Americard in 1958 and eight years
later, in 1966, the banks comprising the Western State Bank Card
Association issued the Master Charge Card. Bank Americard and
Mastercharge card became the focal points for the eventual groupings
of all bank cards throughout the world. The VISA and the MASTER the
largest credit cards today appeared in market in 1966. These two
international cards are very popular and are accepted and honoured
all over the world in 170 countries. These two independent card
companies led to latest innovations in the credit card business. Now
the credit card system has become universally popular throughout the
world including the Communist countries. At the end of 1995 and 1980
a million cards were used in the world. The total number of credit
card users in India is currently in excess of 80 lakh and now more
than 30 banks are chasing customers with their cards.
Credit cards in India
Credit cards have finally arrived in India. The card industry, which
is growing at the rate of 20 per cent per annum is flooded with
cards ranging from gold, silver, global, smart to secure…the list is
endless. From just two payments in the early ‘80s, the industry now
houses over 10 major players vying for a major chunk of the card
pie.
Currently, four major bishops are ruling the card empire - Citibank,
Standard Chartered Bank, HSBC and State Bank of India (SBI). The
industry, which is catering to over 3.8 million1 card users, is
expected to double by the fiscal 2003. According to a study
conducted by State Bank of India, Citibank is the dominant player,
having issued 1.5 million cards so far. Standard Chartered Bank
follows way behind with 0.67 million, while Hongkong Bank has 0.3
million credit card customers. Among the nationlaised banks, SBI
tops the list with 0.28 million cards, followed by Bank of Baroda at
0.22 million.
The credit card market in India, which started out in 1981, is on
the verge of an unprecedented boom. Between 1987 and 2000, the
market has virtually grown to over 3.8 million cards with almost
25-30 per cent growth in new card-holders.
India is generating more credit card spenders than spending places.
While card-base and appends are growing at a spiffy 25-30 per cent2
annually, the number of merchant establishments which accept cards
is growing selectively sluggish. The figure was put at 75,000–80,000
a couple of years ago, and now stands at 100,000 on both the Visa
and MasterCard loops. As opposed to that, there are 2.5 million
card-holders and 3.3 million cards (some, obviously, have more than
one) and the numbers are growing very strongly.
The seven million Indian credit card industry has been growing over
25 per cent3 annually and has now more than 30 banks chasing
customers with their cards. Still, credit cards in India have made
business sense only to a few.
“The annual growth rate is good, but it is only 20 per cent of the
card base, that is generating revenue,” says Roopan Asthana,
manager, Card Products Division of HSBC. Nearly 45-50 per cent of
the card-holders are estimated to be inactive, while another 30 per
cent use the card as a charge card without using the revolving
facility cards are expected to account for 33 per cent of all
purchases by 2000 and 43 per cent by 2005.
The credit card embodies two essential aspects of the basic banking
function - the transmission of payments and the granting of credit.
Therefore, in its true sense, a ‘credit’ card must offer the opinion
of revolving credit. This is very akin to the overdraft facility
offered by banks to their account holders. A credit card holder does
not necessarily have to settle his entire account at the end of the
month for he has the option to make partial payment in subsequent
months. In fact, when the card-holder makes the full payment at the
end of the month he is said to be using his credit card as a ‘charge
card’. Incidentally, the interest paid by the card-holder on the
‘credit’ utilised by him is what makes the business of credit cards
profitable from the point of view of the bank issuing the card.
Credit card frauds
In a recent case of credit card fraud busted by the Chennai Police,
it was found that the credit card particulars had been stolen from
many hotels in several foreign cities such as Singapore. These were
used in preparing duplicate credit cards through which purchases
were made from shops in Chennai.
The incident highlights the risks that are inherent in the use of
credit cards. Citizens have always been very skeptical about use of
credit cards for online purchases fearing the stealing of credit
card information and their use on the Internet lack of “signature”
was the principal reason for fear. This fear has been one of the
reasons for the slow growth of e-commerce and perhaps also
contributed to some of the dotcom failures also.
In the initial days of e-commerce, there were incidents where
“pseudo sites” were created to gather credit card information in
exchange for some service. Many of the e-commerce sites used to save
the credit card details on the web server which were hacked into and
information stolen. Sometimes, the unencrypted flow of credit card
information was collected by an eavesdropper. All these are now
things of the past. At present, the e-commerce sites use various
measures to prevent misuse of credit card data. First, there is
encryption of data between the client’s browser and the e-commerce
site. The credit card information also is sent directly to the
payment gateway and the e-commerce site avoids storing of the data
on its server. As a result of some of these measures, exchange of
credit card data online is saved even though the authorisation
itself is done on the basis of information otherwise found on the
face of a credit card.
Some of the e-commerce sites today take a precaution to ensure that
the billing address on the card and the destination of goods
purchased are same to ensure that there is no third party who is
benefiting from the purchase. This sometimes creates an
embarrassment when a person is trying to send a gift to another
person. One of the precautions that Indian e-commerce site owners
are adopting in such cases is to verify from the destination address
the genuineness of the transaction and the relationship between the
credit card holder and beneficiary.
It can therefore be said that the biggest risk for credit card
frauds online is not from online security problems but from the
possibility of the credit card data being offline in a hotel or a
shop where the user parts with the card for sometime.
The problems that arise to the credit card users are many. There is
harassment from the clutches of bankers also. Some banks issued
credit cards to people without verifying their credit worthiness.
This led the card-holders into a debt. Considering all these things,
the Chennai chapter of the Credit Card Users Association was
launched on April 25, 20074. It is organising credit card surrender
campaign for such card-holders. So the repaid growth of credit
holders will be going up.
The motto of credit cards, besides providing the facility of ‘buy
now and pay later’, also provides a range of benefits like free
insurance cover, preferential treatment at airports, hotels,
restaurants, hospitals and other merchant establishments, discount
offers and the like. Lured by these benefits, middle class and upper
class people are increasingly becoming interested in card
membership. The card-holder feels confident of his status and
prestige. The financial health of Indian banks is also expected to
improve, allowing them to invest in technology and push the card
business strongly.
1 Plastic Money: the currency of Modern India (July 14, 2000) –
www.personalfn.com
2 Bringing card usage down to earth – Raghu Mohan (Economic Times –
Oct.8,1999)
3 Indian Credit Card holders are poor users–Times New Network (July
21,2003) The Economic Times, online.
4 Credit Card users’ association launched, The
Hindu (April, 26, 2007)
J. Sheebarani Gnanapushpam
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