credit card industry in india
TRANSCRIPT
CREDIT CARD INDUSTRY IN INDIA
SELWYN PEREIRA
LPGD / AP10 / 0782
SPECILIZATION : FINANCE
PRIN.L.N.WELINGKAR INSTITUTE OF MANAGEMENT DEVELOPMENT AND
RESEARCH
2011
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ACKNOWLEDGEMENT
Apart from the efforts from my end, the success of this project depends largely on the
encouragement and guidelines of many others. I take this opportunity to express my
gratitude to J P Morgan India and the people who have been instrumental in the
successful completion of this project.
I would like to show my greatest appreciation to Mr. Mohan Kumar. I can’t say thank you
enough for his tremendous support and help. I feel motivated and encouraged every
time I attend his meeting. Without his encouragement and guidance this project would
not have materialized.
The guidance and support received from all the team members including Ajay & Sachin
who contributed and
are contributing to this project, was vital for the success of the project. I am grateful for
their constant support and help.
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CERTIFICATE FROM THE GUIDE
This is to certify that the Project work titled “CREDIT CARD INDUSTRY IN INDIA”
is a bonafide work carried out by Mr. SELWYN PEREIRA (Roll No LPGD/AP10/0782)
a candidate for the Post Graduate Diploma examination of the Welingkar Institute of
Management under my guidance and direction.
SIGNATURE OF GUIDE:
NAME: Mr. Mohan Kumar
DESIGNATION: AVP
ADDRESS: J P Morgan India Private Limited
Paradigm Towers, Mindspace,
Malad West, Mumbai 400064
DATE: 29th AUGUST 2011
PLACE: Mumbai
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TABLE OF CONTENTS
Sr.No. Contents Page Number
1 Introduction to Credit Cards 8
2 Characteristics of the Indian Market 15
3 Different Types of Credit Cards and Features 15
4 How Credit Card works 25
5 Bank Credit Cards and Consumer Behavior 48
6 Customer Analysis 51
7 Competitive Landscape in India 55
8 Recent events in the industry 56
9 Advantages of credit card transaction 60
10 Marketing of Credit card 65
11 Types of Credit card usage 67
12 Advertising & Promotion 70
13 Credit Card Advertising Rules and Laws 75
14 Methods and tools used in credit card industry to detect fraud 77
15 Ways to Avoid Credit Card Fraud 81
16 Smart Cards – A window to the future 83
17 Growth in the electronic payments sector 88
18 Quantitative market research 95
19 Uses of Smart Cards 108
20 Disadvantages Of A Smart Card 118
21 Conclusion & Recommendations 119
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Introduction to Credit Cards
As far back as the late 1800s, consumers and merchants exchanged goods through the
concept of credit, using credit coins and charge plates as currency. It wasn't until about
half a century ago that plastic payments as we know them today became a way of life.
Early beginnings
In the early 1900s, oil companies and department stories issued their own proprietary
cards, according to Stan Sienkiewicz, in a paper for the Philadelphia Federal Reserve
entitled "Credit Cards and Payment Efficiency." Such cards were accepted only at the
business that issued the card and in limited locations. While modern credit cards are
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mainly used for convenience, these predecessor cards were developed as a means of
creating customer loyalty and improving customer service, Sienkiewicz says.
The first bank card, named "Charg-It," was introduced in 1946 by John Biggins, a
banker in Brooklyn, according to MasterCard. When a customer used it for a purchase,
the bill was forwarded to Biggins' bank. The bank reimbursed the merchant and
obtained payment from the customer. The catches: Purchases could only be made
locally, and Charg-It cardholders had to have an account at Biggins' bank. In 1951, the
first bank credit card appeared in New York's Franklin National Bank for loan customers.
It also could be used only by the bank's account holders.
The Diners Club Card was the next step in credit cards. According to a representative
from Diners Club, the story began in 1949 when a man named Frank McNamara had a
business dinner in New York's Major's Cabin Grill. When the bill arrived, Frank realized
he'd forgotten his wallet. He managed to find his way out of the pickle, but he decided
there should be an alternative to cash. McNamara and his partner, Ralph Schneider,
returned to Major's Cabin Grill in February of 1950 and paid the bill with a small,
cardboard card. Coined the Diners Club Card and used mainly for travel and
entertainment purposes, it claims the title of the first credit card in widespread use.
Plastic debuts
By 1951, there were 20,000 Diners Club cardholders. A decade later, the card was
replaced with plastic. Diners Club Card purchases were made on credit, but it was
technically a charge card, meaning the bill had to be paid in full at the end of each
month.
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According to its archivist, American Express formed in 1850. It specialized in deliveries
as a competitor to the U.S. Postal Service, money orders (1882) and traveler's checks,
which the company invented in 1891. The company discussed creating a travel charge
card as early as 1946, but it was the launch of the rival Diners Club card that put things
in motion.
In 1958 the company emerged into the credit card industry with its own product, a
purple charge card for travel and entertainment expenses. In 1959, American Express
introduced the first card made of plastic (previous cards were made of cardboard
or celluloid).
American Express soon introduced local currency credit cards in other countries. About
1 million cards were being used at about 85,000 establishments within the first five
years, both in and out of the U.S. In the 1990s, the company expanded into an all-
purpose card. American Express, or Amex as it often is called, is about to celebrate its
50th credit card anniversary.
Closed-loop system
The Diners Club and American Express cards "functioned in what is known as a
'closed-loop' system, made up of the consumer, the merchant and the issuer of the
card," Sienkiewicz writes. "In this structure, the issuer both authorizes and handles all
aspects of the transaction and settles directly with both the consumer and the
merchant."
In 1959, the option of maintaining a revolving balance was introduced, according to
MasterCard. This meant cardholders no longer had to pay off their full bills at the end of
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each cycle. While this carried the risk of accumulating finance charges, it gave
customers greater flexibility in managing their money.
Bank card associations
"The general-purpose credit card was born in 1966, when the Bank of America
established the BankAmerica Service Corporation that franchised the BankAmericard
brand (later to be known as Visa) to banks nationwide," Sienkiewicz writes.
In 1966, a national credit card system was formed when a group of credit-issuing banks
joined together and created the InterBank Card Association, according to MasterCard.
The ICA is now known as MasterCard Worldwide, though it was temporarily known as
MasterCharge. This organization competes directly with a similar Visa program.
"The new bank card associations were different from their predecessors in that an
'open-loop' system was now created, requiring interbank cooperation and funds
transfers," Sienkiewicz says. Visa and MasterCard still maintain "open-loop" systems,
whereas American Express, Diners Club and Discover Card remain "closed-loop."
Visa and MasterCard's organizations both issue credit cards through member banks
and set and maintain the rules for processing. They are both run by board members
who are mostly high-level executives from their member banking organizations.
As the bank card industry grew, banks interested in issuing cards became members of
either the Visa association or MasterCard association. Their members shared card
program costs, making the bank card program available to even small financial
institutions. Later, changes to the association bylaws allowed banks to belong to both
associations and issue both types of cards to their customers.
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Credit card processing evolves
As credit card processing became more complicated, outside service companies began
to sell processing services to Visa and MasterCard association members. This reduced
the cost of programs for banks to issue cards, pay merchants and settle accounts with
cardholders, thus allowing greater expansion of the payments industry.
Visa and MasterCard developed rules and standardized procedures for handling the
bank card paper flow in order to reduce fraud and misuse of cards. The two
associations also created international processing systems to handle the exchange of
money and information and established an arbitration procedure to settle disputes
between members.
Other issuers join the party
Although American Express was among the first companies to issue a charge card, it
wasn't until 1987 that it issued a credit card allowing customers to pay over time rather
than at the end of every month. Its original business model focused on the travel and
entertainment charges made by business people, which involved significant revenue
from merchants and annual membership fees from customers. While these products are
still in its tool chest, the company has developed numerous no-annual fee credit cards
offering low introductory rates and reward programs, similar to as traditional bank cards.
Another relatively recent entry into the card business is Discover Card, originally part of
the Sears Corporation. According to Discover, its first card was unveiled at the 1986
Super Bowl. Discover Card Services sought to create a new brand with its own
merchant network, and the company has been successful at developing merchant
acceptance. A 2004 antitrust court ruling against Visa and MasterCard -- initiated by the
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U.S. government and the Department of Justice -- changed the exclusive relationship
that Visa and MasterCard enjoyed with banks. It allows banks and other card issuers to
provide customers with American Express or Discover cards, in addition to a Visa or
MasterCard.
The future
While the plastic card has been the standard for a half century, recent developments
show alternative forms of payment rising to prominence, from online services such as
PayPal to credit card keyfobs to chips that can be implanted into cell phones or other
devices.
But with the sheer volume of devices in use around America whose sole purpose is to
read a flat piece of plastic with a magnetic stripe, the "card" in "credit card" is unlikely to
pass from the scene any time soon.
The Shape of Credit Cards
Credit cards were not always been made of plastic. There have been credit tokens
made from metal coins, metal plates, and celluloid, metal, fiber, paper, and now mostly
plastic cards.
First Bank Credit Card
The inventor of the first bank issued credit card was John Biggins of the Flatbush
National Bank of Brooklyn in New York. In 1946, Biggins invented the "Charge-It"
program between bank customers and local merchants. Merchants could deposit sales
slips into the bank and the bank billed the customer who used the card.
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Diners Club Credit Card
In 1950, the Diners Club issued their credit card in the United States. The Diners Club
credit card was invented by Diners' Club founder Frank McNamara and it was intended
to pay restaurant bills. A customer could eat without cash at any restaurant that would
accept Diners' Club credit cards. Diners' Club would pay the restaurant and the credit
card holder would repay Diners' Club. The Diners Club card was at first technically a
charge card rather than a credit card since the customer had to repay the entire amount
when billed by Diners Club.
American Express issued their first credit card in 1958. Bank of America issued the
Bank Americard (now Visa) bank credit card later in 1958.
The Popularity of Credit Cards
Credit cards were first promoted to traveling salesmen (more common in that era) for
use on the road. By the early 1960s, more companies offered credit cards, advertising
them as a time-saving device rather than a form of credit. American Express and
MasterCard became huge successes overnight.
By the mid-'70s, the U.S. Congress begin regulating the credit card industry by banning
such practices as the mass mailing of active credit cards to those who had not
requested them. However, not all regulations have been as consumer friendly. In 1996,
the U.S. Supreme Court in Smiley vs. Citibank lifted restrictions on the amount of late
penalty fees a credit card company could charge. Deregulation has also allowed very
high interest rates to be charged.
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Characteristics of the Indian Market
In 1951, the first bank credit card appeared in New York's Franklin National Bank for
loan customers. The idea, though, had already been experimented with in various forms
much before. In India, Andhra Bank was the first to introduce credit cards in 1981.
The credit card market in India is about 3 million with a value turnover of around
Rs.2500 crores. 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.
Different Types of Credit Cards and Features
Just as there are too many credit card companies to count, there seems to be just as
many different credit cards, all claiming to offer you the best possible deal. Since no two
people are alike, not all programs and incentives will work the same for everyone.
Finding the one that works best for you is key to maintaining responsible credit card
use.
Types of Credit Cards
One of the more recent additions to the credit card world is the low-interest credit card.
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These cards offer a significantly lower interest rate. Also, most of these cards are also
balance-transfer cards. They offer you the option of transferring a balance from a higher
interest rate card and, for a specified period of time, your transferred balance will be at
either 0% interest or something quite low.
Since credit cards have gotten to be such a lucrative business, many corporations have
jumped on the bandwagon. Even airlines now offer credit cards to customers that will
come with a certain amount of frequent flyer miles attached to them, depending on your
balance and purchases. If you do a fair amount of traveling, this can be a real bonus.
Along these same lines, reward credit cards are growing in popularity. Competition is
stiff and many card companies are now offering you many different reward or incentive
options for using their card. Once you accumulate enough points, the rewards will keep
coming in. These can be anything from travel insurance to small appliances and
anything in between. If you use a card regularly, finding one that has a reward program
can really pay off.
Another form of credit card is the instant approval card. Again, many of these
applications come in the mail, some even by e-mail. These cards offer you the
opportunity to apply for a card and receive instant approval, meaning no wait time. Once
you fill out the application, a quick background check will be done and you will have
your approval almost immediately. Other cards can take up to two weeks to process
and approve your application. Although you can get instant approval, this does not
always mean you can get instant credit. Some companies will supply you with a
temporary credit card number and allow you to begin making purchases immediately,
while other will not due to an increase in credit card fraud potential.
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Different types of credit cards offer several different options, depending on what your
needs are. Some are geared toward individual consumers, while others are set up in
ways that work best for small business needs. To know what type of credit card fits your
needs, let's review a few of your options.
Business Credit Cards
A business credit card offers the business owner the opportunity to keep business and
personal expenses separate. The credit card may offer special business rewards and
saving opportunities that go above and beyond what the individual credit card owner
may have. Since money management is essential in successfully running a business,
the card may offer an expense management service that will allow you to keep track of
the outgoing money. You can obtain additional credit cards for employees who may
need them for travel expenses and such as well as have a higher credit limit than you
normally would on an individual credit card.
Student Credit Cards
Many credit card companies will issue student credit cards that have lower credit limits
and fewer incentives to help keep their spending in check. Still, take note. Many college
students graduate with a credit balance that averages between $3,000 and $7,000 and
with interest rates, this can be a real problem when trying to pay them off.
Prepaid Debit Cards
Prepaid debit cards are one type of credit card that has grown significantly in recent
years. With prepaid debit cards, you have actually prepaid and set the credit limit by
depositing money onto the debit card. Depending on how much you have deposited into
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the debit card's account depends on how much credit limit you want on that card. This is
a great way to have the convenience of a credit card without the chance of charging
more than you can afford to pay off.
Credit Cards For Bad Credit
It is possible, even with bad credit to obtain a credit card. These cards will come with
some restrictions not typically found on other types of credit cards. Your credit limit will
be lower and your interest rate higher. Some may require you to have a secured credit
card, meaning you have to maintain a savings or some other type of account that will
cover the expenses on the credit card. Once you have established that you will be
responsible, some, if not all, of your restrictions may be lifted.
Cash Back Credit Cards
Many credit cards will now offer you cash back incentives for using their credit cards.
Depending on how much your balance is and how often you use the credit card, you
can earn cash back for your purchases. Some companies offer 1% off your balance
while others, like Sears, will offer you cash off purchases made in their store. Either
way, if you are planning on using a credit card, finding one that will offer you a cash
incentive is a smart choice.
There are 11 major types of credit cards being provided by banks and financial
institutions in India. These cards provide a wide variety of financial benefits to holders.
Following are various types of credit cards available in India:
- Premium Credit Cards
- Cash Back Credit Cards
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- Gold Credit Cards
- Airline Credit Cards
- Silver Credit Cards
- Business Credit Cards
- Balance Transfer Credit Cards
- Co-branded Credit Cards
- Low Interest Credit Cards
- Lifetime Free Credit Cards
- Rewards
There are some additional credit cards that are available in India as well. Rewards
credit cards available in India can be subdivided into six categories – Points, Hotels and
Travels, Retail, Auto and Fuel.
Premium Credit Cards – There are 32 various premium credit cards available in India :
- ABN AMRO MakeMyTrip Go Credit Card
- ABN AMRO Platinum Credit Card
- ABN AMRO Titanium One Credit Card
- American Express Kingfisher First Credit Card
- American Express Platinum Credit Card
- Axis Bank Visa Platinum Credit Card
- Bajaj Allianz Super Value Titanium Credit Card
- Citibank Platinum Credit Card
- Deutsche Bank Landmark Platinum Credit Card
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- Deutsche Bank Miles & More Platinum Credit Card
- Deutsche Bank Miles & More Signature Credit Card
- Deutsche Bank Platinum Credit Card
- HDFC Bank Platinum Plus Credit Card
- HDFC Bank Titanium Credit Card
- HDFC Bank Visa Signature Credit Card
- HSBC Platinum Credit Card
- ICICI Bank Ascent American Express Credit Card
- ICICI Bank Platinum Credit Card
- ICICI Bank Platinum Identity Credit Card
- ICICI Bank Platinum Premiere Credit Card
- ICICI Bank Thomas Cook Titanium Credit Card
- ICICI Bank Titanium Credit Card
- ICICI Signature Credit Card
- Jet Airways Citibank Platinum Credit Card
- Kotak Mahindra League Platinum Credit Card
- Kotak Mahindra Royal Signature Credit Card
- SBI (State Bank of India) Platinum Credit Card
- Standard Chartered Emirates Platinum Credit Card
- Standard Chartered Emirates Titanium Credit Card
- Standard Chartered Platinum Credit Card
- Standard Chartered Super Value Titanium Credit Card
- Yatra Barclaycard Platinum Credit Card
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Gold Credit Cards – There are 40 gold credit cards available in India :
- ABN AMRO Smart Gold Credit Card
- American Express Gold Charge Card
- American Express Gold Credit Card
- American Express HPCL Credit Card
- Axis Bank Gold Credit Card
- Axis Bank Gold Plus Credit Card
- Axis Bank Secured Credit Card
- Barclays Bank Gold Credit Card
- BOBACRD Gold MasterCard Credit Card
- BOBACRD Gold Visa Credit Card
- Cancard Visa International Gold Credit Card
- Citibank Cash Bank Credit Card
- Citibank Gold Credit Card
- Deutsche Bank Landmark Gold Credit Card
- Deutsche Bank Smart Gold Credit Card
- HDFC Bank Gold Business Credit Card
- HDFC Bank Gold Credit Card
- HDFC Womans Gold Credit Card
- HSBC Gold Credit Card
- ICICI Bank Airtel Gold Credit Card
- ICICI Bank Big Bazaar Gold Credit Card
- ICICI Bank Gold American Express A Credit Card
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- ICICI Bank HPCL Gold Credit Card
- ICICI Bank Orchid An Ecotel Credit Card
- ICICI Bank Solid Gold (MasterCard) Credit Card
- ICICI Bank Solid Gold (Visa) Credit Card
- ICICI Bank Toyota Credit Card
- ICICI Bank Travel Smart Credit Card
- IndianOil Citibank Gold Credit Card
- Jet Airways Citibank Gold Credit Card
- Jet Airways CitiBusiness Credit Card
- Kotak Mahindra Fortune Gold Credit Card
- Kotak Mahindra Trump Gold Credit Card
- NEXTGEN BOBCARD Gold Credit Card
- Reliance Gold Credit Card
- SBI Gold and More Credit Card
- SBI UBI (United Bank of India) Gold Credit Card
- Standard Chartered Gold Credit Card
- Standard Chartered Rotary Credit Card
- Times Card from Barclaycard and Times of Money
Cash back India Credit Cards - There are 20 different cash back credit cards available
in India and these cards offer a host of lucrative financial rewards to the cardholders.
HSBC Gold Credit Card - Following are some salient features of HSBC Gold
Credit Card:
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- There are 0% fuel surcharge facilities available at all outlets.
- Renewal fees is INR 2,000.
- There is balance transfer option.
- Regular interest rate is 3.1% per month.
- There is a maximum of 10% cash back offered on travel bookings.
- Cash advance fee is 2.5%. Minimum cash advance fee is Rs. 250.
- Credit limit is high.
- Issuer is VISA.
- There are no joining fees.
- Issuing bank is HSBC.
- Citibank Cash Back Credit Card
Following are some facts about Citibank Cash Back Credit Card:
- There is a maximum of 30% cash back. This offer is available at some selected
outlets in India.
- Cash advance fee is 2.5% per month. Minimum cash advance fee is INR 250.
- Cardholders always receive cash back benefits upon swiping the card at a
particular outlet.
- Card issuer is VISA.
- There is a fuel transaction waiver. The rate is 2.5% and offer is valid only in
petrol pumps of Indian Oil.
- Issuing bank is Citibank.
- There are no joining and renewal fees.
- There is 0% fuel surcharge facility that is available only at Indian Oil outlets.
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- Regular interest rate is 3.19% or 38.28% per annum.
ABN AMRO Titanium One Credit Card - Following are main features of ABN AMRO
Titanium One Credit Card:
- There is a maximum of 2% cash back that is available on regular purchases.
- Renewal fee is INR 2,000.
- There is a maximum of 5% cash back that is available on payments of utility bills.
- Regular interest rate is 3.5% per month.
- There is 0% fuel surcharge facility that is available at all outlets.
- Cash advance fee is 2.5%. Minimum cash advance fee is INR 300.
- There is balance transfer option.
- Issuer is MasterCard.
- Credit limit is high.
- Issuing bank is ABN Amro.
- Joining fee is INR 500.
Following are some other cash back credit cards that are available in India:
- Deutsche Bank Landmark Platinum Credit Card
- SBI Gold and More Credit Card
- ABN AMRO One Credit Card
- SBI (State Bank Of India) Silver and More Credit Card
- HDFC Bank Gold Credit Card
- LG SBI Credit Card
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- HDFC Womans Gold Credit Card
- Axis Bank Visa Platinum Credit Card
- HDFC Bank Platinum Plus Credit Card
- Taj Epicure Diners Club Credit Card
- HDFC Bank Platinum Plus Credit Card
- Kotak Mahindra Trump Gold Credit Card
- HDFC Bank Value Plus Credit Card
- ICICI Bank Ascent American Express Credit Card
- Standard Chartered Super Value Titanium Credit Card
- ICICI Bank Platinum Identity Credit Card
- Bajaj Allianz Super Value Titanium Credit Card
How credit cards work
Credit cards are the convenient transactions medium in many situations. The modern
world has made it possible to order merchandise by telephone or over the Internet.
However, it is impossible to transmit cash or checks through phone or internet. If the
person had to send a check by mail every time he/she ordered something over the
phone, his/her transaction would be not faster than if he/she ordered by mail. By giving
his/her credit card number over the phone/internet, the merchant need not wait for
his/her check and can send the merchandise immediately.
Secondly, the advantage of using a credit card as a medium of payments is that the
merchants can easily recognize and authenticate the card. If a customer presents a
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check for payment, the merchant must worry about whether or not the customer actually
has sufficient funds in his or her account to complete the payment. For frequent
customers and local banks, it is not too difficult to build sufficient trust between
merchant and customers to allow checks to work as well. But many merchants are
reluctant to take out-of-town checks because of the difficulty of tracking down customers
whose checks are returned by the bank. Even calling the customer’s bank to verify the
availability of funds does not guarantee that the merchant will be paid.
Checks usually take some days to clear through the banking system and be debited
from the customer’s account. Even if the customer’s balance was sufficient at the time
that the merchant accepted the check, it may not be able to cover the transaction once
the check finally reaches the bank. In order to promote the widespread acceptance of
credit cards, the issuing banks guarantee payment to the merchant as long as he or she
follows the procedures established for transaction approval. Before computer networks,
this meant checking the customer’s signature against the one on the card and looking
up the card number in a book of invalid card numbers (stolen cards, closed accounts,
non-paying customers, etc.). Now, approval happens in seconds by computer link.
Because the merchant is guaranteed payment on any approved transaction, accepting
a credit card is less risky than accepting a check from a customer whose
creditworthiness is unknown.
When the customer(credit card holder) present a credit card (say, a Visa/Master card),
the merchant’s staff usually swipes the card through a machine that reads information
from the magnetic stripe on the back end of the card, then types the amount of the
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purchase on the machine’s keypad. The machine contacts (by telephone line) the Visa
computers, which route the call to the bank that issued the card, which then verifies the
existence of the account, that the card being used has not been reported as stolen, and
that the transaction would not put the customer over his or her credit limit. On
confirmation based on the above mentioned process, the transaction concludes with
customer (credit card holder) signing the credit slip as an acknowledgment of the
transaction.
Who all are Involved?
Besides the Credit Card Holder and the merchant, there are quite a few intermediaries
involved in a typical credit-card transaction process. The Visa and MasterCard
organizations are cooperative ventures owned by the banks that issue their cards. In
addition to the organizations themselves, there are two banks involved in most credit-
card transactions—the acquiring bank that handles the merchants credit-card account
and the issuing bank that issued the card to the Card Holder(unless both the banks are
same).
In order to make the transaction flow faster as well as smooth, these three companies
cooperate in passing information very quickly. The cardholder’s issuing bank has up-to-
date information on the customer’s account status. However, it would be difficult if each
merchant had to figure out which bank issued the card and call a specific phone number
for each bank (as there are many banks that issue credit cards). To make the process
less complicated, Visa’s computers and the card issuers’ computers work together so
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that the merchant can communicate only with the Visa network, which then routes the
request to the appropriate bank to transmit account information.
The Visa network also coordinates the transfer of funds from the issuing bank, which
pays for the merchandise and extends credit to the customer through the acquiring
bank, which holds an account in the merchant’s name. The settlement process has
become much faster with the advent of electronic processing system.
Win – Win Situation
Each of the banks as well as the Visa or MasterCard organization involved spends lots
of money on the computers, information management systems and the personnel that
operate its credit-card services. The Visa and MasterCard organizations are mainly
funded by membership dues and fees paid by the banks that make up the
organizations.
There are mainly two ways; the banks can get the revenue from credit-card
transactions:
First, the acquiring bank charges a fee to the merchant in the form of a discount on
credit-card transactions. For example, if the customer (credit card holder) needs to pay
Rs.100 on any item, the merchant receives only a credit of Rs.98 or so. The acquiring
bank keeps about two percent of the transaction amount, some of which is shared with
the issuing bank through an interchange fee that is paid by the merchant’s bank to the
cardholder’s bank.
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The second source of revenue is the fees and interest charges that issuing banks
collect from their cardholders. These revenues depend not on the number or size of
transactions, but on the number of cardholders paying annual fees and on the volume of
cardholders’ balances that are not paid off within the grace/free credit period on or
before interest begins to be charged.
The acquiring bank gets revenue by withholding about two percent of the value of each
transaction, the issuing bank gets revenue by the interchange fee it receives from the
acquiring bank and through any charges it collects from cardholders.
The Visa and MasterCard networks receive money from dues and fees paid by all of the
banks that belong to their systems.
It is a win-win situation for credit card holders also as there is no need of carrying cash
and at the same time the customers can enjoy the free credit (grace) period.
Online Credit Card Transactions
It seems natural that online commerce would be done with credit cards. No physical
paper needs to be passed unlike cash or checks. We simply type our credit card
number into the merchant's World Wide Web (WWW) page payment form and wait for
our purchase to be shipped to us. The only thing that needs to pass between the
merchant and the buyer is the credit card number. The problem is, it's not that simple.
People have some legitimate fears about giving their credit card number out over the
Internet. It is an open network without any basic security provisions built in. Unless a
secure server is involved, one that uses SSL or S-HTTP for transporting data, data
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passes between the browser and the server unencrypted. Because of these fears,
methods are being developed to make purchasing products online more secure.
The first attempt at making online credit card transactions secure was to take the
transaction off-line. Many sites will allow you to call in your credit card number to a
customer support person. This solves the problem of passing the credit card number
over the Internet, but eliminates the merchant's ability to automate the purchasing
process. An employee needs to be available 24 hours a day to take phone calls from
buyers. Also, many potential customers that visit the net only have one phone line. This
means they need to log off the Internet in order to actually make a purchase.
The next method that was developed, which is currently used by many sites, is hosting
the WWW site on a secure server. A secure server is one that uses a protocol such as
SSL or S-HTTP to transmit data between the browser and the server. These protocols
encrypt the data being transmitted, so when you submit your credit card number
through their WWW form it travels to the server encrypted. This method does help ease
people's fear, but it still does not go far enough for many people to feel comfortable
using their credit card online.
It was apparent that for online commerce to flourish a truly secure means of making
payment needed to be developed. This report describes three systems for secure credit
card transactions online which should meet this need. Two of these fully operational,
First Virtual's and CyberCash's payment systems, and one, the SET protocol, is
currently being developed by MasterCard and Visa. I examine how credit card
transactions are handled by each system, and discuss their advantages and
disadvantages from both a buyer's and a merchant's viewpoint.
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First Virtual Holdings
First Virtual was one of the first Internet payment systems to be available to the public,
becoming fully operational in October of 1994. A main goal of this company was to
create an Internet payment system that was easy to use. Neither buyers nor sellers are
required to install new software, (though automated sale processing software is
available). If you have access to Internet email, you can sell or buy over the Internet
using the First Virtual System.
The First Virtual payment system is unique in that it does not use encryption. A
fundamental philosophy of their payment system is that certain information should not
travel over the Internet because it is an open network. This includes credit card
numbers. Instead of using credit card numbers, transactions are done using a First
VirtualPIN which references the buyer's First Virtual account. These PIN numbers can
be sent over the Internet because even if they are intercepted, they cannot be used to
charge purchases to the buyer's account. A person's account is never charged without
email verification from them accepting the charge.
Their payment system is based on existing Internet protocols, with the backbone of the
system designed around Internet email and the MIME (Multipurpose Internet Mail
Extensions) standard. First Virtual uses email to communicate with a buyer to confirm
charges against their account. Sellers use either email, Telnet, or automated programs
that make use of First Virtual's Simple MIME Exchange Protocol (SMXP) to verify
accounts and initiate payment transactions.
The following steps occur during a sale when using the First Virtual payment system:
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1. Merchant requests buyer's First VirtualPIN (usually through a form on a WWW
page).
2. Merchant can then check whether the VirtualPIN actually belongs to a real First
Virtual account that is in good standing. Merchants can verify accounts by using
the following programs; Finger, Telnet, email, or the FV_API utility.
o Note - Verifying the account is an optional step in the sale process.
3. The merchant then initiates a payment transaction through First Virtual. This
payment transaction is initiated by sending the following information either by
email, Telnet, or a SMXP enabled program to First Virtual;
o Buyer's First VirtualPIN
o Merchant's First VirtualPIN
o The amount and currency of the sale (Not everything is processed in
dollars!)
o A description of the item for sale
4. First Virtual generates an email request to the buyer to confirm the sale. This
email request contains the following sale information:
o The merchant's full name
o The amount of the sale
o A description of the item bought
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5. Buyer confirms sale by sending a YES response to back to First Virtual
o A buyer can also respond NO, to state that they are unsatisfied with the
item and are unwilling to pay, or FRAUD, to state that they never made
the purchase and someone must have stolen their VirtualPIN.
o If a buyer does not respond in a reasonable time, their account is
suspended.
6. First Virtual sends a transaction result message to the merchant, indicating
whether the buyer accepted the charges.
7. After a waiting period, (91 days after buyer's credit card has been charged), the
amount of the sale minus transaction fees are directly deposited into the
merchant's account.
o Note - The 91 day waiting period is in place to protect First Virtual from
buyers who dispute the charge on their credit card and have the credit
card company chargeback First Virtual for all or part of the sale.
o Merchant assumes all risk!
The First Virtual payment system has several advantages and disadvantages over other
payment systems used on the Internet.
Advantages:
Neither buyer or seller needs to install any software in order to use the system.
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Buyers are virtually 100 % protected from fraud. No charges are processed
against their account without their confirmation.
Purchases are essentially anonymous. The merchant is never given the buyer's
name from First Virtual.
It is extremely easy to become a merchant, or seller, under First Virtual. First
Virtual does not screen merchants, nor do they require merchants to have a
special business accounts established with a bank. All a person needs to sell
merchandise, services, data, etc.. over the Internet is an ordinary checking
account.
First Virtual has very low processing fees compared to other Internet payment
schemes or even straight credit card processing.
Disadvantages:
Merchant assumes all risk!
Extremely long waiting period between when a sale is made and when payment
is deposited in the merchant's account.
CyberCash
CyberCash has been servicing credit card transactions over the Internet since April
1995. It has strong ties to the current credit card processing infrastructure, through Bill
Melton, a founder of Verifone, as one of its fathers. The use of their payment system
has grown tremendously over a year. CyberCash claims that they process thousands of
transactions a day, they can send payment transactions to 80% of the banks in
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America, and to have distributed over 400,000 copies of CyberCash Wallet software to
buyers who use their system.
It is important to note that CyberCash is not a credit card processing company. Unlike
First Virtual, they do not transfer funds into the merchant's account. CyberCash sells
safe passage over the Internet for credit card transaction data. They take the data that
is sent to them from the merchant, and pass it to the merchant's acquiring bank for
processing. Except for dealing with the merchant through CyberCash's server, the
acquiring bank processes the credit card transaction as they would process transactions
received through a point of sale (POS) terminal in a retail store.
The CyberCash payment system is centered around the CyberCash Wallet software
program, which buyers use when making a purchase. This program must be
downloaded and installed on the buyer's machine before they can make a purchase.
This program handles passing payment information, encrypted, between the buyer and
the merchant.
Once a potential buyer has obtained the CyberCash Wallet and installed it, there are
still a few steps to take before it can be used. First, a buyer needs to create a persona
or wallet ID which is a string of characters which identify the wallet, and a password.
These are then registered with CyberCash. Buyers are allowed to create more than one
wallet ID, each with its own password. Secondly, they must bind at least one credit card
to the wallet. Binding a credit card entails entering pertinent credit card processing
information such as credit card number, expiration date, shipping address and phone
number. This information is then registered with CyberCash. Buyers can bind multiple
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credit cards to the wallet. Once the wallet ID is established, and at least one card has
been bound, the buyer is ready to start purchasing.
To be able to accept payment using the CyberCash system, merchants must do two
things. First, the merchants must install the CyberCash Internet Payment Software
(SMPS). This software allows the merchant to interface with both the CyberCash buyer,
or Wallet software, and CyberCash's servers. Secondly, the merchant must establish a
merchant account with an acquiring bank that supports Internet transactions using
CyberCash's Secure Internet Payment System. CyberCash can only communicate with
banks they have an agreement with.
Steps to a credit card purchase using CyberCash's payment system:
1. The buyer indicates that they want to purchase an item from the merchant's
WWW site by clicking on the CyberCash pay button.
2. The merchant's SMPS software sends an invoice to the buyer's CyberCash
Wallet software.
o The CyberCash Wallet is registered as a helper application to the buyer's
WWW browser. It is invoked by the browser whenever it downloads a file
with the MIME content encoding of application/x-cybercash.
3. The buyer selects a credit card from the ones bound to their wallet and clicks
OK.
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4. The Buyer's CyberCash Wallet then digitally signs and encrypts the invoice and
credit card information with the key assigned to that Wallet-ID. The encrypted
packet is then sent to the Merchant's SMPS software.
5. The merchant software adds information to the payment packet requesting that
either the credit card payment be authorized or authorized and captured.
o Under normal credit card operating procedures, i.e.. a merchant using a
POS terminal, the merchant only receives authorization when the sale
actually happens, and then that night sends all the credit card payments to
the acquiring bank to be captured.
o CyberCash is working on allowing batch capture processing and may
have it in place by the time you read this.
6. The merchant's SMPS software digitally signs and encrypts the payment packet
with their CyberCash key. The packet is then sent to the CyberCash server.
o The merchant never sees the customers credit card number.
o The payment packet is encrypted twice before arriving at CyberCash's
server, once by the buyer's software and once by the merchant's.
7. CyberCash's server moves the packet to a machine that resides behind their
firewall and off the Internet. CyberCash then decrypts the message and checks
to make sure that the merchant has not tampered with the original invoice agreed
upon by the buyer.
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8. The credit card information, with the merchant's request (authorize or authorize
and capture), is encrypted using hardware that banks use for encrypting financial
data. This information is sent over dedicated lines to the merchant's acquiring
bank.
9. The merchant's acquiring bank then processes the merchant's request as it
would any other credit card transaction. It forwards the request through the card
associations network to the card issuing bank.
o Discover and American Express cards are not associated with an issuing
bank. Authorizations and captures are performed through the card
company itself for these particular cards.
10.The card-issuing bank sends an approval or denial code back to the acquiring
bank. The acquiring bank then sends this code to CyberCash.
11.CyberCash sends the merchant a message indicating success or failure of the
credit card payment transaction. This message is of course sent encrypted.
12.CyberCash claims that the process up to this point should only take between 15
to 20 seconds.
13.The merchant's SMPS software then sends a message back to the buyer's
CyberCash Wallet indicating success or failure of the payment transaction.
As with First Virtual, the CyberCash system has its own set of advantages and
disadvantages.
Advantages:
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CyberCash uses strong encryption for transporting payment information.
o They claim to be the only Internet payment company granted an export
license to use RSA's 786 bit encryption algorithm.
The Merchant does not see the buyer's credit card number.
Merchants do not have a waiting period for receiving payment, as with First
Virtual. The merchant's bank account is credited within in the normal time frame
for credit card transactions.
Disadvantages:
Potential buyers and merchants must both install extra software in order to use
the system. This makes the system harder to use for people with little computer
experience.
Merchants need to have an account with an acquiring bank that accepts
CyberCash Secure Internet Payments.
CyberCash is one of the pioneering companies in Internet payment systems. They
currently have little competition in handling credit card transactions over the Internet.
This will change. The release of the SET protocol (see below) will make it easier for
other companies to provide Internet credit card payment systems. CyberCash is
reacting to this by expanding their operations to include other types of Internet payment
services including digital cash (e-cash) and micropayments.
CyberCash will support the SET protocol, once it is released. They have always stated
that they would support open standards for credit card processing once they existed. In
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fact, CyberCash is one of the companies working on developing the SET Protocol. SET
capabilities will be added to their current software, and they also plan on selling SET
gateway services to acquirers.
SET (MasterCard/Visa)
SET stands for Secure Electronic Transactions and is a proposed standard for
performing credit card transactions over the Internet. It is being developed jointly by
Visa and MasterCard, with technical assistance from various Internet, information
systems, and cryptology companies such as Netscape, IBM and VeriSign. With these
names behind it, in the future SET may very well become the dominant method for
paying by credit card over the Internet.
MasterCard and Visa are developing SET as a license-free protocol for credit card
transactions over the Internet. Even though it is being developed by MasterCard and
Visa, the protocol can be used by any type of credit card such as American Express or
Discover. It is important to note that SET is still a work in progress. Visa and
MasterCard have released drafts of both the business and technical specifications of
SET for public comment. MasterCard states that testing of SET should start in the
second quarter of 1996, and it should be available for use by the fourth quarter.
There are several goals they want to achieve by creating this protocol. First, they want
to create a simple, inexpensive way for merchants to conduct credit card sales over the
Internet. Second, they want to produce a protocol for processing credit card
transactions that would have little impact on the existing financial infrastructure. Third,
the SET protocol will allow software vendors to produce credit card payment software
that will interoperate. Also, by being an open, license-free standard, SET will create a
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level playing field and insure competition among software vendors. This should keep
costs down for merchants and financial institutions interested in processing credit card
payments over the Internet.
On the surface, the SET protocol looks very similar to the CyberCash payment system.
Merchants and buyers will both need software which follows the SET protocol in order
to use SET for credit card transactions. Also, acquiring banks process credit card
transaction requests delivered to them through SET in much the same way as the
process requests coming through a point of sale terminal. Merchants can request the
same type of transactions (authorize, authorize and capture, etc..) as they can through
CyberCash.
There are differences between CyberCash and SET. CyberCash takes an active role in
processing each credit card transaction that flows through their system.. CyberCash's
server sits in between the merchant and the acquiring bank. It verifies the identity of the
buyer and the merchant involved in the transaction. The server also handles the
translation from a CyberCash format for transaction data to the format used by the
acquiring banks. With SET, There is no single company which will be responsible for
processing the transactions. The task of translation from SET request format to the
format used by acquiring banks is done by the SET payment gateway. These gateways
will either be run by companies contracted by the acquiring banks to do so on their
behalf (most likely), or by the acquiring banks themselves. Identity verification of buyers,
merchants, and acquiring banks is not handled by a centralized server. SET uses a
system of certificates for party verification. Certificates are like the stamp a notary public
places on a document to confirm the signatures on it. Certificates are issued by a
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trusted entity or "certificate authority" that can vouch that the party presenting a digital
signature is who they say they are. The certificate shows that the signature has been
proven to belong to the party in question. These certificates are passed between the
buyer's, merchant's, and acquirer's payment gateway software to prove that each entity
involved in the transaction is who they claim to be. For a fairly understandable and
detailed explanation of how certificates work within the SET protocol, I advise the reader
to download a copy of the SET business specifications.
The SET payment process is slightly more complicated than the others discussed in this
paper because of the need to pass public keys between parties and verify certificates
during the transaction. The payment process outlined below follows the outline set forth
in the SET business specifications. It shows a merchant requesting authorization of the
credit card transaction at the time of sale, and then requesting the actual capture
(charging the account) at a later time. The document does state that SET allows for the
capture of the credit card charge at the same time of authorization. However, I think
they wanted to present a case which closely reflects the sequence of events that takes
place under credit card transactions conducted through normal retail channels.
Steps in making a credit card purchase using the SET protocol:
1. The buyer indicates that they are interested in making a credit a card purchase.
2. The merchant's system generates and sends the buyer an invoice for the
purchase.
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o This process is not currently specified in the SET protocols. As it stands,
the protocol only details what happens once the buyer's software
responds to this invoice.
o The buyer is running software similar to the CyberCash Wallet which will
handle the acceptance of the invoice and the transmission of the buyer's
credit card data to the merchant. This software may be built into the
buyer's WWW browser.
3. The buyer selects a VISA or MasterCard credit card for payment from the ones
they can use with their SET payment software.
4. The buyer's software initiates the payment process by sending a request to the
merchant's software for both their encryption public key and the public key of the
payment gateway (acquiring bank's system) that the merchant uses. The request
indicates the type of credit card the buyer will use, as a merchant may use
different payment gateways for different types of cards (probably not).
o The buyer's software needs both the merchant's and payment gateway's
(acquiring bank) public keys before it can send credit card data to the
merchant.
5. The merchant's software generates a response to the request and replies back to
the buyer's software. This response includes:
o A unique transaction identifier generated by the merchant's system
o The certificate for the merchant's public key
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o The certificate for the payment gateway's public key
Note - a certificate is an authenticated version of a public key. The
certificate can be linked backed to the entity that issued it. By
issuing the certificate, the issuing entity ,or certificate authority, is
stating that this public key actually does belong to the party claimed
within the certificate.
6. The buyer's software then verifies the merchant's and payment's gateways
o Please read the SET business specification for information about this
verification process.
7. The buyer's software generates two packets of information to send back to the
merchant, the Order Information packet (OI), and the Purchase Instructions (PI)
packet. Each packet is encrypted separately. The PI is encrypted with the
payment gateway's public key since the merchant is not meant to have access to
it.
o The OI is data meant for the merchant to see. It contains the transaction
identifier, brand of card being used, and the transaction date. The
merchant does not get to see a copy of the buyer's credit card number.
o The PI is data meant for the acquiring bank to use when processing the
transaction. It is tunneled through the merchant to the payment gateway.
By tunneled through, I mean that the merchant does not decrypt the
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packet and process it, but passes it to the payment gateway untouched.
The PI includes:
Credit card number and expiration date
Purchase amount agreed to by the buyer
Description of the order
o A precise definition of what information is contained in these and other
packets and messages used in the SET protocol can be found in the SET
technical specification.
8. The buyer's software transmits the OI and PI to the merchant.
9. The merchant's software checks the message from the buyer with the OI and PI
for any tampering. If no tampering is found, the software starts the process of
requesting authorization from the merchant's acquiring bank.
10.The merchant's software generates an authorization request for the credit card
payment request. Included in this request is the transaction identifier that the
merchant generated at the beginning of the payment process.
11.The merchant sends to the payment gateway of their acquiring bank a message
encrypted using the payment gateway's public key. This message includes the
following:
o The authorization request
o The PI packet sent from the buyer
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o The merchant's certificate authority with their public key
12.The payment gateway then decrypts the message and its various components
such as the PI from the buyer. It checks the various parts of the message for any
tampering. These checks include:
o Making sure the transaction identifier in the authorization matches the one
in the buyer's PI packet.
o The merchant has not tried to tamper with the data in the buyer's PI
packet.
13.The payment gateway then sends a request for payment authorization to the
buyer's credit card issuer through customary bankcard channels, i.e.. the same
as the acquiring bank would request authorization for any typical credit card
transaction.
14.The issuing bank sends back an approval or denial response and code to the
payment gateway in response to the authorization request. This happens over
regular bankcard networks.
15.The payment gateway generates an authorization response message to be sent
back to the merchant. This message includes:
o The issuing bank's response
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o An optional capture token to be used by the merchant when requesting
capture of the sale later on (May be used by the acquiring bank to find the
original authorization request from their records.)
16.The payment gateway encrypts and sends the authorization response message
back to the merchant's software.
17.The merchant's software decrypts the authorization notice from the payment
gateway. It examines the notice to find out if the request was approved or not. It
then stores the authorization response and capture token sent by the payment
gateway for later use when capturing the sale.
18. If the transaction is approved, the merchant's software then creates a purchase
response message which is sent to the buyer's software. This message informs
the buyer that payment was accepted and that the product or service that they
purchased will be delivered.
19.The buyer's software processes the purchase response message and informs
the buyer that payment was accepted.
20.At a later time, the merchant's software generates a capture request message to
send to the payment gateway. This request includes the capture token (optional),
transaction ID, and authorization information. The sequence of events
surrounding the capture are very similar to steps 13 - 15 of the authorization
process.
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It is important to remember that steps 4 through 19 of this process will happen in a
matter of seconds. This is the sequence of events surrounding a "normal" credit card
transaction. These transactions can vary depending on the circumstances. SET allows
for variations such as performing the authorization and capture at the same time for
merchants that require real time processing.
The SET protocol provides the following advantages and disadvantages over other
payment systems:
Advantages:
Eliminates the need for a third party to monitor Internet credit card transactions.
This will lower the cost of doing credit card business over the Internet.
Strong encryption and authentication scheme to be used.
Merchant does not have access to the buyer's credit card number.
Merchants do not have a waiting period for receiving payment, as with First
Virtual. The merchant's bank account gets credited within in the usual time frame
for credit card transactions.
Is backed by MasterCard and Visa.
Disadvantages:
It is not ready for use yet. The SET protocol was just released for public
comment in February 1996.
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Buyers and merchants will need to install software which allows SET transactions
processing. Acquiring banks will either need to contract with a company to run a
SET Internet gateway for them, or install a SET Internet gateway themselves.
Merchants will need to have an account with an acquiring bank or card processor
that is set up to accept SET transactions.
With MasterCard and Visa putting their weight behind SET, it should probably become
the dominant method of doing credit card transactions over the Internet. Companies are
already starting to develop software to process SET transactions for buyers, merchants
and acquiring banks.
Bank Credit Cards and Consumer Behavior
Bank credit card is one of today's most ubiquitous financial instruments (Wolters, 2000).
For bank management perspectives, identifying the appropriate market for the credit
card, interpreting consumers’ needs for the product and developing business strategies
are crucial to cope with fierce competition in the credit card market. In addition,
Bernthal, Crockett, and Rose (2005) indicated that credit cards came with important
technology to help facilitate several financial transactions for consumers, but the cards
have capacity to support consumers in their everyday life activities without much
concerning about cash in hands. Brito and Hartley (1995) observed that another
important service on credit card was about borrowing on credit cards. However, such
borrowing came with high interest rates which might appear irrational, but low
transactions costs can make credit cards attractive relative to bank loans. In addition,
credit cards offer liquidity services by helping consumers to avoid some of the
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opportunity costs of holding money. Goyal (2004) stated that service products, such as
credit cards, being intangible and experiential in nature are different to evaluate prior to
purchase and consumption. Information regarding supplementary services can help
consumers make pre-purchase evaluation of credit cards. In addition to pre-purchase
evaluation, the impact of supplementary services is studied towards post-purchase
evaluation of credit card services.
Cargill and Wendel (1996) answered the question about the way credit cardholders
using their credit cards and found that consumers are rational with respect to credit card
usage. Understanding card usage rationality assists credit card issuers to formulate
strategy to cope with competition and to provide better services for consumers.
Moreover, d'Astous and Miquelon (1991) stated that for credit card users, choosing a
suitable credit card requires a knowledge of one's credit card usage and comparison
information on credit card costs. Chebat, Laroche, and Malette (1988) conducted the
credit card research on English-speaking and French-speaking Canadians in Toronto
and Montreal, focusing on their attitudes toward credit cards. Both groups are satisfied
with benefits from using credit cards, improving their financial situations. In addition, the
English group was concerned about costs, accuracy, safety, practicality, and facilitation,
while the French group is concerned about costs, accuracy, over-consuming, and over-
spending. As for the impact of customer characteristics, income and education
positively affect usage.
Stanghellini (2003) investigated that finance agencies, including banks, have started to
develop new products aiming not only to increase their portfolio but also to maintain
good relationships with existing customers and to prevent undesired behaviors of high-
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default risk customers. This suggests that understanding the behaviors of the customers
is significant for financial operations, because the customers can be either profitable or
unprofitable. Devlin, Worthington, and Gerrard (2007) the results suggest that credit
card providers should always keep in mind about whether the discounts they offer, the
promotions they arrange and their loyalty schemes are superior to those offered by
competitors. Being responsive to competition is also an important key to succeed.
Several researchers conducted consumer behaviors and the role of credit cards. Lunt
(1992) stated that it is important for banks offering credit card services to study what
makes consumers who have 5 or 6 credit cards use one rather than another when
making a purchase to determine marketing techniques. Among many factors affecting
card adoption include high credit limit, quality customer service, fair fees, and a fair
interest rate are the factors that count at the point of sale. In addition, lower interest
rates, cash advance checks with low rates, and sweepstakes are some of the marketing
promotions used by banks. Some other promotions were cashback bonuses and no
annual fee. Moreover, Sulaiti, Ahmed, and Beldona (2006) studied the role of credit card
on consumer behavior and found that credit card usage by consumers across the oil-
rich Arab countries (such as Qatar, Bahrain, and Kuwait) is changing in their
consumption behavior, because having credit card motivates Arab consumers to buy
more often, and encourage promoting impulse buying. Carow and Staten (2002) found
that convenience and rebates are the main reasons for using a bank credit card.
Furthermore, Hayhoe, Leach, Turner, Bruin, and Lawrence (2000) found that affective
credit attitude (feeling about using credit cards) and gender influenced college students'
credit purchasing. Affective credit attitude predicted the purchase of clothing,
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electronics, entertainment, travel, gasoline, and food away from home. Their results
also indicated that gender differences in the relationship between financial practices,
financial stress, affective credit attitude and the number of credit cards with a balance.
Lee and Kwon (2002) found that consumers' usage of store credit cards is related to a
number of variables, including the use of bank cards, credit history, attitude toward
credit, income, education, and ethnicity. It is important for banks to develop marketing
strategies to attract and win competition in the industry. Devlin, Worthington, and
Gerrard (2007) examined credit cardholders carrying many credit cards at the same
time. In this case, there were main credit cards (most often used cards) and subsidiary
cards (rarely used cards) and the respondents stated that their subsidiary cards were
held for "stand-by purposes". Bielski (2001) suggested that development of loyalty
programs and e-commerce programs that all add to a high quality customer experience
for credit card business. Moreover, those programs can attract and retain credit card
users.
Customer Analysis
Understanding the importance of customer retention and methods of identifying
profitable clusters in a highly competitive Credit Card market environment.
Developing tools for customer identification, loyalty programs and market
segmentations and analysis, studying market size and applying analytics for
future business potential.
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The existence of Financial/Credit Card Industry has a very little value without the
existence of the customers. In modern world, the Credit Card sector is one of the fastest
growing profit centers in the financial services industry. In the credit card business, the
longer-term the customers is with the firm, more the profit. In fact, given the high cost of
acquisition in many markets, credit cards only become profitable if a customer remains
for a certain length of time. So, the aim is not only to create and win more and more
customers but also to retain them through effective customer service.
In response to increasing customer demand, credit card companies are increasingly
seeking to differentiate themselves through offering a wider range of card services and
benefits. With rising competition, product improvement alone is not enough to capitalize
on the current industry trends. In a time of changing consumer values and economic
uncertainty, the marketing function has a more strategic role to play in driving growth
and high performance for any industries. In this modern world customers have more
information and more choices than ever. Fortunately, the organizations can employ their
powerful analytical tools to understand and engage customers today and anticipate their
needs tomorrow. The discipline of analytics can serve to identify the segments that
matter most, uncover useful insights about the behavior and point out the way to
process changes that can surely make a difference in customer loyalty and profitability.
For any Financial Institution, it is important to know who their Most Valuable
Customers (MVCs) are so that more resources may be used to market relevant
products and services to these MVCs while fewer resources should be expended on
unprofitable customers. The goal is to make the right offer to the right customer at
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the right time through right channel. Such customer knowledge can immediately and
significantly reduce total cost while, at the same time, increase sales with individual
customers. This strategy enables an organization to anticipate greater returns from its
campaigns, a reduction in costs, as well as increase in conversion rates.
Traditionally, most of the financial organizations are organized around product-centered
and function-centered models rather than a customer-centered model. By becoming
truly customer-oriented, a financial organization can achieve the following benefits:
Higher returns on invested capital(for e.g. improve the ROI of marketing
campaigns
More profitable customers
Lower capital costs (due to the consistency of financial results that comes from
those long-term, carefully managed customer relationships)
Larger investment opportunities (due to their understanding of customer finances
and unmet needs)
Build a foundation for highly targeted marketing (the Financial Organizations do
not want to treat all customers alike nor does they want to treat them all
differently. Create more or less homogenous groups in terms of their needs and
expectations)
Improve cross-selling through segmentation schemes that reveal growth potential
of specific groups
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Decrease customer churn by isolating loyalty drivers and optimizing retention
offerings
Improve decision making through dashboard reporting that integrates business
intelligence
Anticipate shifts in customer priorities
Financial Institution with clientele from various segments could think of “market
penetration” by offering the existing range of services to existing customers.
Financial Institutions which are not facing acute competition could think of
“Market Development” by offering the existing services to new customers
Design new product range for their customers of various segments based on
their needs (Market segments, targeting one or more segments, developing
products and marketing programs, tailor-made for these segments)
Customer Segmentation
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Method of Segmentation
Credit Card Organizations can try to understand the group behaviour patterns,
demographics, and attitudes. Such analysis enables organizations to develop
appropriate product offering strategies or to identify MVCs. Here are couple of common
segmentation methods:
Statistical Segmentation (grouping, prediction, factor analysis, cluster, RFM
Analysis)
Manual Segmentation/Tree (CHAID/CART etc.)
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Market Basket Analysis (product using sequences)
Can create segment based on attitudinal behaviour (Survey data can help here
but extrapolation might be a problem. But classification techniques like
Discriminant Analysis definitely can help in this situation).
Competitive Landscape in India
Unlike debit cards, credit cards are governed by domestic commercial banks. ICICI and
HDFC together account for around 38% of the total credit cards in circulation in 2009
and almost 46% in term of value transaction in the same year. However in 2009 there
was no aggressive competition as banks where shifting from unsecured to secured
forms of business in order to remain profitable. According to industry sources, ICICI has
the largest network of POS terminals with over 40% of the total market share, followed
by Axis bank and HDFC.
Recent events in the industry
Industry observers have found that there is a strong correlation between the growth of
the debit and prepaid market in India, and that of the mobile phone market, showing that
this region presents phenomenal opportunities.
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A recent estimate by Visa Inc puts the target population for credit and debit cards in
India at 200 million. Yet there are about 400 million Indian people who don't have a
bank account. It is this combined 600 million which should be viewed as the true target
market for prepaid cards.
Providing intelligent insight into the Indian prepaid and debit card industry, this VRL
report gives your business the expertise to take advantage of this emerging market.
Focusing on target market
The number of Indian prepaid cards in issue is almost embarrassingly small. According
to the Prepaid International Forum there are around 4 million prepaid cards in India.
This comprises a mere 2% of total debit cards (there are 185 million debit cards in
India), but the targeted population for prepaid cards by any measure has to be
considerably larger. A recent estimate by Visa Inc puts the target population for credit
and debit cards in India at 200 million. Yet there are about 400 million adult Indians who
don't have a bank account. It is this combined 600 million which should be viewed as
the true target market for prepaid cards.
The existing market for Indian debit/prepaid cards
Unsurprisingly the Indian card market is fast growing, and the pace is accelerating.
Industry observers point to strong similarities between the growth of the Indian mobile
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phone market, and that for Debit and Prepaid cards. The Compound Annual Growth
Rate of mobile phone take up in India during 2006-2010 was 52%. By comparison the
number of debit cards issued rose from 18.1 million in 2003 to 184.79 million in 2009,
+47% CAGR. The transaction value has shown healthy growth of 32% during the
period. In 2009-10 fiscal, payments made by debit cards in India stood at US$ 5.87
billion (Rs 264.18 billion) a rise of 44% compared on 2008-09.
Payroll cards dominate the prepaid cards market with a 34% share, with travel cards at
24%, and multipurpose cards with a 22% market share. Remittances and other prepaid
cards are estimated to account for 14% and 6% of the market respectively. Estimates
by ICICI suggest the prepaid cards market is expected to grow by almost 75% in 2010
year-on-year, rising from $2.9 billion to $5 billion.
Axis Bank is the domestic leader in prepaid cards, with a 39% market share of followed
by Itz cash cards at 22% and ICICI bank at 16%. Other players include SBI, HDFC
Bank and Punjab National Bank. In the multipurpose cards market, Itz Cash Card
Limited is the leading player. It is the largest firm in the non-banked category for prepaid
cards. As for the number of debit cards issued, SBI dominates with a 37% share
followed by ICICI bank at 11%.
Factors influencing the growth of the industry
Important features driving the debit/prepaid card industry include the confident growth
trajectory of the Indian economy, the availability of a payment infrastructure embracing
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both private and public sector banks, and increased penetration of mobile telephony.
India’s economic expansion remains the catalyst for a dramatic change among the
country’s consumers. GDP growth has averaged around 7% since 1997 and India was
able to keep its economy growing at a credible rate even during the 2008-2009 slump,
managing +5.4% in 2009. This broad based growth is creating a potent middle class,
primarily urban based, who are leading the spending and usage of plastic cards. While
there is no official definition of how to classify the middle class in India, consensus
seems to have settled on a figure of c-200-300 million people. Even using the most
aggressive estimates of its size, the middle class comprises less than 30 percent of the
population. With sufficient disposable income to spend on goods and services, the
middle class is an attractive target for prepaid cards.
According to a recent study if India is able to maintain its current growth trajectory,
average household incomes will triple over the next two decades and it will become the
world’s 5th-largest consumer economy by 2025, up from 12th now. Private consumption
plays a much larger role in India’s growth than it has in that of other developing
countries. In 2005, private spending reached about 17 trillion Indian rupees ($372
billion), accounting for more than 60 percent of India’s GDP.
As for payment infrastructure, most Indian banks have been widening their networks of
automated teller machines (ATMs) in order to expand their business. Banks have also
been installing increasing numbers of point of sale (POS) terminals (electronic data-
capture swipe machines for accepting debit and credit card payments) at retailers. As of
2010, there are 40,000 ATMs and 450,000 POS terminals in India. A majority (more
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than 70%) of these ATMs and POS terminals are located in cities with the rest in small
towns and villages. The key cities which lead in number of ATMs include Mumbai,
Delhi, Kolkata, Bangalore, Chennai, Ahmadabad, Hyderabad, Pune, Kanpur, Surat,
Jaipur and Lucknow. Another important infrastructure requirement for the development
of banking services and prepaid cards business is a credible telecom network. India has
been investing heavily in its telecom infrastructure. It is the world's fastest growing
telecommunications market (CAGR of 52%), with 671.69 million telephones. Close to
95% of all phones in India are mobile phones, with a penetration rate close to 57%.
Potential for expansion in rural areas
As telephone ownership in urban areas matures, rural areas are taking the lead in
adding new phones. Rural areas added an average of 8.76 million phones monthly
during December 2009 to March 2010. By July 2010, the number of mobile phones in
rural India had reached 236 million. This number is markedly higher than the 187
million adult population living in rural India with bank accounts. In short there are a
significant number of people with mobile phones but without bank accounts in rural
India. This gap will only increase as millions of mobile phones are added monthly in
rural India. This is an attractive back-drop for starting mobile banking services in rural
India. ‘Mobile wallets’ would bring low-cost banking & remittance services to millions, for
whom banking services are not readily available or easily accessible. The attraction is
that the mobile telephony infrastructure is well developed. This offers an attractive
opportunity to open new markets and business opportunities for service providers,
banks, mobile operators & merchants.
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Leading domestic banks like SBI, ICICI, HDFC, AXIS and Canara all offer mobile
banking services in India. For example, iMobile, a mobile banking application offered by
ICICI Bank, assists its customers to carry out mobile money transfers, bill payments and
check credit card balance through their mobile. This mobile application covers savings
bank, Credit Card and Loan accounts. By using iMobile almost all internet banking
transactions can be done on mobile phones.
Advantages of credit card transaction
Every type of business benefits financially by accepting credit cards. With more than
500 million credit cards in use domestically, US charges recorded for 1999 alone
reached $1.1 trillion!
Accepting credit cards has advantages as sales increase by as much as 40%. Listed
below are some advantages of accepting credit cards:
More Sales: Studies show that credit card customers spend 2 1/2 times more
than customers who only carry cash.
Impulse Buying: Credit cards give customers freedom to spend for previously
unplanned purchases.
More Expensive Merchandise: Credit cards entice customers to purchase more
expensive merchandise than they had originally planned to buy.
Competitive Weapon: Credit card customers are often less conscious of slight
price differences and will seek out businesses that offer credit card payment
options.
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Enhanced Advertising: Since customers are more likely to shop at businesses
where they have credit card acceptance, they tend to look for and read those ads
first.
Steadier Sales: Credit smoothes out business peaks. Cash shoppers buy
heavier on paydays and just before holidays; credit card customers buy
whenever the need arises.
Customer Loyalty: Research shows customers who spend more on credit tend
to return to the same business again.
Faster to use : To make a purchase, the card owner just waves his card over
the RFID reader, waits for the acceptance indicator - and goes on his way.
American Express, Visa and Mastercard have all agreed to waive the signature
requirement for contactless credit card transactions under $25.
Highly secure data transmission standards used: Contactless cards make
use of the most secure encryption standards practical with current technology.
128-bit and triple DES encryption make it nearly impossible for thieves to steal
your data.
Free Credit Period: Firstly the Credit Card offers you a free credit period (of 50-
55 days) from the date of the billing cycle which helps you to purchase on credit
without any hassle of carrying cash, thus making your shopping much easier.
Online Shopping: The Credit Card helps you to buy products/services online or
over the phone thus helping you to purchase anywhere 24x7.
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Advantage of various Branding offers: Most importantly credit cards offer
various discounts & schemes which are associated with entertainment, travel,
shopping etc. Issuing Credit Card Banks tie up with the reputed brands to sell
products/services at attractive rates which you can buy through your credit cards.
To check offers running on your credit card.
Borrowing cash through credit cards: You can also withdraw cash through
ATMs at any time.
Reward Points: Credit Cards also offer reward points on purchases which you
can accumulate and redeem later with cash backs & attractive gifts etc.
Why should I process credit cards?
There are several advantages for companies processing credit cards. The average
American's reliance on cash and checks for retail and Internet business transactions is
continually diminishing.
Today, the average American adult carries at least two credit cards. Together, Visa's
and Mastercard's annual volume exceeds $210 billion dollars
What are the business advantages of processing credit cards?
A merchant account will allow you to:
Improve your customer service. With credit cards you give your customers a
wider range of payment options.
Increase sales. Additional payment options increase both your total revenue and
the size of individual sales.
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Improve your cash flow.
Electronic funds transfer means you get your money faster.
Reduce risk.
Unlike personal checks, electronic payment options will not be returned NSF.
You also reduce the amount of cash kept in your store.
Increase productivity and record keeping. Electronic payments mean faster tallies
at the end of the day and easier trips to the bank.
Increase your market share. Offering state of the art payment methods for your
customers puts you ahead of the competition.
Compare credit cards
There is a plethora of credit card choices available in the market which would simply
clutter the process of choosing your card, so before you opt for a card you must
evaluate the card features on the basis of following points:
• Interest rate: The interest rate is levied by banks whenever you revolve your
outstanding balance into your next billing cycle; it ranges from 2.79 - 3.9 per cent per
month varying from bank to bank. Go with the bank which has the cheapest interest
rate.
• Identify a card suiting your needs & where you spend the most : Search for a
card which serves your needs & the areas of your expenditure should match the type of
the card, e.g. if you are an overseas traveler you can look at a Global card which can be
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used for paying expenses in foreign currency and offering 24-hour travel bookings
around the globe.
• Annual Fee, Joining Fee & other features : You should review the features of the
cards available; make sure that the card offers maximum features such as zero annual
fees, zero joining fee 24-hour helpline & good reward points program.
•Grace Period/Interest free Period : It is that period offered by banks during which
they don’t levy any charges, the period is between the statement date and the due date
of payment. It is normally between 15 to 20 days and varies from bank to bank. You
must look for a card which offers maximum grace period.
• Look out for various kinds of rewards & lucrative offers : There are various cards
which have a reward structure offering rewards in the form of flier points while
purchasing a specific good/services & these points can be redeemed for attractive gifts
& cash back offers. Card companies offer certain credit cards which come with the high
annual fee and offer luxurious services like hotel accommodations, concierge services
for 24X7 travel bookings around the globe.
Balance Transfer in Credit Card - How does it help?
What is a Balance Transfer?
It is the process of transferring the existing outstanding balance or debt from one credit
card to another credit card.
How does it benefit?
It benefits the card holders when there are high interest rates on their existing cards as
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against the other card on which the balance is transferred. This facility helps those who
are not satisfied with the services by the existing card company like incorrect billing,
non-receipt of the card bill etc. thus switching from one card to another offers the card
holders with low interest charges or sometimes 0% charges & other services.
Balance Transfer interest rates
Most of the banks offer low interest rates or sometimes even zero interest on balance
transfer on credit cards ; however you should note that these rates are applicable only
for initial period (3-4 months), post that the bank will start charging you at the same rate
what your preceding card company charged you.
Credit Limit
The balance transfer reduces the credit limit of the second card to the balance
transferred amount. You must note that the transferred amount should not exceed 80
per cent of your credit limit.
Marketing of Credit card
In order to satisfy credit cardholders’ needs, low annual fees and domestic and
worldwide credit card acceptance were highly necessary. However, in order to offer
different services from competitors and to build long-term customer loyalty, bank
marketers can initiate a marketing campaign with attractive installment plan choices and
point redemption. Additionally, making credit cards to be more widely used in more
domestic stores can increase credit card adoption. This requires collaboration among
banks and other businesses to share higher benefits from greater numbers of card
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users. For installment plan, longer installment period should be provided for allowing
customers to pay back in longer term with lower amount of payment, while banks can
have higher profit from interest charges. Moreover, various interest rates on installment
plan can be offered. For example, the customer may be able to choose the fixed interest
rates or flexible interest rate on each plan. In addition, many installment plans can be
developed innovatively to attract more customers in response to their diverse needs.
Bank marketers can apply more creative point collection campaigns to encourage
higher card usage. Carow and Staten (2002) also suggested that the collaboration
between banks and other businesses, such as gasoline companies, can contribute to
benefits for both parties and their research results help explain the growth in popularity
of "co-branded" cards. Therefore, the marketers can offer point redemption methods in
more convenient ways through channels, such as telephone, internet, point-of-sales,
and ATMs. Moreover, banks should have a co-branded program with businesses,
including retailers, dining and restaurants, gas companies, hotels, airlines,
transportations, shopping malls, and hospitals.
Credit card issuers should also build inter-organizational network among business
partners in various industries in order to enhance card acceptance in many domestic
areas in the country. Despite high competitive credit card market, banks with stronger
inter-organizational relationship can survive and succeed in the market.
Types of Credit card usage
Here are few ways to get the most out of your plastic.
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1. Build a good credit rating: Pay your credit card bills on time, stay well within your
credit limits and be careful not to take on too much debt with too many cards and you'll
begin to establish an excellent record on your credit reports from all three credit
reporting agencies. That information, in turn, is used to calculate your credit score -- a
number that tells potential lenders how likely you are to repay your debt. Use your cards
to boost your credit score and you'll not only qualify for zero and low-interest rates on
competing cards but you may also be eligible for a better deal on your mortgage and
auto insurance.
2. Protect your big purchases: If you buy something that's damaged or defective and
you used a credit card, you have the right to withhold payment under the Fair Credit
Billing Act. You do need to make a good-faith effort to solve the dispute with the
merchant. But if you can't, your credit company will investigate the problem. If after
contacting the merchant you are unable to settle and the card company sides with you,
the charge won't be added to your bill. Purchases made with debit cards are not
covered under the Fair Credit Billing Act. In addition, some cards offer extended
warranties and other protections for large purchases made on the card. Check with your
credit card company.
3. Make online shopping safer: The Fair Credit Billing Act also covers online
purchases, making a credit card the best way to pay in cyberspace. If you're worried
about security, many credit card companies offer a one-time use account number for
large online purchases that keeps your real account number off of the Web.
4. Use your card for a low-interest loan: Robert Manning, research professor of
consumer finance at the Rochester Institute of Technology and author of "Credit Card
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Nation," once used a low interest rate credit card to buy a car. The fixed-rate on the
card was better than what banks were offering on auto loans and he didn't have any of
the application hassles.
5. Avoiding Fraud: Debit cards and checks are some of the worst ways to pay for
anything. Sticking with credit cards or cash can save you a lot of money. Pretty much
anything you do involves risk. When you carry around $50 in your pocket, there is a risk
that you might lose it or get robbed. When you give a credit card to a waitress, there is a
risk that she might steal the number. When you write a check at the grocery store, there
is a risk that someone might take your personal information and use it to steal your
identity. When you carry your ATM card with you, there is the chance that you it might
get stolen, lost, someone might watch you type in your pin and then steal it, etc.
6. Keeping Records: Credit cards are one of the easiest ways to track your spending.
When coupled with a program like Microsoft Money or Quicken, you can easily see
where your money is going and keep track of how your spending is changing from
month to month. Some companies are adding management features into their accounts
so you can categorize charges online and view the totals for each category even without
downloading them to your computer.
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7. Cash Back and Rewards Points: Most credit cards have some type of rewards
program. Generally these will give you 1% of the total of your purchases back in cash,
points toward airline tickets, gift certificates for stores, etc. When looking for a credit
card, compare these reward programs. Some only give you the equivalent of .05%
back.
8. Other Benefits: Most cards have a bunch of other benefits that are buried in the fine
print and people generally don’t take advantage of. For example, most VISAs have an
extended warranty plan. If you buy something with a 1 year warranty and it fails 18
months after the purchase, the credit card company will replace or repair the device for
you–even though the original warranty has expired.
Some cards offer a service where they will keep track of all of the warranties on all of
your appliances and home electronics. A number of cards give you theft protection if
you have an item (that was purchased on the card) stolen within a certain period of
time.
Other cards give you travel insurance in case you die or are dismembered (the term
they actually use) on a flight paid for with your credit card. Many have insurance that
can be used in lieu of the additional insurance car rental companies try to sell you when
you rent a vehicle.
Some cards (particularly American Express) offer roadside assistance, travel planning,
international travel emergency assistance and even personal concierge services.
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Advertising & Promotion
- Once upon a time, life took Visa.
- All good things were priceless with MasterCard.
- Membership had its privileges with American Express.
But that's all changing as America's card brands retool their advertising strategies in an
effort to convince economically battered consumers to forgive them their excesses, cut
them some slack -- and find it in their debt-hardened hearts to buy on credit again.
Second only to Wall Street investment bankers, credit card issuers have become this
year's favorite punching bag for cash-strapped consumers and outraged lawmakers
eager to end their usurious policies and practices.
Even before the reforms of the Credit CARD Act of 2009 kick in, three major card
brands have rolled out new TV campaigns that seek to repair some of the damage
wrought by an ungraceful credit ebb and heated regulatory hearings.
"The credit crisis has sent the issuers and associations back to the drawing board to
figure out what works best in this new regulated environment," says Anuj Shahani,
director of competitive tracking services at Synovate Mail Monitor.
Based on these three new TV commercial campaigns, the card companies hope to
change your perception of them from go-ahead-and-spend-you-deserve-it libertines to
we're-really-here-to-help-you-control-yourself counselors.
But since their livelihoods depend on how much you charge, don't expect any anti-
plastic messages from these new massage treatments.
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American Express: "Don't Take Chances, Take Charge"
American Express has long depended on exclusivity and celebrity to entice us to its
growing family of colorful cards with the slogan, "Membership has its privileges." Its
recent "Do You Know Me?" campaign featured the likes of Martin Scorsese, Ellen
DeGeneres and Robert De Niro.
While there is still a whiff of the VIP lounge about its new "Don't Take Chances, Take
Charge" campaign, this 30-second journey takes a neutral stand on conspicuous
consumption and focuses instead on the benefits of using the green card over cash.
The opening line -- "Sometimes the little things in life feel like our biggest enemies" --
shows us the unhappy faces of luxury purchases past: an expensive purse, latte,
leather furniture and a computer mouse that symbolizes online shopping. The subliminal
message: your card is another treasured "little thing" that only seems like an enemy.
Next, it injects a touch of fear by throwing in a symbolic gas and water bill, followed by a
dash of identity theft. Times are scary. Boo!
Once the "we'll repair/replace/credit your account" reassurance message is delivered, it
cuts to smiling images of everyday, non-frivolous items (a bike, baggage carousel, an
old prop plane), closing with a down-to-earthiness rare for American Express
commercials.
"The new campaign encourages consumers to think carefully about how they pay for
their purchases and to take a closer look at the cards in their wallet," says Deborah
Curtis, vice president of advertising for American Express.
Especially the green one.
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Visa: "Let's Go"
Of the large credit card transaction processing companies, Visa has always been the
most extrinsically driven brand. Throughout the 1980s and most of the 1990s, the card
promoted self-indulgence and conspicuous consumption -- while pointing out the
growing number of places where credit cards are accepted -- with "Visa. It's everywhere
you want to be."
But as rival MasterCard morphed its flagship slogan, "There are some things money
can't buy. For everything else, there's MasterCard" into the more family-focused, get-a-
life lessons of the "Priceless" campaign ("Haircut: $10. First haircut: priceless."), Visa
responded in 2006 with its own non-materialistic tack, "Life takes Visa."
In "Let's Go," Visa does indeed go in a new direction to tout its Visa Check Card Gone
are the celebrities, the exotic locales and actor Billy Crudup's "Priceless" punch lines,
replaced by working-class images: a suburban tract home, a bedroom with no window
coverings, a morning commuter train platform.
It's almost like Visa is now everywhere we don't want to be.
Our caviar dreams have been scaled back accordingly. The voice-over asks, "Will you
do something that you've always wanted to do?" followed by images of a jog in the park
and a walk in the surf. Have our dreams really sunk that low?
The kicker -- "Will you keep going, no matter what life throws your way?" -- shows a guy
boogying in his boxers, a senior partner looking bewildered and a woman content to
stay in the surf. What, is this an ad for Aricept?
End message: "More people go with Visa."
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Translation: Just keep going. We know you'll buy something.
Discover: "Get Cash Back: This One's On Me"
Admittedly, the opening sequence of this Discover commercial brings to mind the Cialis
twin bathtubs as a giddy baby boomer couple bumpstires on a go-kart track. The "Get
cash back" graphic morphs into "Get immaturity back."
Translation: With cash back, you can afford a second childhood, although not the SUV
from previous commercials.
Scene two shows three guys toasting beers in a bar. What are they toasting? That one
of them can now afford to buy the round -- either because of the cash back or the fact
that they have no dates.
Scene three: Dad and the kids "Get Saving the Universe Back" while enjoying some at-
home gaming.
Subliminal message: Keep it simple and no one gets hurt --financially.
AmEx, Mercedes rev up deals - To American Express, had launched a new card in
partnership with Mercedes-Benz.
The Mercedes-Benz credit card offers five times the American Express Membership
Rewards points for charges at Mercedes-Benz dealerships, triple points for gas and
double points for restaurants, plus a $500 certificate for the purchase or lease of a car
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(after $5,000 in spending), 1,000 extra miles on a lease and an annual $50 certificate
for Mercedes-Benz accessories. The annual fee is $95.
For $475 a year, a platinum version of the card offers more generous certificates plus
access to airport clubs, hotel perks and a personal concierge service.
American Express will also offer service packages and $1,000 Mercedes-Benz
certificates through its Membership Rewards program.
Chase upgrades Sapphire Preferred - Chase upgraded its Chase Sapphire Preferred
card so that it offers double points on travel and dining purchases. A news release said
the upgrades, combined with existing features including no foreign transaction fees and
dedicated customer service, make the card "the perfect rewards card for affluent card
members who love travel and dining."
Brent Reinhard, marketing director for Chase Sapphire, said Chase made the change to
make the card more attractive to the affluent segment.
"One of the things we realized about the affluent customer is they're affluent for a
reason," he says. "They do their research. They're making sure their dollar is working
hard for them. For us, it was important to make sure we had a really strong value
proposition that resonated with this segment."
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Business cards launched - There were also several announcements of new or
enhanced cards for business owners, which card issuers often categorize as affluent
because they spend a lot:
Capital One launched a new small-business card, the Capital One Business No
Hassle Cash Premier card, which offers 2 percent cash back on all purchases.
"No major competitor has as high a cash-back rate across all purchases as our
new small business cash back card," the company said in a release.
American Express launched a Business Gold Rewards Card that includes double
points on online marketing expenses and allows business owners to redeem
reward points for Facebook ads.
Credit Card Advertising Rules and Laws
Revealing the Annual Percentage Rate
With “credit card advertising,” companies are not required to display the annual
percentage rate unless the advertisement describes the amount of any repayment. If
there is an advertisement and it contains the annual percentage rate and payable credit
card fees and charges then the advertisement must distinctly state this – that the fees
and charges are payable. This can be done by either stating the amount of the fees and
charges payable or providing a specific amount of charges and fees that are payable.
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The Comparison Rate - If you find an advertisement that contains a comparison rate
then the rate must reflect a calculated nominal rate per annum including the
compounding frequency. In addition, an accompanying statement must reveal the
amount of credit on which the rate is based and the term.3
There must also be a warning that informs the consumer that the rate shown is only
accurate for that particular example. The warning can be stated as such, “Care should
be taken in using this comparison rate. Differences between contracts, and variations
permitted during the period of the contract, can detract from its usefulness or even lead
to a false impression.”
Revealing Interest Rates - When a credit card company discloses its interest rates in
an advertisement then the interest rate but show that is is a nominal percentage rate per
annum or that that it is a comparison rate calculated as described above.
Interest Free Deals - Interest free deals are a major advantage to consumers who have
the discipline to pay back the loan within the interest free time period. Retailers and
department stores will offer these deals when advertising the sale of electronics, major
appliances, computers, bedding and many other items.
You are required to sign up for a credit card at the retail store, however, the money
provided for the item is provided by a separate finance company. If the loan is not paid
within in the interest free period, the consumer runs the risk of paying extremely high
interest charges of up to 30%. There are also fees and other charges that are
associated with these interest free deals.
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Methods and tools used in credit card industry to
detect fraud
Credit cards are increasingly becoming a part of our daily lives these days. Credit card
companies make considerable investments on research and analytics for understanding
market dynamics and consumer spending patterns and for better customer service
experience. Credit Card Analytics are mainly used for following strategic services to
the commercial credit card industry:
Loss Provision Strategies/Fraud Protection
Predictive Modelling to target the right customer for right kind of service/s through
right channel
Customer Segmentation
New Customer Acquisition Strategies
Industry Benchmark Studies
Issuer Profitability Studies
Portfolio Risk Based Pricing
P&L Modelling which helps Financial Planners in development of Business Plans
& Assessing Organization Expenses and Revenues
Marketing Mix Modelling which helps to reallocate budgets among different
marketing vehicles.
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Issuer Risk Assessment Studies (Account Pricing, Fees, Authorization
Strategies, Line Increase/Decrease Strategies, Queuing of Delinquent Accounts)
Strategic Operational Assessment Reviews
Loss Provision Strategies/Fraud Protection
Credit card fraud is the most common type of identity crime and on the rise.
Types of Credit Card Fraud
Credit fraud can fall into one of five categories:
1. Counterfeit credit card
2. Lost or Stolen Cards
3. No-Card Fraud
4. Non-Receipt Fraud
5. Identity Theft Fraud
The percentage that each type of credit card fraud represents is described below:
1. Counterfeit credit card: Makes up for 37% of all funds lost through credit card
frauds. To make fake cards, criminals use the newest technology to “skim”
information contained on magnetic stripes of cards and other security features
such as holograms.
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2. Lost or Stolen Cards: Cards stolen from either cardholders or lost by them
account for 23% of all card frauds. Often, cards are stolen from the workplace,
gym, and unattended vehicles.
3. No-Card Fraud: Comprises 10% of all the losses and happens without the
physical card been in hand. This can happen by giving your credit card
information on the phone to shady or fraudulent telemarketers and deceptive
Internet sites that are promoting the sales of their non-existent goods and
services.
4. Non-Receipt Fraud: Is responsible for 7% of all losses. It occurs when new or
replaced cards mailed by your card company are stolen during the process of
being mailed. However, this type of fraud is on the decline with the card-
activation process that most companies use. In 1992, non-receipt fraud
represented 16 % of the losses.
5. Identity-Theft Fraud: Accounts for 4% of all losses, and occurs when criminals
apply for a card using someone else’ identity and information.
o Credit cards are responsible for $2.5 trillion in transactions a year at more
than 24 million locations in 200 countries and territories. (Source:
American Bankers Association, March 2009)
o It is estimated that there are 10,000 payment transactions every second
around the world. (Source: American Bankers Association, March 2009)
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o Card fraud costs the U.S. an $8.6 billion annually and the bulk of that loss
falls on the card issuers. (Source: Aite Group LLC)
India is also not lagging behind. There are lots of data and those are being generated
every second. In terms of predictive modelling (logistic regression), the credit card
industry (and finance in general) is way ahead of the line. And I think it should be
because if they can reliably predict where and when fraud might occur, they can have a
significant impact on their organization’s bottom line. Of course, this pretty much applies
to any industry.
The predictive modelling for fraud detection is very critical to any of the Financial
Organization and the credit card industry and the Financial Organizations are tight
lipped about what they look for. However, their algorithms are constantly changing
based on how fraud is perpetrated (as the patterns of fraudulent activities are changing
with time). For some cases, the small online purchases were being used to see if a card
was active and could be used, this information was added to their predictive model. Of
course, one must also consider active purchasers versus inactive ones, the spending
patterns etc., and because they want to make sure that they flag cards with a fraudulent
alert that might actually be fraudulent and not typical buying behaviour for the card
holder and not present a situation of false alarm.
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Ways To Avoid Credit Card Fraud
1. Report fraud as soon as you suspect it - Any case of fraud must be dealt with
immediately. You need to call your card provider or bank and file an immediate report
using a 24-hour number that you have been given. Your card will be canceled
immediately and then the company will help you deal with any further matters.
2. Shop safely - When you are out and about shopping there are ways to avoid credit
card fraud that you may not have thought of. When the sales assistant gives you back
your card take a look at it first to make sure that it is yours before putting it in your
pocket or wallet. Also, you should always make sure that nobody sees your pin number
whenever you use your card. Try to shield it with your hands. These thieves can be very
tricky and use cameras or assistants to watch what number you are keying in for your
pin.
3. Check Statements - It's surprising how many people don't check their monthly credit
card statements. Yet keeping an eye on the amounts charged to your account can be a
quick way to determine whether your card is being used by a fraudster or not.
4. Eyes On Your Card - Never allow your credit card out of your sight at any time. It
might be trendy to slip your credit card into the bill-folder at a restaurant to be charged
back at the counter, but this could be an excellent opportunity for a fraudster to take
advantage of you. This also goes for anywhere you can't see your credit card being
processed in front of you.
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5. Don't Be Fooled by Email Phishing - Phishing' is the term used to describe a
fraudulent email requesting that you click on a link. You’ve then encouraged to enter
your personal details into a website. Your credit card issuer will never ask you to verify
your details or to click on a link to re-enter your details. Millions of people every year get
scammed this way.
6. Keep your information private - Your bank or credit card issuers should never call
or e-mail you for your account information. If you receive such a call or e-mail, call your
bank immediately and let them know about it.
7. Secure Online Shopping Sites - Even though most people fear shopping online, it
can actually be a little safer than shopping in person but only if you check that you're
using a secure website. A secure site used encryption to keep your information safe.
Check the address bar in your browser to be sure it says HTTPS:// in front of the
address. Also check whether there's a little lock symbol in the bottom right of your
browser.
8. Safe Statement Disposal - Buy a cheap shredder from a discount department store
and be sure to shred your old credit card statements and bank statements. There really
are people willing to go through garbage to find personal financial details like this.
9. Notify Your Credit Card Issuer - Always notify your credit card issuer immediately
of a change of address. Be sure your statements and correspondence are being sent to
the correct address as quickly as possible.
10. No Sharing - It's never a good idea to share your credit card information with
anyone for any reason. There are plenty of people every year who are scammed by
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family members or friends using their credit card details fraudulently. Even if your
intentions are good, make sure you enter your own details and take responsibility for
your own card.
Smart Cards – A window to the future
Security was the main purpose of smart cards from the early days. In case of the ideal
smart card tamper-resistance has utmost priority. The card manufacturer provides the
card’s physical and the OS’s logical security. This is necessary to preserve the
application’s logical security.
The ideal smart card has large storage capacity. It is in the region of megabytes, so
even photographs and multimedia information can be stored on it (to be used in e.g.
facial recognition). High storage capacity is also necessary to enable the use of more
complex applications.
The ideal card is capable of real-time speech and video encryption. This requires
three things: fast computation, fast communication with the outside world and fast
cryptographic functions. For the latter purpose it contains a cryptographic
coprocessor for accelerating both symmetric and asymmetric cryptography.
In case of cryptographic protocols random number generation is vital. This card can
generate good quality random numbers. If a random number generator can be
predicted, whole security protocols can be corrupted. (A good example for this danger is
the Fiat-Shamir algorithm, which would be suitable for a smart card due to its relatively
low processor requirements on the card side.) It is theoretically proven that the
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generation of random data is not possible in an algorithmic way. In such cases a human
factor is often used. Mobile phones can use disturbances in the ether as random seeds.
The ideal card has an own power supply and a timer. Equipping a security-oriented
microcomputer with timers increases its cryptographic potential. The own power supply
enables it to run without the support of a reader. Programmers do not have to keep in
mind that the attacker may remove the card from the reader and so cut off its power
supply thus trying to leave the card in an inconsistent state. To avoid such problems,
transaction management should have been implemented. The own power supply not
only makes transaction management unnecessary, but provides the possibility for an
application to run on the card continuously.
Moreover, more applications can run simultaneously in the ideal card’s multithreaded
environment.
The ideal smart card is a compromise between two philosophies. The upper layer of the
software architecture is flexible and replaceable whereas the operating system is
strongly connected to the hardware.
The ideal smart card has a long lifetime (measured in decades). This and the fact of
storing precious information on the card gives robustness even more importance. The
increase of the number of smart card based applications will definitely increase the
number of smart cards held by one person. To solve this problem the ideal smart card
runs multiple applications. These may change dynamically so that new applications can
be downloaded to the card and deleted when they are not used. It is vital that these
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applications are separated so that they cannot tamper with each other’s data. However,
due to lack of storage space and reasons of consistency, it is also vital that they can
interact with each other and share data (e. g. cardholder name) or even
code.
The card is programmed in a high-level platform- (and vendor-) independent
programming language so that the source code can be easily transferred from one
card to another.
The card can be easily programmed because its interface with the standard IT devices
is standardized. This not only includes the PC and mobile phones, but communication
through the Internet as well.
Trust is critical in case of all security applications. Neither the ideal card’s hardware, nor
its OS contains any trapdoors. Its security features are well documented, and the
possible customers can receive information on the smart card’s internal architecture. It
is not designed using “security by obscurity”, but strong cryptography and careful
planning and testing.
Developing security oriented applications for PCs is difficult. This is due to their
numerous I/O devices, network connections and possible attack points. In case of a
smart card the only point where interaction with the outside world is possible is the
contacts. The restriction of communications is on one hand convenient, but on the other
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hand it restricts the power. A simple LED on the card gives the ideal card the ability of
direct feedback to the user.
Smart card of the future
What is realistic from the features of the ideal smart card, and what capabilities exist in
the cards on the market today.
Today’s cards have 8-32 kilobytes of memory. This is likely to increase in the future in
parallel with the development of IC technology. Computational power has a closer limit
though. Controlling overheating has always been a problem in case of microelectronics
but it case of cards the problem is even larger. The card’s shape is restricted and plastic
may not melt. The authors believe that computational power will increase in the future,
but will not increase dramatically. Neither will smart cards’ speed nor their storage
capacity increase over that of PCs’.
Real-time encryption of speech or video is far beyond the capabilities of today’s cards,
and the authors believe that it will not be possible in the near future. Supplying cards
with cryptographic hardware is a question of price thus it is a question of mass
production. Security and portability are the two areas where cards can be better used
than PCs. This is why the author suppose that the smart card of the future will be
equipped with cryptographic hardware. The production of good quality random numbers
is a problem yet to be solved. The documentation of today’s cards contains no
information on the ways of random number generation.
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The possession of an own power supply probably has technical limitations, so cards are
not likely to have one in the near future. This implies the absence of a timer too.
However, non-card-shaped devices such as iButton do have such possibilities.
Transaction management and power supply are two alternatives. On Java Cards the
previous one is supported by the programming environment. Although the Java Card
API seems to be a well designed, clear and card-independent programming
environment, this part of the technology is still in an infant stage today. Though the
language of Java Cards is object oriented, this feature cannot be practically used due to
limited hardware resources. This specification has changed a lot in the past and it is
likely to change in the future in parallel with the improvement of the hardware.
The lifetime of cards is not measured in decades nowadays. However, iButton is a
device designed for hard circumstances (rock climbing, swimming), and its estimated
lifetime is much larger than that of smart card. However, the technology of
programmable smart cards is new so no long-term experience is available. The Java
Card specification defines an environment, where applets may enter and leave the card
dynamically. However, these applets cannot interact with each other.
The applications of Microsoft Smart Card for Windows may share data among each
other, but the card’s file system needs to be re-designed before a new application is
downloaded. The ideal smart card would have to be a compromise between these two,
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but security and robustness remain vital. The authors believe that although technology
does not have the proper tools for this today, a solution will be found for this problem
in the future.
Java Card and Microsoft Smart Card for Windows both use high-level languages today,
this seems to be the trend of development. Documentation for the cards is incomplete,
the main tool of manufacturers is unfortunately still “security by obscurity”.
Smart cards are not likely to have an own user interface in the future. However, their
future is closely connected with that of mobile phones. Mobile telephony already gave a
boost to the improvement of smart cards, and this rapidly developing area is where
programmable smart cards are mostly used in practice today. Combining the power of
smart cards with the user interface and network connection of mobile telephones new
possibilities may arise. SIM cards already offered the users various applications in the
past, and there is more to come.
Growth in the electronic payments sector
Growth in the electronic payments sector has surpassed general economic growth and
growth in other financial sectors. Electronic payments include credit, debit, and other
electronic instruments used to transfer payments from consumers to merchants.
The growth in the electronic payments sector is companied by numerous economic and
transactional benefits. As demonstrated by Muham-mad Yunus and the Grameen Bank,
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winners of the 2006 Nobel Peace Prize, gains from financial innovations can be
extensive, widespread, and developmentally favorable.
Electronic payments improve economic inefficiencies, make payments more secure and
convenient, and, as a corollary to the lessons learned from micro finance, provide the
impetus for further economic and social development.
For developing countries, those gains could be significant, but they would depend on
the concur-rent development of the appropriate network and payments infrastructure,
government regulation, consumer education, and competition within the sector. As
governments in developed economies have learned, adequate regulatory oversight in
the electronic payments sector is essential to maintaining financial stability, consumer
confidence, and data privacy and security of the sector. Although electronic payments
growth could represent an opportunity for developing countries to rebalance their
economies by encouraging domestic consumption—and an opportunity for the United
States to lower its trade deficit—governments, industry, and consumer groups will need
to educate consumers to use electronic payments responsibly and securely.
Electronic Payments Promote Economic Efficiency and Growth -
Electronic payments expand the consumer market, increase banking access to the
unbanked, improve macroeconomic efficiency, and encourage entrepreneurial activity.
The ultimate benefit of adapting an electronic payments system will depend on how
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competition and the evolution of the informal sector affect how widely electronic
payments are adopted.
Electronic Payments Expand the Consumer Market -
The development of an electronic payments system enlarges the consumer market and
boosts the purchase of U.S. exports, particularly in the e-commerce and travel and
tourism sectors. According to an analysis of a cross-section of 50 countries by Global
Insight, increasing the existing share of electronic payments in a country by a margin of
just 10 percent will generate an increase of 0.5 percent in consumer spending. For
example, according to the Economist Intelligence Unit, consumer expenditure in China
was $865 billion in 2005. Increasing credit cards’ share of the transaction market from
20 percent to 22 percent would result in an incremental $4.33 billion in consumer
expenditure.
Electronic Payments Increase Access to the Banking System –
Electronic payments act as gateways into the banking system for unbanked segments,
which make up as much as 70 percent of the world’s population. In a simulation of the
U.S. economy, a 10 percent shift of currency into deposits or other reserves that can be
used for loans increased GDP by more than 1 percent annually.2 Many Latin American
countries, such as Brazil and Mexico, with large unbanked or under banked populations
would benefit significantly from movements into the formal financial sector.
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Electronic Payments Create Macroeconomic Efficiency –
Electronic payment networks have the potential to provide cost savings of at least 1
percent of GDP annually over paper-based systems through increased velocity,
reduced friction, and lower costs.3 For China, with a nominal—that is, unadjusted for
purchasing power parity (PPP)—GDP of $2.278 trillion in 2005, that amount translates
into a potential savings of roughly $23 billion.
Electronic Payments Are a Source of Capital for Start-ups –
Credit cards are one of the most reliable sources of start-up funds for new
entrepreneurs. Unlike bank loan officers, private angel investors, or government lending
programs, credit cards offer a simple and rapid access to capital that has helped a
significant number of U.S. entrepreneurs establish new businesses. In addition,
factoring future credit card receipts for short-term capital needs is a valuable option for
many small businesses. The small and medium-sized enterprise sector in emerging
countries, which typically has difficulty accessing financing, could benefit from that alter-
native financing source.
Electronic Payments Benefit Consumers and Merchants –
In addition to the numerous economic benefits that result from expanding the electronic
payments markets, electronic payments systems also provide consumer and seller
protection and convenience. For consumers, electronic payments provide an
established system of dispute resolution, increase the security of their payments, and
reduce their liability for stolen or misused cards. Electronic payments also provide
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immediate access to funds U.S. Department of Commerce, International Trade
Administration on deposit through debit cards and offer the convenience of global
acceptance, a wide range of payment options, and enhanced financial management
tools. For sellers, electronic payments improve the speed and security of the transaction
processing chain, from verification and authorization to clearing and settlement. Such
payments also provide better management of cash flow, inventory, and financial
planning through rapid bank payments. Electronic payments may also reduce costs and
risks by eliminating the need to run an in-house credit facility.
Financial Sector Development Enhances Economic Growth and Innovation –
Financial development increases economic growth by directing capital to an economy’s
most productive areas. The greater a country’s financial development, the larger the
economic growth over the subsequent decades. A doubling of the size of private credit
in a developing country is associated with a 2 percent annual increase in economic
growth.6 Finally, more new firms are created in countries with developed financial
systems, and capital-dependent industries and firms grow faster. The development of
the financial system includes the banking, securities, and electronic payments sectors.
Electronic payments, for example, contribute toward the development of a more efficient
and sound financial system. Numerous studies show that the growth of electronic
payments has measurable economic benefits for countries primarily because electronic
payments are much more cost-effective on a large scale than cash payments. E-
commerce and travel and tourism, for example, are two sectors that depend significantly
on the ability of consumers to use electronic payments at the point of purchase.
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Electronic Payments and Exports –
In addition to its role in developing a country’s domestic economy, the electronic
payments sec-tor is also linked to an expansion of exports. As discussed earlier, more
accessible and convenient payment options facilitate larger consumer purchases. An
analysis of credit card penetration data shows a moderate correlation between credit
cards per capita and exports per capita, which is higher than the correlation between
GDP per capita and exports per capita. Also, a moderate correlation exists between
changes in credit card penetration and exports. Although it is likely that both credit card
penetration and exports between 1998 and 2005 were affected by economic growth in
GDP, that analysis suggests that the development of electronic payments markets has
important implications for further economic and trade opportunities for U.S. businesses.
Credit Card Market Penetration in Selected Countries Is Growing –
Below table shows the extent to which credit and charge cards were used in different
countries in 1998 and 2005.
Country 1998 2005 Change(%) Number of
Companies
Malaysia 0.10 0.30 192 n.a
Germany 0.19 0.27 46 7
France 0.15 0.23 50 5
Thailand 0.04 0.20 372 4
Chile 0.14 0.19 37 n.a
South Africa 0.08 0.13 69 5
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Mexico 0.06 0.13 112 4
Venezuela 0.13 0.12 -5 n.a.
Hungary 0.00 0.09 3022 n.a.
Poland 0.02 0.08 251 4
Colombia 0.04 0.07 70 n.a.
Czech Republic 0.00 0.07 2323 4
Indonesia 0.00 0.04 360 4
Saudi Arabia 0.02 0.04 101 5
China 0.01 0.03 136 1
Russia 0.00 0.02 >9999 8
India 0.00 0.02 405 4
United States 1.80 2.53 40 7
Taiwan 0.49 2.14 341 n.a.
Hong Kong 1.12 2.05 84 n.a.
Canada 1.40 1.79 28 5
Japan 1.95 1.74 -11 6
South Korea 0.88 1.50 71 6
United Kingdom 0.71 1.35 90 6
Australia 0.85 1.05 24 5
Singapore 0.52 0.94 80 n.a.
Spain 0.33 0.75 130 8
Italy 0.25 0.51 101 5
Sweden 0.34 0.49 43 5
Israel 0.40 0.47 18 n.a.
Portugal 0.20 0.46 127 5
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Netherland 0.26 0.43 70 n.a.
Brazil 0.14 0.38 168 6
Argentina 0.24 0.35 44 n.a.
Belgium 0.28 0.32 13 n.a.
Quantitative market research
Need Gaps - As per the research conducted, HSBC’s major problem is low awareness
level among consumers caused by their low-key advertising, very stringent credit
policies, and absence of direct selling. Lately, they have tried to venture into co-branded
(with Shopper’s Shop) and affinity cards (with Top Gun Club) also. They have alliances
with Thomas Cook, DBS lounges, DHL tele-express services, Oberoi Hotels and Sita
Travels. The bank primarily draws upon its strength from a strong ATM network of 56
ATMs.
Credit Card holder behavior - 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).
An important fact that should be observed is that it is only in the past few years that the
Indian customer is beginning to accept ‘Credit’. The Indian culture doesn’t promote
credit, and it is this outlook change which is the most important development for the
credit card industry. ABN Amro, for instance, backed up their launch of the ‘Freedom
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Card’ with research that showed that the Indian middle class views the credit card as a
potential debt trap.
Unmet Needs - ‘Unmet needs’ analysis in qualitative research has brought to light
benefits which are not currently being offered by the credit card industry and hence
present an opportunity.
Need for a Card customized for Internet transactions - With rapid growth of
business over the Internet, there now exists a great need for a card suitable for
transacting safely and conveniently over the Internet. The growing number of Internet
users will provide a lucrative market for this product.
Need for ‘Premium’ benefits - Even though there are credit cards like Diners in the
premium segment, there is a dearth of ‘premium’ benefits. Examples of these are
Special airport Lounges etc.
These benefits are available to the Indian consumer once he goes abroad, but within
India, he doesn’t get all the extra ‘premium’ benefits which can associated with Premium
cards.
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Proliferation of ATMs - The credit card can be used for withdrawing cash from an
ATM. This revolving credit facility is also a major revenue earner for the issuing bank
(interest charges range from 1.99 % to 3 % per month). There are very few ATMs in the
metros, and are not there in most non-metro cities. The lack of the ATMs doesn’t allow
the credit card to be used to its potential.
Wider Acceptability - Though the numbers of Merchant Enterprises are on the
increase, more ME should be included in the credit card framework.
Product Characteristics translating into need gaps (as told by consumers)
a) Low Credit limit
b) High Interest Charges (& interest charges applicable on the interest itself)
c) High Annual charge
d) Grace period (mentioned, but not much importance given)
e) Lost card liability of Rs 1, 000 on non-photo card (eg. Stanchart) as opposed to nil on
photo card
f) Low Value added benefits and inadequate information updates
Other factors affecting sales level
· With a parallel economy of the same order as the country’s GDP, for a large number of
people, the incentive to use credit card is low.
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· Lack of a strong telecom network hinders efficient card operations.
· Without the full convertibility of the rupee, internationally acceptable cards could not till
recently be launched in India and full potential of the card business is still not realized.
· The average consumer is more comfortable with cash and is averse towards credit.
· Moreover, the problems of reluctant MEs and postal delays may hinder the
development of the card market.
Target Audience
a) Customer Segments: The segmentation of the card industry can be done on the
basis of income. Further research can only be conducted after preliminary secondary
research of the income profiles in the country.
The Indian market reflects considerable diversities in income levels and lifestyles. A
World Bank estimate places average annual household incomes (in terms of purchasing
power) at US $6452. But there are large segments of people, whose income levels are
significantly higher, growing faster and spurring a consumer revolution. It is difficult to
obtain correct estimates of this group, as there is a very small percentage of India’s
‘rich’ who pay income tax and their income levels are correctly reported. Therefore to
conduct this segmentation, we shall have to make use of National Council of Applied
Economic Research (NCAER) data and not the estimates from the income tax
department.
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The segment which have been identified are as follows:
Segments Income Group (Rs.)
Very Rich 2,15,000+
Consuming Class 45,000 – 2,15,000
Climbers 22,000 – 45,000
Aspirants 16,000 – 22,000
Destitute < 16,000
According to NCAER reports:
· The Very Rich (annual income over Rs 215,000) will increase from 1 million to 6.2
million households by 2006-7.
· The Consuming Class (annual income of Rs 45,000-215,000) will grow from 28.6
million to 90.9 million households by 2006-7.
· The number of households in the Aspirants (Rs 16,000-22,000/year) and Destitute
(less than Rs 16,000/year) groups will decrease significantly.
Segments with high unrealized potential
· Mid-Size cities in India have low credit card penetration. The residents of such cities
are affluent and they are good markets for Citibank cards. This low penetration is due to
comparatively low acceptance of credit cards.
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· Rich farmers who live in the rural belt but also spend quite some time in the nearby
towns can be tapped. A product can be introduced to serve their specialized needs.
· The growing number of netizens represents a segment with high-unrealized potential.
b) Customers Motivations - Preliminary qualitative research has identified certain
motivators differentiated on the basis of the income segments. Further quantitative
research shall be conducted keeping this in mind to arrive upon the ideal positioning.
Segments Motivations
Very Rich Convenience and acceptability, Level of service, Credit Limit
Consuming Class ‘Prestige’, Convenience and acceptability, Level of service, Charges
Climbers ‘Prestige’, Charges
Charges include all commissions, interest rate, annual fees, which are to be paid to the
bank. The motivational factor has been derived from the credit card holder behavior and
income levels. This shows differentiation as we move along the various segments. Fee
charges are not at all important for the ‘Very Rich’ but they assume a fair degree of
importance as we move down the segments. This segment primarily has either the non-
premium cards or cards issued by the nationalized banks. In both the scenarios, level of
service is not very high. The other segments have not been considered since they do
not fall into the potential customer category. However, with the introduction of ‘Kisan’
Cards (The major issuing banks are: Dena Bank, Punjab National Bank, State Bank of
India Benegal Circle, State Bank of Indore, Vijaya Bank), these segments are also being
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brought into purview of credit card users (assumption: 65% of low-income households
are associated with agriculture).
Sampling and Research Methodology
Stratified Sampling - In this random sampling technique, we first divide the whole
population into mutually exclusive subgroups or strata on the basis of our three
identified target segments (Very Rich, Consuming Class and Climbers) and then units
are selected randomly from each stratum. The population herein consists of the urban
employed. The segments are based on predetermined criteria, i.e. the demographic
characteristic income. It is important that the segments be as heterogeneous as
possible.
It is considered representative if its features are characteristic or typical of the entire
group. With a representative sample, you can make generalizations about the entire
population with a measurable degree of precision and confidence. We have thus divided
our population into mutually exclusive and exhaustive groups of like elements, or strata,
and shall then select a random sample from each.
Since we are going in for a positioning statement that will be targeted at a broad group
of individuals, we do not require very high confidence limits and so can conduct the
research with a proportionately small sample of the population in the various strata.
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Quantitative Research Methods
Concept Testing - Multiple concepts "screened" among a general audience of target
consumers. In depth evaluation of single concepts using standard, projectable
measures
Objective: Use a cost effective approach to identify which new ideas have the most
potential and are worthy of further development Use the results in combination with
product testing results in a sales forecasting model to predict:
o Likely sales take-off in year one
o Repeat purchasing levels (Multiple credit card users)
o The profile of likely buyers (verify qualitative and secondary research)
Pricing Research - Use multiple price points to develop a simple price/sales curve in
early stage concept testing to assess price sensitivity with respect to credit limit, interest
charges and annual charges.
Use full profile pricing scenarios to develop a much more sophisticated category pricing
model which allows us to predict the impact on purchasing when the client or
competitors run discount price promotions or introduce new price points/value benefits
for existing brands.
Objective: Assess alternative return on investment strategies
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Proprietary Research Methods
Laddering Research - This research method is designed to determine the rational and
emotional basis for brand preference and to identify new brand positioning, equity,
extensions and advertising strategy alternatives.
It will show how consumers discriminate between products in the category, based upon
factors that directly affect their preference.
It also shows the means by which these discriminating factors relate to the satisfaction
of higher level personal needs.
Laddering Research shall give us –
o A very detailed and insightful understanding of the rational and emotional reasons
people have for choosing specific brands (credit cards) in the category
o A framework for discussing and choosing strategic options for positioning and
advertising the brand.
o A basis for clearly differentiating the brands within the category (rationally and/or
emotionally)
o A basis for comparing and contrasting the strategies behind the historical advertising
and selling of brands within the category (strategies can be "mapped" on the strategic
framework that has been developed)
o A much more insightful response to new ideas for the brand
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Strategic Advertising Research
A proven assessment method for advertising which measures advertising against it's
strategic objectives (not norms) and offers the ability to objectively assess multiple
creative approaches and multiple advertising strategies for a brand using "common
sense" measures.
The method is based on the "accepted" theory of how advertising works to inform and
persuade people
o We all agree on the specific communication objectives for the advertising before
proceeding with the research.
o We conduct the research early enough in the advertising development process to
make good use of the study results
o We conduct the study only with the target audience
o We allow people to see the advertising several times - this is not a recall test
o We measure delivery of the agreed communications strategy at all levels, both
rational and emotional
o We measure attitude shift towards purchasing the product
o We utilise additional multiple measures of advertising so that we are all in a better
position to assess the strengths and weaknesses of the advertising and to improve it
o We collect a great deal of information in each interview so that we have the right
balance of objectivity in our analysis of the findings
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Information Areas
1. The bank may offer more than one type of credit card based on the segmentation and
the conclusions arrived at as a result of the research. Research needs to identify the
profitability of targeting the respective segments and the efficacy of the
suggested positioning statements to these segments.
2. The bank should be able, on the basis of the research, to ascertain the profitability
of adopting a generic strategy of differentiation, based on the wide range of cards
and services it may offer. The bank may then effectively target most segments of the
society.
3. A clear cut cost-benefit relationship is desired with respect to the potential customers
relative weightage of the provision of various services such as schemes to pay
MTNL bills, customs duties, dial-a-draft facility, frequent flyer program with Indian
Airlines and Air India etc.
4. The ad spend will also be ascertained after testing the effectiveness of various
advertising and promotion options in order to increase market share. Consideration
should also be taken to the medium of advertisement and promotions so that the bank
may decide upon a strategy after weighing the costs and benefits.
5. Qualitative research has indicated that HSBC has an image of non-exclusive
membership, but exclusive service and has the largest number of ATMs. Positioning
opportunities in this line suggested the card should be targeted at middle to senior
business professionals and businessmen, positioning the card on friendly service.
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Attention must be paid to verify the effectiveness of the same through quantitative
research.
6. Test possible Key Success factors that have come up in qualitative research
Present:
i. Brand recognition
ii. Access to major channels
iii. Marketing program
iv. Reach (target market)
Future:
i. Level of Service
ii. Acceptability
iii. Safety of use over the Internet.
iv. Value Added Benefits
7. Test Feasibility of recommended innovations and improvements in the product
line.
8. Test assumed positioning objectives -
a) The positioning should be so that it disassociates with the ‘elite’ image associated
with the bank. The positioning may be done so as to give an image that the cards can
be acquired by people from not only the upper class, but also the middle income
categories. This is essentially to counter the strategy of SBI-GE. In other words, it
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should give a mass appeal to the cards while reinforcing the ‘clean’, and ‘dependable’
image of the bank at the same time.
b) The positioning should be such as to imply that HSBC credit cards are a part of the
customer’s everyday life. It should lead the customer to keep the card with him
whenever he goes out. This in turn, shall lead to more card usage as the card would be
handy for the customer to use whenever he wants to make purchases or withdraw cash.
For users with multiple cards, such an objective shall bring more usage for the Bank’s
card, compared to others.
c) It should try to leverage HSBC’s strong perceived ATM network.
9. Test alternatives for positioning - On quality of service: After convenience and
acceptability of credit cards, the most important thing for customers is quality of service.
This can be defined as prompt response in issuing the card, 24 hour customer service
and quick complaint and grievance redressal. A positioning based on superior quality of
service would create a favorable image in the mind of the consumer leading him to not
only buy the card but also use also use it more often.
Positioning based on benefits: Such a positioning has not been recommended as
differentiation among credit cards fails to provide sustainable competitive advantage, as
benefits offered on cards are easy to copy. However, as need gaps arose in the
preliminary research, we must also test this, while giving weight to the above.
Positioning as a low cost card: This has previously been disregarded as an option as
the costs involved are higher than its competitors and also in this industry one cannot
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gain an SCA by
competing on price and advantages can be gained only on the basis of service and
innovative product features.
Positioning on use: Credit cards in India are most often used while traveling. This can
be the main positioning plank because it would increase the credit card usage and as
HSBC has a good brand image it won’t be thought of as a card exclusively meant for
travel.
Positioning on acceptability: Acceptability is the most important factor in the minds of
the consumer and so positioning on this factor will add new consumers.
Positioning as a card for transactions on the net: With the impending boom in e-
commerce in India, HSBC could position itself as the best and safest medium for
payment purposes.
Uses of Smart Cards
Smart cards currently exist for a vast array of applications. However, the expected
growth in the industry will not be due merely to growth in these segments, but also to
the addition of the Internet and electronic commerce with their myriad of uses.
Current Applications
A smart card, as mentioned above, is a portable computational device with data storage
ability. As such, they can be a very reliable form of personal identification and a tamper-
proof, secure information repository. The main possible applications of smart cards are
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the following:
Payphones - Outside of the United States there is a widespread use of payphones
equipped with card readers rather than p; or in addition to p; coin recognition and
storage. The main advantages are that the phone company does not have to collect
coins, and the users do not have to have coins or remember long access numbers and
PIN codes. Smart cards have the further advantage over magnetic stripe cards of being
reloadable, and allowing advanced features like phone banking, automatic memory
dialing and on-line services.
Mobile Communications - Smart cards are used as identification device for GSM
digital mobile phones. The card stores all the necessary information in order to properly
identify and bill the user, so that any user can use any phone terminal.
Banking & Retail - Smart banking cards can be used as credit, direct debit or stored
value cards, offering a counterfeit- and tamper-proof device. The intelligent microchip on
the card and the card readers use mutual authentication procedures that protect users,
merchants and banks from fraudulent use. Other services enabled by smart cards are
advanced loyalty programs and electronic coupons.
Electronic Purse - A smart card can be used to store a monetary value for small
purchases. Card readers retrieve the amount currently stored, and subtract the amount
for the goods or services being purchased. Groceries, transportation tickets, parking,
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laundromats, cafeterias, taxis and all types of vending machines are only some of the
purchases that often do not reach amounts to justify the hassle of using a credit card (a
cash card reader does not require a permanent phone connection with a host
computer). Radio-read smart cards will allow the free flow of people through
transportation systems, avoiding the need of ticketing machines or validation gates.
Health Care - Smart cards allow the information for a patient's history to be reliably and
safely stored. Health care professionals can instantaneously access such information
when needed, and update the content. Instant patient verification allows immediate
insurance processing and refund. Doctors and nurses themselves can carry smart card-
based IDs that allow secure, multi-level access to private information.
ID Verification and Access Control - The computational power of smart cards allows
running mutual authentication and public-key encryption software in order to reliably
identify the bearer of the card. For higher security needs, a smart card is a tamper-proof
device to store such information as a user's picture or fingerprints. Smart cards can be
used also for network access: in addition or in alternative to user IDs and passwords, a
networked computer equipped with a smart card reader can reliably identify the user.
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Computer security - The Mozilla Firefox web browser can use smart cards to store
certificates for use in secure web browsing. Some disk encryption systems, such as
FreeOTFE, TrueCrypt and Microsoft Windows 7 BitLocker, can use smart cards to
securely hold encryption keys, and also to add another layer of encryption to critical
parts of the secured disk. Smart cards are also used for single sign-on to log on to
computers. Smart card support functionality has been added to Windows Live
passports.
Credit cards - These are the best known payment cards (classic plastic card):
Visa: Visa Contactless, Quick VSDC—"qVSDC", Visa Wave, MSD, payWave
MasterCard: PayPass Magstripe, PayPass MChip
American Express: ExpressPay
Discover: Zip
Roll-outs started in 2005 in USA. Asia and Europe followed in 2006. Contactless (non
PIN) transactions cover a payment range of ~$5–50. There is an ISO/IEC 14443
PayPass implementation. Some, but not all PayPass implementations conform to EMV.
Non-EMV cards work like magnetic stripe cards. This is a typical USA card technology
(PayPass Magstripe and VISA MSD). The cards do not hold/maintain the account
balance. All payment passes without a PIN, usually in off-line mode. The security of
such a transaction is no greater than with a magnetic stripe card transaction.
EMV cards have contact and contactless interfaces. They work as a normal EMV card
via contact interface. Via contactless interface they work somewhat differently in that the
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card command sequence adopts contactless features such as low power and short
transaction time.
Cryptographic smart cards - Cryptographic smart cards are often used for single sign-
on. Most advanced smart cards include specialized cryptographic hardware that uses
algorithms such as RSA and DSA. Today's cryptographic smart cards generate key
pairs on board, to avoid the risk from having more than one copy of the key (since by
design there usually isn't a way to extract private keys from a smart card). Such smart
cards are mainly used for digital signature and secure identification.
The most common way to access cryptographic smart card functions on a computer is
to use a vendor-provided PKCS#11 library. On Microsoft Windows the CSP API is also
supported.
The most widely used cryptographic algorithms in smart cards (excluding the GSM so-
called "crypto algorithm") are Triple DES and RSA. The key set is usually loaded (DES)
or generated (RSA) on the card at the personalization stage.
Some of these smart cards are also made to support the NIST standard for Personal
Identity Verification, FIPS 201.
Financial - Smart cards serve as credit or ATM cards, fuel cards, mobile phone SIMs,
authorization cards for pay television, household utility pre-payment cards, high-security
identification and access-control cards, and public transport and public phone payment
cards.
Smart cards may also be used as electronic wallets. The smart card chip can be
"loaded" with funds to pay parking meters and vending machines or at various
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merchants. Cryptographic protocols protect the exchange of money between the smart
card and the accepting machine. No connection to the issuing bank is necessary, so the
holder of the card can use it even if not the owner. Examples are Proton, Geldkarte,
Chipknip and Mon€o. The German Geldkarte is also used to validate customer age at
vending machines for cigarettes.
Identification - A quickly growing application is in digital identification. In this
application, the cards authenticate identity. The most common example employs Public
key infrastructure (PKI). The card stores an encrypted digital certificate issued from the
PKI provider along with other relevant information. Examples include the U.S.
Department of Defense (DoD) Common Access Card (CAC), and various identification
cards used by many governments for their citizens. Combined with biometrics, cards
can provide two- or three-factor authentication. Smart cards are not always privacy-
enhancing, because the subject carries possibly incriminating information on the card.
Contactless smart cards that can be read from within a wallet or even a garment
simplify authentication.
The first smart card driver's license system in the world was implemented in 1987 in
Turkey. Turkey had a high level of road accidents and decided to develop and use
digital tachograph devices on heavy vehicles, instead of the existing mechanical ones,
to reduce speed violations. Since 1987, the professional driver's licenses in Turkey are
issued as smart cards and the driver is required to insert his driver's license into the
digital tachograph before starting to drive. The tachograph unit records speed violations
for each driver and gives a printed report. The driving hours for each driver is also being
monitored and reported. In 1990 the European Union conducted a feasibility study
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through BEVAC Consulting Engineers, titled "Feasibility study with respect to a
European electronic drivers licence (based on a smart-card) on behalf of Directorate
General VII".
A smart card driver's license system was later issued in 1995 in Mendoza province of
Argentina. Mendoza had a high level of road accidents, driving offenses, and a poor
record of recovering outstanding fines. Smart licenses hold up-to-date records of driving
offenses and unpaid fines. They also store personal information, license type and
number, and a photograph. Emergency medical information such as blood type,
allergies, and biometrics (fingerprints) can be stored on the chip if the card holder
wishes. The Argentina government anticipates that this system will help to collect more
than $10 million per year in fines.
In 1999 Gujarat was the first Indian state to introduce a smart card license system. To
date it has issued 5 million smart card driving licenses to its people
In 2002, the Estonian government started to issue smart cards named ID Kaart as
primary identification for citizens to replace the usual passport in domestic and EU use.
As of 2010 about 1 million smart cards have been issued (total population is about 1.3
million) and they are widely used in internet banking, buying public transport tickets,
authorization on various websites etc.
By the start of 2009 the entire population of Spain and Belgium will have an eID card
that is used for identification. These cards contain two certificates: one for
authentication and one for signature. This signature is legally enforceable. More and
more services in these countries use eID for authorization.
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Smart cards are also beginning to be used in emergency situations. In 2004, The Smart
Card Alliance issued a statement expressing the need to "to enhance security, increase
Government efficiency, reduce identity fraud, and protect personal privacy by
establishing a mandatory, Government-wide standard for secure and reliable forms of
identification". In light of this, emergency response personnel have now begun to carry
these cards so that they can be positively identified in emergency situations. WidePoint
Corporation, a smart card provider to FEMA, produces cards that contain additional
personal information, such as medical records and skill sets. Cards like these provide
immediate access to information, which allows first responders to bypass organizational
paperwork and focus more time on the emergency resolution.
Schools - Smart cards are being provided to students at schools and colleges.
Usage includes:
Tracking student attendance
As an electronic purse, to pay for items at canteens, vending machines etc
Tracking and monitoring food choices at the canteen, to help the student
maintain a healthy diet
Tracking loans from the school library
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Public transit - Smart cards and integrated ticketing have become widely used by
public transit operators around the world. Card users may use their cards for other
purposes than for transit, such as small purchases. Some operators offer points for
usage, exchanged at retailers or for other benefits. Example: The Octopus Card used
in Hong Kong, London's Oyster Card, and San Francisco's Clipper card. However, they
have been criticized for presenting a privacy risk because it can allow the mass transit
operator (and the government) to track an individual's movement. In Finland, for
example, the Data Protection Ombudsman prohibited the transport operator Helsinki
Metropolitan Area Council (YTV) from collecting such information, despite YTV's
argument that the card owner has the right to a list of trips paid with the card. Earlier,
such information was used in the investigation of the Myyrmanni bombing
Concessionary travel - A highly successful use for smart cards within the UK is in
concessionary travel schemes. Mandated by the Department for Transport, travel
entitlements for elderly and disabled residents are administered by local authorities and
passenger transport executives. Smart cards have been issued as bus passes to
qualifying residents; however these smart cards can instead now be used by elderly and
disabled people who qualify for concessionary taxi travel. These schemes are part of an
additional service offered by some local authorities as an alternative for residents
unable to make use of their bus pass. One example is the "Smartcare go" scheme
provided by Ecebs.
Other - Smart cards are widely used to protect digital television streams. VideoGuard is
a specific example of how smart card security worked.
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The Malaysian government uses smart identity cards carried by all citizens and resident
non-citizens. The personal information inside the MYKAD card can be read using
special APDU commands.
Since April 2009, Toppan Printing Company has manufactured reusable smart cards for
money transfer and made from paper instead of plastic.
Security - Smart cards have been advertised as suitable for personal identification
tasks, because they are engineered to be tamper resistant. The chip usually implements
some cryptographic algorithm. There are, however, several methods for recovering
some of the algorithm's internal state.
Differential power analysis - Differential power analysis involves measuring the
precise time and electrical current required for certain encryption or decryption
operations. This can deduce the on-chip private key used by public key algorithms such
as RSA. Some implementations of symmetric ciphers can be vulnerable to timing or
power attacks as well.
Physical disassembly - Smart cards can be physically disassembled by using acid,
abrasives, or some other technique to obtain unrestricted access to the on-board
microprocessor. Although such techniques obviously involve a fairly high risk of
permanent damage to the chip, they permit much more detailed information (e.g.
photomicrographs of encryption hardware) to be extracted.
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The Disadvantages Of A Smart Card
With all the advantages of using smart cards, there are some disadvantages to using
them also. For example, even though they are small, lightweight, and easy to carry, they
can be easily lost if the person is irresponsible. This is fine if the card has a single use
like a bus pass, but if one smart card has multiple uses, allowing you entrance to office
parking, access to the office, and paying for lunch, then losing this card will have give a
different outlook to the day if it is lost.
A second disadvantage of the using smart cards is their level of security. They are more
secure than swipe cards. However, they are not as secure as some in the general
public would believe. This creates a false sense of security and someone might not be
as diligent as protecting their card and the details it holds.
A third disadvantage to smart cards is the actual technology and hardware. If used as a
payment card, not every store or restaurant will have the hardware necessary to use
these cards. One of the reasons for this is since the technology is more secure, it is also
more expensive to produce and use. Therefore, some stores may charge a basic
minimum fee for using smart cards for payment, rather than cash.
The fourth disadvantage of using smart card technology is their identity theft potential.
When used correctly for identification purposes, they make the jobs of law enforcement
and healthcare professionals easier. However, for criminals seeking a new identity, they
are like gold, based on the amount of information it can contain on an individual.
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Conclusion & Recommendations
Most often credit cards can provide convenience but they can also land you in debt
through unwise choices or through no fault of your own, such as an emergency. In order
to overcome the risks of credit card use, avoid accumulating too may and pay the debt
off on time, read terms and conditions carefully and take measures to avoid fraud.
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