lxxxv

Chapter II - A THEORETICAL FRAMEWORK

2.1. INTRODUCTION Oxford Dictionary and Thesaurus defines “credit card authorizing purchase of goods on credit”. Credit cards are innovative instruments in the area of financial services offered by commercial banks. The concept of credit cards was first developed by Diners’ club founder Frank McNamara, an American businessman who found himself without cash at a weekend resort founded Diner’s card in 1950. issued their first credit card in 1958. Bank of America issued the Bank Americard (now Visa ) bank credit card later in 1958. Right from that time, the commercial banks and non-banking companies in the USA adopted the concept of credit cards to develop their business. Barclays Bank was the first bank to introduce credit card in 1966 in Britain.102

The credit card business got momentum in the sixties and a number of banks entered the field in a big way. Credit card culture is an old hat in western countries. In , it is relatively a new concept that is fast catching on. The present trend indicates that the coming years will witness a burgeoning growth of credit cards which will lead to a cashless society. Credit has become an important vehicle of trade promotion. Credit cards provide convenience and safety to the buying process. One of the important reasons for the popularity of credit cards is the sea change witnessed in consumer behaviour. Credit cards enable an individual to purchase products or services without paying immediately. The buyer only needs to present the credit cards at the cash counter and sign the bill. Credit card can, therefore, be considered as a good substitute for cash or cheques.103

102 http://inventors.about.com/od/cstartinventions/a/credit_cards.htm. 103 S. Gurusamy (2007). Merchant Banking and Financial Services . Chennai: Vijay Nicole Imprints Private Limited, p.344. lxxxvi

A Credit card is a card or mechanism which enables cardholders to purchase goods, travel and dine in a hotel without making immediate payments. The holders can use the cards to get credit from banks up to 50 days free of cost. The credit card relieves the consumers from botheration of the carrying cash and ensures safety. It is a convenience of extended credit without formality. Thus credit card is a passport to, “safety, convenience, prestige and credit.”104 A credit card is a plastic card having a magnetic strip, issued by a bank or business authorizing the holder to buy goods or services on credit. Any card, plate or coupon book that may be used repeatedly to borrow money or buy goods and services on credit is called credit card.105

A credit card is a card establishing the privilege of the person to whom it is issued to charge bills. Most retail firms accept credit cards. Credit cards allow consumers to make purchases without paying cash immediately or establishing credit with individual stores. They eliminate the need to check credit ratings and to collect cash from individual customers. The issuing institution establishes the card’s terms, including the interest rate, annual fees, penalties, the , and other features. is typically an unsecured debt. Repossession is not easily accomplished by the lender to ensure payment. Banks have often priced the product assuming maximum risk exposure.106

A credit card is a device which enables the holder to obtain goods on credit from specified supplies. The holder of the card, in some cases, has to pay the yearly subscription and the suppliers also have to pay commission on sales to the bank or the body issuing the card. The suppliers are paid promptly and so are protected against bad debts, while the holder makes a single monthly payment to cover all his purchases for that period. Credit cards are issued only after the applicant’s credit worthiness has been accepted as satisfactory. According to credit rating, holder of

104 E. Gordon and K. Natarajan (2006). Financial Markets and Services . New Delhi: Himalaya Publishing House, pp.414. 105 http://www.advfn.com/money-words_term_1199_credit_card.html. 106 C.J. Woelfel (1994). Encyclopedia of Banking and Finance . New Delhi: S. Chand and Company Limited, pp.267. lxxxvii the credit card may be allowed a specified amount of credit from one month to another .107

A credit card, as the name indicates, enables the cardholder to enjoy credit from the issuing bank for a specific period after the purchases. During this intervening period, the cardholder is allowed to use the card for incurring further expenses.108 A is used to make an electronic withdrawal from funds on deposit in a bank, as in purchasing goods or obtaining cash advances. Credit cards are one of the most popular forms of payment for consumer goods and services in the .

2.2. HISTORY AND DEVELOPMENT OF CARD 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 was not until about half a century ago that plastic payments as we know them today became a way of life. The most common pre-plastic credit instruments were charge plates, celluloid “coins” and charge coins .109

The concept of using a card for purchases was described in 1887 by Edward Bellamy in his Utopian novel Looking Backward . Bellamy used the term credit card eleven times in his novel. 110 In the early 1900s, oil companies and department stores issued their own proprietary cards. Such cards were accepted only at the business that issued the card and in limited locations. While modern credit cards are mainly used for convenience, these predecessor cards were developed as a means of creating customer loyalty and improving customer service. 111 The modern credit card was

107 J.L. Hamson (1970). The Structure of Modern Commerce . London: The English Language Boom Society and Maclonaled and Evans Ltd., p.170. 108 RBI (1994). Report of the Committee on Technology Issues Relating to Payment System, Cheque Clearing and Security Settlement in the Banking Industry, Mumbai: RBI, pp.75. 109 http://www.creditcards.com/credit-card-news/credit-cards-history-1264.accessed on December 18, 2007. 110 E. Bellamy (1888). Looking Backward 2000-1887 (Utopion novel ). United States: William Ticknor Publisher, pp.470. 111 S. Sienkiewicz (2007). in a paper for the Philadelphia Federal Reserve Bank entitled “Credit cards and payment efficiency.” Published December 18. papers.ssrn.com/sub/papers cfm?abstract Id=927493. lxxxviii the successor of a variety of merchant credit schemes. It was first used in the 1920s in the United States, specifically to sell fuel to accepting each other's cards. Western Union had begun issuing charge cards to its frequent customers in 1914. Some charge cards were printed on paper card stock, but were easily counterfeited.

The Charga-Plate was an early predecessor to the credit card and used during the 1930s and late 1940s. Charga-Plate was a of Farrington Manufacturing Co. Charga-Plates was issued by large-scale merchants to their regular customers, much like department store credit cards of to-day. The first bank card, named "Charg-It," was introduced in 1946 by John Biggins, a banker in Brooklyn. 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. 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 account holders.112

The concept of paying different merchants using the same card was invented in 1950 by Ralph Schneider and Frank X. McNamara , founders of Diners Club , to consolidate multiple cards. The Diners Club, which was created partially through a merger with Dine and Sign, produced the first "general purpose" , and required the entire bill to be paid with each statement. That was followed by Carte Blanche and in 1958 by American Express which created a worldwide credit card network. 113 The Bank of America created the Bank Americard in 1958, a product which, with its overseas affiliates, eventually evolved into the Visa system. MasterCard came to being in 1966 when a group of credit-issuing banks established Master Charge. It received a significant boost when Citibank merged its proprietary ‘Everything Card ’, launched in 1967, into Master Charge in 1969. The fractured nature of the U.S. banking system meant that credit cards became an effective way for those who were traveling around the country to move their credit to places where

112 http://www.creditcards.com/credit-card-news/credit-cards-history, accessed on December 18, 2007, IST 18.00 hrs. 113 http://en.wikipedia.org/wiki/Diners_Club_IST16.00hrs_20th _October_2008 (accessed). lxxxix they could not directly use their banking facilities. In 1966, Barclaycard in the UK launched the first credit card outside the U.S. 114

There are now countless variations on the basic concept of revolving credit for individuals (as issued by banks and honoured by a network of financial institutions), including organization-branded credit cards, corporate-user credit cards, store cards and so on .115

2.3. FEATURES OF CARD The features of modern credit cards such as owner identification, for its cardholders and floor limit for its merchant establishments, convenience and safety to add value of cards, wider usage or popularity all over the world and dependence on technology to keep operating cost to the minimum, have been a runaway success for credit cards. 116

Along with convenient, accessible credit, credit cards offer consumers an easy way to track expenses , which is necessary for both monitoring personal expenditures and the tracking of work-related expenses for taxation and reimbursement . Credit cards are accepted worldwide, and are available with a large variety of credit limits, repayment arrangement, and other perks (such as rewards schemes in which points earned by purchasing goods with the card can be redeemed for further goods and services or credit card cash back ). Some countries, such as the United States , the , and , limit the amount for which a consumer can be held liable due to fraudulent transactions as a result of a consumer's credit card being lost or stolen. A credit card is part of a system of payments named after the small plastic card issued to users of the system. The issuer of the card grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a to the user. A credit card is different from a charge card, which requires the balance to be paid in full each month. In

114 www.mastercards.com 115 http://en.wikipedia.org/wiki/creditcard. 116 S. Gurusamy (2007). op. cit. , p.343. xc contrast, credit cards allow the consumers to 'revolve' their balance, at the cost of having interest charged. Most credit cards are issued by local banks or credit unions, and have the same shape and size, as specified by the ISO 7810 standard. 117

2.4. EVOLUTION AND GROWTH OF CARD The number of credit and users in India is climbing fast, and rising affluence is likely to erode Indians’ lingering reluctance to spend on credit. Indians have traditionally valued thrift and frugality. But the spread of affluence in the wake of rapid economic growth is challenging these values, at least for many middle-class and high-income families. One sign of this is the phenomenal growth in the number of credit and debit cards in India—in the past three years, the number of credit cards has more than doubled and the number of debit cards has almost quadrupled.

Credits cards are a relatively recent development. The VISA Company, for example, traces its history back to 1958 when the Bank of America began its Bank Americard program. In the mid-1960s, the Bank of America began to license banks in the United States the rights to issue its special Bank Americards. In 1977 the name Visa was adopted internationally to cover all these cards. VISA became the first credit card to be recognized worldwide.118

Credit cards are relatively new to India. Andhra Bank and Central Bank of India introduced credit cards in 1981. As of now there are about more than dozen major banks in Indian and foreign which have entered this line of business, besides some non-banking institutions. Since the plastic money has become as good as legal tender more people are using them in their day-to-day activities. The attitude of people towards credit cards has changed.

A phenomenal amount of money moves get transacted nowadays through electronic transfer, credit cards and debit cards. The Indian credit card market is in its growth phase, it recorded a growth of about 30 per cent a year. Debit cards are

117 http://en.wikipedia.org/wiki/credicard. 118 http://www.corporate.visa.com xci growing at 40 per cent. The RBI data put total electronic transaction in the country at over Rs.2,35,000 crores in 2006-07. This increased to Rs.3,60,000 crores in the first 10 months (April-January) of 2007-08. At the end of April-January 2007-08, all of us together held about 27.5 million credit cards transacted Rs.47,476 crores through these cards in 10 months of the year. 119

The Indian credit cards industry is still in a relatively nascent stage when compared to economies in West Asia, a survey by Master Card International. According to the survey results, only 14 per cent of Indians currently own a credit card. This is in sharp contrast to countries such as the and where 63 per cent and 50 per cent of respondents, respectively, own a credit card. The results indicate that the high growth potential for the payment card industry in India,

In terms of the single most important factor influencing of credit card, 30 per cent of Indians say they are influenced by the credit card brand, closely followed by 23 per cent who choose a credit card depending on the credit limit. Interestingly, 8 per cent of cardholders say they are influenced by the card design, while only 5 per cent and 2 per cent cardholders say they are influenced by the interest rate and the bank staff recommendations respectively. 120

2.4.1. Drivers of growth in card payment market Several factors have combined to fuel the astonishing growth in the use of credit and debit cards in India. Apart from the convenience offered by cards, these factors include the following: 1. Rising consumerism 2. Improved payment infrastructure 3. Competition and lower costs 4. Co-branding

119 Priya Ranjan Dash. “Your credit card under watch.” Financial Chronicle. Chennai, (April 17, 2008), p.16. 120 Business Line. New Delhi (December 27, 2007). Survey accessed online on 17 th Dec., 2007. xcii

xciii

2.4.2. Credit card outstanding rising in India The outstanding on plastic cards has risen by more than 50 per cent to Rs 19,345 crores as on February 15, 2008 according to the RBI. The credit card industry in India is still nascent according to VISA. Indians make just 1 per cent of their total purchases by credit cards against 20 per cent by Koreans. The global average is around 9 per cent. The Indian Credit Card market is expected to touch 55 million cards by 2010-2011. 121

2.4.3. Indian credit card user base grows 30% YoY India had just 3.5 million credit cards in 2000. As of March-2006, the number has swelled to 19 million, by January 2007 there were 22 million credit cards in India at the end of April-March 2007-08, all together held about 28 million credit cards and Indian had already transacted Rs.56,846 crores through these cards in the year. It represents the average growth of 30 per cent yearly. Not just the number of users have increased, but also the average spending has gone up from $368 (Rs.16,560) in 2000 to $437 (Rs.19,665) in 2006 and in 2007-08 to Rs.56,846 crores. 122

2.4.4. SBI to increase co-branding credit business SBI card which is a subsidiary of the State Bank of India and operating as an NBFC is exploring the option of tying up with regional banks to expand its national footprint. SBI card has forged alliance with United Bank of India and Catholic Syrian Bank, as first step in this direction. It also has alliance with the Indian Railways, Tatas, Hero Honda for co-branded. The credit card industry in India is growing annually at the rate of 30 per cent, while SBI has been growing at the rate of 45 per cent . SBI is one of the big players of credit cards in India with 3.6 million customers. 123

121 www.cardbhai_com/reliance_creditcard_launched_creditcard_in.html (Accessed on May 05, 2008) at 10.58 p.m. 122 Ibid. 123 Ibid. xciv

2.5. PLASTIC CARD TREND 2.5.1. Volume and value of transaction in India By January 2004, there were 10 million credit cards in India. The number of debit cards was much larger at 18 million. Although there are fewer credit than debit cards in circulation, the total volume and value of credit card transactions is much higher. One of the reasons for the rise is easier to obtain credit than personal loans.

TABLE 2.1 Volume and value of credit and debit card transaction in Indian banking (Volume in Lakh and Value (Rs.) in crore)

Credit card transaction Debit card transaction Year Volume Value Volume Value

2003-04 1,002 17,663 377.57 4,874 2004-05 1,295 25,686 415.32 5,361 2005-06 1,561 33,886 456.86 5,897 2006-07 1,695 41,361 601.77 8,172 2007-08 2,282 57,985 883.06 12,521 2008-09 2,596 65,356 1,276.54 18,547 % Growth 2008-09 13.76 12.71 44.56 48.13 over 2007-08

Source: Reserve Bank of India, Money and Banking - Monthly Bulletin (May 2009).

The above table shows that the value and volume of credit and debit card during the financial year between 2003-04 and 2008-09. It reveals that the number of credit and debit card transaction grew by 159 per cent and 238 per cent respectively in six financial year ending on March 2009. The value of credit and debit card transactions were also increased to 270 per cent and 281 per cent respectively in the same period.

In the previous year ending 2008-09 over 2007-08, credit and debit card transaction growing up in 13.76 per cent by volume and 44.56 per cent by value and xcv

12.71 per cent and 48.13 per cent in value respectively in the same period. It is concluded that there was a growth of credit and debit cards by volume and value in India.

2.5.2. Outstanding credit card in Indian market In the following table, we can see the year wise growth of the credit card industry in India.

TABLE 2.2 Growth of outstanding credit card in Indian banking (Number in lakh )

Year Number* Net increase / Decrease Growth (%)

2001-02 60.68 ------2002-01 76.08 15.40 25.38 2003-04 100.48 24.40 32.07 2004-05 129.47 28.99 28.85 2005-06 173.27 43.80 33.83 2006-07 231.23 57.96 33.45 2007-08 275.47 44.24 19.13 2008-09 246.99 -28.48 -10.34 Average growth score 23.20

Source: Reserve Bank of India, Money and Banking - Monthly Bulletin (May 2009). * Number of outstanding cards at the end of March 2009 (excluding those withdrawn/blocked)

From the above table one can observe that the credit card is a upward growth of 25 per cent to 34 per cent during 2001-02 to 2006-07. The highest growth rate reported on 2005-07 but in FY2007-08, the rate of growth came down to 19.13 per cent which was below the average growth scores of 23.20 per cent. Further, FY 2008-09, there was an unexpected sudden decline of 10.34 per cent and with many banks closing inactive and unproductive accounts in their credit card portfolio. But during eight years commencing from 2001-2009 there was a growth of around three time (307%). Further, the study indicates that the growth to some extent will be xcvi impacted by the current financial turmoil and credit squeeze. Bankers will also become a little more conscious while doing risk evaluation of card applicants upon expiration of the card, banks did not renew for some customers and some canceled the cards voluntarily or by force due to more default rate and credit losses of the banks. It could also be customer consolidation because multiple cards becoming unmanageable by the users. The overall trend will remain positive over the past periods. It is concluded that there was a growth of credit card business in India and the need for credit does not diminish.

The growth percentage of outstanding cards can be represented by the following figure.

70

60

50

40

30

20

10 In percentage In

0 in Numberlakh 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 -10

-20

-30

-40 Year

Growth (%) Net increase

Fig. 2.1 Growth of outstanding card in Indian banking

xcvii

2.5.3. Outstanding debit card in banking industry In the following table, we can see the year wise growth of the debit card in banking industry.

TABLE 2.3 Growth of outstanding debit card in Indian banking (Number in lakhs)

Year Number* Net increase Growth (%)

2003-04 181.02 ------

2004-05 349.13 168.11 92.87

2005-06 497.63 148.5 42.53

2006-07 749.86 252.23 50.69

2007-08 1,024.37 274.51 33.64

2008-09 1,374.31 349.94 34.16

Average score 50.78 Source: N. Premavathy (2007). * Number of outstanding debit card at the end of March.

The above table reveals that the growth of outstanding debit card in India for the past five years around three times and the average score at the rate of 50.78 per cent. At present from 1 st April 2009, the decision taken by the RBI to encourage paperless e-banking transaction, the customers were allowed for free use of ATM-debit card without charge in any banks ATMs across the country will increase further growth in future.

2.5.4. Reason for slow growth of outstanding credit card in 2007-2008 According to data released by the RBI, credit card growth started slowing down from FY 2007-08, mainly due to defaults by consumers. Here is some latest fact, India now has 25 million credit card users - 1/10th the size of Mobile Phone users, For FY 2007-08, the growth in new credit card accounts was 19.13 per cent, previous financial year 33.45 per cent. But FY 2008-09, there was a negative growth xcviii of -10.34 per cent. ICICI Bank is now the largest credit card issuing bank in India with 9 million cards on March end 2008. Defaulters on credit card are up by 12 per cent when compared to 10 per cent in FY 06-07. One of the reasons attributed to higher default rate in other retail debt is demanding higher EMIs which have put pressure on individuals. Also over leveraging up to 20 times their annual income on loans has led to the rise of defaulters. International financial crisis is also another reason to reduce the borrowing power and increase the default rates of customers. 124

2.5.5. Negative growth of outstanding credit card in 2008-2009 Credit losses on credit cards in India are relatively high at Rs.3,420 per active card per year vis-a-vis Rs.3,070 in the US and Rs.1,220 in , according to a study commissioned by MasterCard’s India Cards Council (ICC). The study pointed out that insufficient inputs were used to check the credit-worthiness of applicants and absence of annual fees encouraged customers to hold cards from multiple banks, resulting in a high level of inactive cards. Hence, none of the issuers have been aggressively marketing cards in the past few months. Credit card norms have been tightened. Issuers have raised the minimum income requirements across the board and also the cut-off scores for issuances on these cards. 125

The negative impact of the economic slowdown is clearly showing on the credit cards segment. The number of outstanding credit cards declined drastically by 25 million in FY ending on March, 2009 from 28 million on March, 2008. The credit card business is facing a slowdown as rising defaults have prompted banks to tighten due-diligence procedures. The new issuance of cards has seen a slowdown because of credit losses. Recently, State Bank of India admitted that its losses on the credit card business were of the order of Rs.150 crores and non performing assets (NPAs) on this portfolio had touched a whopping 16.5 per cent during the financial year ending on 2007-08. 126 The Indian credit card market the number of outstanding cards at the end of March 2009 was reduced (25 million) due to blocked and

124 www.cardbhai_com. March 05, 2008 at 11.05 p.m. 125 Ibid. 126 www.creditcard.india.com xcix withdrawn of inactive cards. This may reduce more default rate and credit losses of banks in India.

2.6. MAJOR BANKS ISSUING CARD IN INDIA The major credit card issuers in India are as follows: 1. ABN AMRO credit card 11. HDFC credit card 2. Andhra Bank card 12. HSBC bank card 3. Axis Bank Credit cards 13. ICICI credit card 4. Bank of Baroda credit card or 14. Indian Overseas Bank card BoB credit card 5. Bank of India card 15. Stand Chart credit card 6. Barclays Bank credit card. 16. State Bank of India credit card (SBI credit card) 7. Canara Bank card 17. Syndicate bank card 8. Central Bank of India card 18. Union Bank card 9. CITI Bank card 19. Vijaya bank card 10. Corporation Bank card

2.6.1. Big players in India’s credit card industry ICICI Bank leads the pack with a 30 per cent market share and has issued 5 million credit cards by the end of March 2006. At present upto March 2008, ICICI Bank is the largest credit card provider in the country with 9 million credit cards, has shown a growth of around 20-22 per cent, lower than the average growth of 30 per cent it has seen in the past three years. HDFC Bank (after merger with Centurion Bank of Punjab) has become the second largest credit card issuer in India beating Citibank and SBI-GE Money in the race. HDFC Bank now has a base of 4.3 million credit card customers while CITI India has around 3.4 million and SBI-GE Capital have around 3.6 million customers at the end of FY 2008. HSBC credit card base 3.5 m by 31 March 2008. ICICI Bank, HDFC, HSBC, SBI and Citi Bank have over 80 per cent share of the Indian credit card industry. 127

2.7. CLASSIFICATION OF CREDIT CARD Before we apply for a credit card it is always better to know what type of credit card is best suited to our profile. Catering to different types of consumer

127 www.businessline.in/webextras. c needs, credit card companies issue several types of credit cards. Each type has its own benefits. They can be classified as follows:

ci

2.7.1. Based on Franchise / Tie-up i. Proprietary Card: Cards that are issued by the banks themselves without any tie-up, are called proprietary cards. A bank issues such cards under its own brand. Examples include SBI Card, CanCard of Canara Bank, Citicard. ii. Master Card: This is a type of credit card issued under the umbrella of MasterCard International. The issuing bank has to obtain a franchise from the MasterCard Corporation of the USA. The franchised cards will be honoured in the MasterCard network. iii. VISA Card: This type of credit card can be issued by any bank having tie-up with VISA International Corporation, USA. The banks that issue such cards are said to have a franchise of VISA International. The advantage of a VISA franchise is that one can avail the facility of the VISA network for transactions. iv. Domestic tie-up Card: These cards are issued by a bank having a tie-up with domestic card brands such as CanCard and Indcard are called ‘Domestic cards’

2.7.2. Based on geographical validity i. Domestic Card: Cards that are valid only in India and Nepal are called ‘domestic cards’. They are issued by most of the banks in India all transactions will be in rupees. ii. International and Global Card: Credit cards with international validity are called ‘international cards’. They are issued to people who travel abroad frequently. They are honoured in every part of the world except India and Nepal. The cardholder can make purchases in foreign currencies subject to RBI sanction and FERA rules and regulations.

2.7.3. Based on the issuer category. 1. Individual Card: These are the non-corporate credit cards that are issued to individuals. Generally, all brands of credit cards are issued to individuals. ii. Corporate Card: They are credit cards issued to corporate and business firms. The executives and top officials of the firms use them. They bear the names of the firms, and the bills are paid by the firms. cii

2.7.4. Based on mode of credit recovery i. Revolving Card: This type of credit card is based on the revolving credit principle. A credit limit is fixed on the amount of money one can spend on the card for a particular period. The cardholder has to pay a minimum percentage of the outstanding credit which may vary from 5 to 10 percent at the end of a particular period. Interest varying from 30 to 36 percent per annum is charged on the outstanding amount. ii. Charge Card: A charge card is not a credit instrument, it is a convenient mode of making payment. This facility gives a consolidated for a specific periods and bills are payable in full on presentation. There is neither interest liability nor no per-set spending limits.

2.7.5. Based on status of Card i. Standard Card: Credit cards that are regularly issued by all card-issuing banks are called ‘standard cards’. With these cards, it is possible for a cardholder to make purchases without having to pay cash immediately. They however, offer only limited privileges to cardholders. Some banks issue standard cards under the Brand name “Classic” cards, which are generally issued to salaried people. ii. Business Card: Business cards also known as ‘Executive cards’, are issued to small partnership firms, solicitors, firms of chartered accountants, tax consultants and others, for use by executives on their business trips. They enjoy higher credit limits and more privileges than the standard cards. iii. Gold Card: The gold card offers high value credit for elite. It offers many additional benefits and facilities such as higher credit limits, more cash advance limits that are not available with the standard or the executive cards.128

2.7.6. Innovative card In addition, credit cards which have evolved into a variety of innovative cards over the years are also issued by banks.

128 N. Premavathy (2007). Financial Services and Stock Exchanges . Chennai: Sri Vishnu Publications, pp.5.10-5.14. ciii i. ATM Card: ATM cards allow customers to their accounts at any time-24 hours a day, every day of the year, through Automated Teller Machines. Customers can withdraw cash, transfer funds, find out their account balance and perform other banking and financial transactions with the help of ATMs. ii. Debit Card: A debit card, like an ATM card, directly accesses a customer’s account. It is a hybrid of ATM and credit card. The card directly debits a designated savings bank account. Whereas in the case of credit cards, a grace credit period of 20 to 50 days for making the payment is available, no such credit period is allowed under debit cards. These cards can be used either at merchant locations who have this facility to buy goods and services or at ATMs. Presently, ATM-Cum Debit cards issued by Indian banks are in use. iii. Prepaid Card: Prepaid cards are also known as ‘Stored Value Cards’. These cards are with stored value paid in advance by the holder. The card issuer and the service provider are identical. They are also called Limited Purpose Prepaid Cards which can be used for a limited number of well -defined purposes. Its use is often restricted to a number of identified points of sales within a specified location iv. Private Label Card: These cards are uniquely tied to the retailer issuing the card and can be used only in that retailer’s stores. A bank, on the basis of a contractual agreement with the retailer extends credit under this type of card. v. Affinity Group Card: These are credit cards designed for a collection of individuals with some form of common interest or relationship, such as professional, alumni, retired persons’ organizations, sports teams, schools, or service organizations. This credit card carries the logo of the affiliated organization on the card design and brings special benefits and discounts on products from that company. In case the affiliated company is a charity or non-profit organization, a part of the credit card expenses go into the affiliate organization's account. For example: The Help Age India Credit Card issued by ICICI bank. 129

129 www.icicicard.com civ vi. : A smart card is a credit card sized plastic card with an embedded computer chip. The chip allows the card to carry a much greater amount of information than a magnetic strip card. The telecom industry, was perhaps the pioneer in smart cards, the most prominent being Subscriber Identity Module (SIM) cards in the GMS digital cellular network. Using special terminals designated to interact with the embedded chip, the card can perform special functions. This is essentially a prepaid card. vii. Chip Card: A chip card is a plastic card with an embedded integrated circuit or as microchip as opposed to magnetic strips on a conventional card. The chip can be used on existing debit and credit cards as well as on emerging products like stored value cards. Inserting the card in a -pad effects the transaction, and the value on it reduces accordingly. It is re-loadable and disposable. The idea is to do away with the trouble of carrying cash. The chip card also scores over the magnetic card, in that it can retain 50 to 60 of the latest transactions, which can be produced on demand. It is also considered more durable and secure since the cardholder alone can access it through a Personal Identification Number (PIN). viii. Co-branded card: The Times Card, a co-branded credit card, is the first of its kind, from a publishing house in the Asian subcontinent. This is a co- branded credit card of Times of India Group and Citibank MasterCard. The co-branding concept caught the credit card industry the world over during the last five years. 130

2.7.7. Other types of credit card i. Special purpose Card: The eighties saw the development of special purpose cards. A host of special purpose cards were issued by departmental stores, airlines, oil companies. For instance, the International Bank of Asia in launched the first ‘women only’ card, ‘My card’ in the year 1988. A highly encouraging membership and increasing potential of such special purpose cards are called “Lady’s card” in Malaysia. In 1990, the Green card

130 N. Premavathy (2007). op.cit. , pp.5.10-5.14. cv

was launched in the U.K and Europe to promote contributions towards the protection of the environment. HDFC issued ‘My City’ credit cards used in particular city with special discount offer for oil and petrol and also an offer for cash back. AXIS Bank also offers special purpose credit cards like Gift card, Travel currency card and Remittance card. 131 ii. Add-on card: An add-on card is more of an additional Credit card that the customer can apply in the name of their family members (father, mother, sister, brother, spouse, children), within the overall credit limit. Family members applying for Add-on cards have to be 18 years and above. All the payments for the services made from Add-on card(s) is done by the original cardholders. Most banks allow for at least two Add-on cards. iii. Photo card: If a card comes with the imprinted photo, then it is a Photo card. This type of card is considered safer as it is easier to identify the credit card user. It also serves as more identity card. iv. Power card: It is a comprehensive credit card product that enables banks and financial industry to enter into issuing and acquiring business of Credit Cards. The basic advantage of this efficient tool is to improve productivity and control the risks involved in day-to-day activities of any financial institutions in credit cards. The product is 24 × 7, multi language, multi currency, multi-bank and multi country. v. Regular credit card: This is the most basic type of credit card. It has a low credit limit and the most basic status among various credit cards. Credit card companies can club various other reward programs like travel rewards, cash back offers to enhance its value and appeal to customers. vi. Silver credit card: Silver credit cards have higher eligibility criteria than regular credit cards. They bring more benefits to the customers, and have higher credit limits than regular credit cards. vii. Gold credit card: Gold credit cards have a higher status and credit limits than silver credit cards. Needless to say these types of credit cards have higher income requirements as their eligibility criteria. In addition to the

131 http://www.apnaloan.com/credit-card-india/axis-bank-(uti)/index.html cvi

regular benefits, banks extend special privileges to their gold credit card holders. viii. Platinum or credit card: These types of credit cards bring more benefits to credit card holders than regular, silver or gold card. These credit cards generally have platinum or titanium hue and are issued to a select class of clients who have excellent financial background and good income levels. Platinum credit cards have personal concierge services, in addition to exclusive platinum benefits. ix. Signature credit card: A league of its own, the Signature Credit Cards usually have no pre-set spending limits, personal concierge service, signature travel, and lounge and membership benefits. Offered to a very elite group these credit cards, requires an excellent financial status. On June 9, 2007 ICICI bank introduced the Visa Signature Card and became the first credit card issuer in India to launch a premium credit card. This has a joining fee of Rs.25,000/- and an annual fee of Rs.2,500/-. The exclusivity of this signature card is exemplified by the statement. x. Credit cards by invitation only: The earliest of the elite, no one can apply for these card. For example, the American Express Black Credit Card, popularly called the Centurion Card, is issued by invitation to the most exclusive and elite, to those who spend a certain minimum amount (which can run into crores of rupees). These cards have huge annual fees and minimum spending levels. In fact, these credit cards are so exclusive, that they have an aura of mystery surrounding them and are considered status symbols. xi. Reward card: There are cards which offer rewards for specific kinds of purchases. For example, the Airline Reward Card offer rewards on air travel, Cash back card offer cash rewards on every card purchases, Fuel Reward Card offer rebates on petroleum and other fuel purchases from specified outlets and preferred partners. Similarly, Hotel Reward Card give rebates on hotel stay and related expenses and Health Rewards Card give benefits on medical expenses, health treatments and related activities. The rewards cvii

offered by credit card companies in alliance with various brands and stores, make them more attractive for the credit card holders. xii. Student credit card: As the name implies, these credit cards are especially designed for students and help them start their credit card journey. These bring lots of rewards especially suited for students, which help them save time, money and enjoy their student life. They are a first step towards building credit history. A good credit history goes a long way in creating a relationship with banks helping to secure much needed loans and credit in the future. xiii. Special feature credit card: Credit cards can also be grouped on the basis of their features. For example, based on their introductory interest rates, credit cards can be low introductory interest credit cards, or 0 (zero) Interest credit cards. The Zero introductory interest credit cards provide interest free credit (0%) for a specified time period, which is called the introductory period. Similar is the case with credit cards that come without any annual fee what so ever and are called ‘no annual fee’ credit cards. xiv. Balance transfer credit card: Credit card companies provide lucrative offers with 0 per cent introductory interest or low introductory interest charges on balance transfers. This allows credit card holders to transfer the outstanding balances on their existing credit cards to a credit card with low or zero interest on balance transfers. This brings them a lot of savings in the interest rates. The balance transfer credit cards may charge a balance transfer fees for every such operation .132 xv. Kisan Credit Card (KCC): The Kisan Credit aims at providing need based and timely credit support to the farmers for their cultivation needs as well as non-farm activities and cost effective manner to bring about flexibility and operational freedom in credit utilization. The Kisan Card is for a period of 3 years subject to an annual review. It was launched in 1998-99 by the Government of India in consultation with the Reserve Bank of India and National Bank for Agricultural and Rural

132 www.creditcards.com cviii

Development is a huge hit with the farmers in India. According to the RBI, presently there are about 66.56 million Kisan Credit Cards in use across India, which have been issued by various banks. 133 xvi. Secured credit card: Secured credit card is a type of credit card secured by a owned by the cardholder. This deposit is held in a special . The cardholder of a secured credit card is still expected to make regular payments, as with a regular card, but should they default on a payment, the card issuer has the option of recovering the cost of the purchases paid to the merchants out of the deposit. The advantage of the secured card for an individual with negative or no credit history is that most companies report regularly to the major credit bureaus. This allows for building of positive credit history.134

2.8. CREDIT CARD OPERATION CYCLE 135

The credit card operation comprises the following steps as follows: i. Credit purchases: A Cardholder purchases goods/services and gives the credit card. ii. Processing of credit card: A Merchant establishment delivers goods after taking an authenticated credit card and noting the number and taking signatures on certain forms. iii. Raising of bill: The Merchant establishment raises the bill for the purchase and sends it to the credit card issuing bank for payment. iv. Marking payment: The issuing bank pays the amount to the merchant establishment. v. Bill to cardholder: The issuing bank raises bill on the credit cardholder and sends it for payment. vi. Card Payment: The credit cardholder makes the payment to the issuing bank.

133 http://www.rupeetimes.com/news/credit_cards/kisan_credit_cards_becoming_increasingly_ popular_with_farmers_1235.html. 134 http://en.wikipedia.org/wiki/credit_card#parties_involved. 135 S.Gurusamy (2007), op.cit., p.340. cix

Contract for credit card(1) Card Issue of Credit card(2) Card user/ issuing bank Payment of Credit card customer

and raising bill (4) (4) bill raising and and Services (3) (3) Services and

card credit of Charging Purchase of Goods Goods of Purchase

Clearing and settlements (7) settlements Clearing and

Merchant’ s Merchant Submission of Bill for collection (5) Bank Establishment Payment for bills (6)

Fig. 2.2. Mechanics of credit card operation.

Source: S. Gurusamy (2007).

2.9. PARTIES IN A CREDIT CARDS 136 The following important parties involved in the operation of credit cards are: Credit cardholders: The person named on the card. This may be customer of a bank to whom the card has been issued or any such person to whom the bank has issued a card authorized by the customer of the bank to hold and use the card. This individual is also responsible for payment of all charges made to that card. The holder of the credit card who uses to make a purchase is called the consumer. Card-issuing bank: The financial institution or other organization that issued the credit card and also responsible for billing the cardholders for charges. The bank bills the consumer for repayment and bears the risk that the card is used fraudulently. The issuing bank extends a line of credit to the consumer. Liability for non-payment is then shared by the issuing bank and .

136 www.reuters.com cx

Merchant Establishments: The individual or business accepting credit cards for sold products or services to the cardholders. Acquiring bank : The financial institution accepts payment for the products or services on behalf of the merchant establishments. Independent sales organization : Resellers (to merchants) of the services of the acquiring bank. i.e outside services providers for marketing of cards . Merchant account : This could refer to the acquiring bank or the independent sales organization, but in general is the organization that the merchant deals with. Credit : An association of card-issuing banks such as Visa, MasterCard, Discover, American Express that set transaction terms for merchants, card-issuing banks, and acquiring banks. Transaction network : The system that implements the mechanics of the electronic transactions. May be operated by an independent company, and one company may operate multiple networks. Transaction processing networks include Cardnet, Nabanco, Omaha, Paymentech, NDC Atlanta, Nova, Vital, Concord EFSnet, and Visa Net. Affinity partner : Some institutions lend their names to an issuer to attract customers that have a strong relationship with that institution, and get paid a fee or a percentage of the balance for each card issued using their name. Examples of typical affinity partners are sports teams, universities, charities, professional organizations, and major retailers.

2.10. CREDIT CARD TRANSACTION 137 The flow of information and money between these parties in the credit cards always through the card associations is known as the interchange, and it consists of the following steps. Authorization: The cardholder pays for the purchase and the merchant submits the transaction to the acquirer (acquiring bank). The acquirer verifies the credit card number, the transaction type and the amount with the issuer (Card-issuing bank) and reserves that amount of the cardholder's credit limit for the merchant. An

137 http://en.wikipedia.org/wiki/credit_card cxi authorization will generate an approval code, which the merchant stores with the transaction. Batching : Authorized transactions are stored in "batches", which are sent to the acquirer. Batches are typically submitted once per day at the end of the business day. If a transaction is not submitted in the batch, the authorization will stay valid for a period determined by the issuer, after which the held amount will be returned to the cardholder's available credit ( authorization hold ). Clearing and settlement : The acquirer sends the batch transactions through the credit card association, which debits the issuers for payment and credits the acquirer. Essentially, the issuer pays the acquirer for the transaction. Funding : Once the acquirer has been paid, the acquirer pays the merchant, the merchants receives the amount totaling the funds in the batch minus the “discount rate,” which is the fee the merchant pays the acquirer for processing the transactions. Charge backs : A is an event in which money in a merchant account is held due to a relating to the transaction. Charge backs are typically initiated by cardholders. In the event of a chargeback, the issuer returns the transaction to the acquirer for resolution. The acquirer then forwards the chargeback to the merchant, who must either accept the chargeback or contest it.

2.11. REWARDS Many credit card customers receive rewards, such as frequent flier points, gift certificates, or cash back as an incentive to use the card. Rewards are generally tied to purchasing an item or service on the card, which may or may not include balance transfers , cash advances , or other special uses. Depending on the type of card, rewards will generally cost the issuer between 0.25 and 2.0 per cent of the spread. Networks such as Visa or MasterCard have increased their fees to allow issuers to fund their rewards system.

2.12. Merchants must pay interchange fees to the card-issuing bank and the card association. For a typical credit card issuer, interchange fee revenues may represent about a quarter of total revenues. These fees are typically from 1 to 6 percent of each cxii sale, but will vary not only from merchant to merchant (large merchants can negotiate lower rates )but also from card to card, with business cards and rewards cards generally costing the merchants more to process. The interchange fee that applies to a particular transaction is also affected by many other variables including the type of merchants. Interchange fees may consume over 50 per cent of profits from card sales for some merchants (such as supermarkets) that operate on slim margins. In some cases, merchants add a surcharge to the credit cards to cover the interchange fee.

2.13. GLOBAL PLAYER IN CREDIT CARD MARKET 2.13.1. MasterCard: MasterCard is a product of MasterCard International and along with VISA is distributed by financial institutions around the world. Cardholders borrow money against a line of credit and pay it back with interest if the balance is carried over from month to month. Its products are issued by 25,000 financial institutions in 220 countries and territories. In 1998, it had almost 700 million cards in circulation, whose users spent $650 billion in more than 16.2 million locations. The company , which had been organized as a cooperative of banks, had an initial public offering on May 25 , 2006 at $39.00 USD. The stock is traded on the NYSE under the symbol MA.138 2.13.2. VISA card: A VISA card is a product of VISA USA and along with Master Card is distributed by financial institutions around the world. Visa Inc. commonly referred to as VISA, is a multinational corporation based in San Francisco, California , USA . The company operates the world's largest retail electronic payment network, managing payments among financial institutions, merchants, consumers, businesses and government entities. Before Visa Inc's IPO in early 2008, it was operated as a cooperative of some 21,000 financial institutions that issued and marketed Visa products including credit and debit cards. A VISA cardholder borrows money against a credit line and repays the money with interest if the balance is carried over from month to month in a revolving line of credit. Nearly 600 million cards carry one of the VISA brands and more than 14 million locations accept them.

138 http://mastercard.com cxiii

In 2006, according to The Nilson Report, Visa held 44 per cent of the credit card market share and 48 per cent of the debit card market share in the United States . Visa Inc. is the world’s largest payments company, with more than US$ 4.0 trillion of total volume as of March 31, 2008.139 2.13.3. American Express: The world’s favourite card is American Express Credit Card. More than 57 million cards are in circulation and growing and it is still growing further. Around US $ 123 billion was spent last year through American Express Cards and it is poised to be the world’s no.1 card in the near future. In a regressive US economy last year, the total amount spent on American Express cards rose by 4 percent. They are very popular in the U.S., , Europe and Asia and are used widely in the retail and everyday expenses segment.140 2.13.4. Diners Club International: Diners Club International, originally founded as Diners Club, is a charge card company formed in 1950 by Frank X. McNamara, Ralph Schneider and Casey R. Taylor. When it first emerged, it became the first independent credit card company in the world. Diners Club is the world's no.1 Charge Card. Diners Club cardholders reside all over the world and the Diners Card is a all time favourite for corporate. There are more than 8 million Diners Club cardholders around the world. They are affluent and are frequent travelers in premier businesses and institutions, including Fortune 500 companies and leading global corporations. In April 2008, and Citibank announced that Discover would purchase the Diners Club Network from Citi for $165 million. Discover Bank has no plans on issuing Diners Club branded cards. Discover purchased the network, but not the licensees issuing the cards. The deal was completed on July 1, 2008. 141 2.13.5. Discover Card: The Discover Card was originally introduced by Sears in 1985 , and was a unit of Dean Witter , which merged with Morgan Stanley in 1997. In 2007, the unit was spunoff as an independent, publicly traded company. To-day, Discover is headquartered in the Chicago suburb of Riverwoods, IIinois . Discover Financial Services is an American financial services company, which issues the

139 www.corporate.visa.com 140 www.americanexpress.com 141 www.dinersclub.com cxiv

Discover Card and operates the Discover and Pulse networks . Discover Card is the third largest credit card brand in the United States , when measured by cards in force, with nearly 50 million cardholder.142 2.13.6. JCB Card ( Credit Bureau): Japan Credit Bureau, usually abbreviated as JCB, is a credit card company based in Tokyo , Japan . Founded in 1961 , it established dominance over the Japanese credit card market when it purchased Osaka Credit Bureau in 1968 and its cards are now issued in 20 different countries. Fifty-nine million JCB card members worldwide use their cards to purchase over US$ 62.7 billion of goods and services annually in 190 countries worldwide. JCB also operates a network of membership lounges targeting Japanese, Chinese, and Korean travelers in Europe, Asia, and North America. The JCB philosophy of “identify the customer’s needs and please the customer with service from the Heart” is paying rich dividends as their customers spend US$ 43 billion annually on their JCB cards.143

2.14. CREDIT CARD NUMBERING The numbers found on credit cards have a certain amount of internal structure, and share a common numbering scheme. The card number's prefix, called the Bank Identification Number , is the sequence of digits at the beginning of the number that determine the bank to which a credit card number belongs. This is the first six digits for bank card associations such as MasterCard and Visa cards. The next nine digits are the individual account number, and the final digit is a validity check code. In addition to the main credit card number, credit cards also carry issue and expiration dates (given to the nearest month), as well as extra codes such as issue numbers and security codes . Not all credit cards have the same sets of extra codes nor do they use the same number of digits.

2.15. CREDIT CARD IN ATM Many credit cards can also be used in an ATM to withdraw money against the credit limit extended to the card, but many card issuers charge interest on cash

142 www.discover.com 143 www.jcbinternational.com cxv advances before they do so purchases. The interest on cash advances is commonly charged from the date of the withdrawal is made, rather than the monthly billing date. Many card issuers levy a commission or for ATM charges for cash withdrawals, even if the ATM belongs to the same bank as the card issuer.

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2.16. CREDIT CARD SYSTEM 2.16.1. Interest charges Credit card issuers usually waive interest charges if the balance is paid in full each month, but typically will charge full interest on the entire outstanding balance from the date of each purchase if the total balance is not paid. The credit card may simply serve as a form of revolving credit , or it may become a complicated financial instrument with multiple balance segments each at a different interest rate, possibly with a single umbrella credit limit, or with separate credit limits applicable to the various balance segments. Interest rates can vary considerably from card to card, and the interest rate on a particular card may jump dramatically if the card user is late with a payment on that card or any other credit instrument, or even if the issuing bank decides to raise its revenue.

2.16.2. Fees charged to customers 144 Interest free credit period is applicable only on retail purchases and if previous months balance outstanding is paid in full. It may vary from banks for 20-50 days. The major fees are for: • No joining fees, annual fees and renewal fees are applicable on the primary and secondary card member unless indicated by the banks. • Late payments or overdue payments (30% of minimum amount due, subject to minimum of Rs.400 and maximum of Rs.600) • Charges that result in exceeding the credit limit on the card (whether done deliberately or by mistake), called over limit fees (2.5% of over limit amount, subject to a minimum of Rs.500) • Returned cheque fees or payment processing fees (Rs.250 ) • Cash advances and transaction fees (2.50% on advanced amount, subject to a minimum of Rs.300) on Easy deposit card – NIL for ICICI Bank ATM cash withdrawals fees. • Transactions in a foreign currency (3.5% of the amount).

144 www.icicibank.com cxvii

• Outstation Cheque Processing Fee (1% of the cheque value, subject to minimum of Rs.100) • Dial-a-Draft – Transaction Fee (3% of the draft value amount subject to a minimum of Rs.300) • Railway Booking Surcharge (1.80% for Internet transactions and 2.5% for other bookings) • Fee on Cash payment at Branches(Rs.100) Interest will be charged if cardholder do not pay back the previous bills is full, and also on all cash advances from the data of transaction until date of settlement.

2.16.3. Grace period A credit card's grace period is the time the customer has to pay the balance before interest is charged to the balance. Grace periods vary, but usually range from 20 to 50 days depending on the type of credit card and the issuing bank. Some policies allow for reinstatement after certain conditions are met. Usually, if a customer is late paying the balance, finance charges will be calculated and the grace period does not apply. Finance charges incurred depend on the grace period and balance, with most credit cards there is no grace period if there is any outstanding balance from the previous billing cycle or statement (i.e. interest is applied on both the previous balance and new transactions). However, there are some credit cards that will apply finance charge only on the previous or old balance, excluding new transactions.

2.16.4. Benefits to customers Because of intense competition in the credit card industry, credit card providers often offer incentives such as frequent flyer points, gift certificates , or cash back (typically up to 1 to 5 percent based on total purchases) offers try to attract customers to their programs. Low interest credit cards or even 0 per cent interest credit cards are available.

2.16.5. Benefits to merchants cxviii

For merchants, a credit card transaction is often more secure than other forms of payment, such as cheques because the issuing bank commits to pay the merchant the moment the transaction is authorized, regardless of whether the consumer defaults on the credit card payment . In most cases, cards are even more secure than cash, because they discourage theft by the merchant's employees and reduce the amount of cash on the premises. Prior to credit cards, each merchant had to evaluate each customer's credit history before extending credit. That task is now performed by the banks which assume the credit risk .145

2.17. MARKETING OF CREDIT CARD Marketing is a business term referring to the promotion of products, especially advertising and branding. The term developed from the original meaning which referred literally to going to market, as in shopping, or going to a market to sell goods or services. Customer satisfaction is the key concept of any marketing like credit cards. It is rightly pointed out by Mahatma Gandhiji, “A Customer is the most important visitor of our premises. He is not dependent on us. We are dependent on him. He is not the interruption to our work. He is the purpose of it. He is not an outsider to our business. He is part of it .We are not doing a favour by serving him. He is doing us a favour by giving an opportunity to do so.” It is a sad commentary on our banks that they either do not find time to take customers seriously or lack to carry out customer survey. Banks should adopt a marketing approach stating the philosophy. “Customer is the king” let’s find about him and serve him – How do we do that? By satisfying his needs.146

The concept of marketing is customer satisfaction, it includes identifying the most profitable market at present and in future, assessing present and future needs of customers, setting business development goals and making plans to meet them, and managing the various services and promoting them to achieve the plans. In this background, the researcher conducted a survey on the credit cardholder’s satisfactions among the banks in this study area. The satisfaction can be tested by

145 http://en.wikipedia.org/wiki/credit_card 146 B. Chand (1994). Marketing of Services . Jaipur and New Delhi: Rawat Publication, p.88. cxix way of product awareness, level of satisfactions and dissatisfaction, problems perceived by them. This study has also been assessed for shifting options given by the users among the banks in this area. This research will help the banks to market their credit cards and aim to improve their sales by enhancing the usage of cards among the existing cardholders and also attracting new users by way of successful marketing of their products.

2.17.1. Mode of marketing The marketing of credit cards in banks is carried out through any one of the following important modes. 2.17.1.1. Direct marketing Any medium that can be used to deliver a communication to a customer can be employed in direct marketing. Direct marketing is a sub-discipline and type of marketing . There are two main definitional characteristics which distinguish it from other types of marketing. The first is that it attempts to send its messages directly to consumers , without the use of intervening media . This involves commercial communication (direct mail, e-mail, and telemarketing) with consumers or businesses, usually unsolicited. The second characteristic is that it is focused on driving purchases that can be attributed to a specific "call-to-action." This aspect of direct marketing involves an emphasis on trackable, measurable positive responses from consumers regardless of medium. 147

2.17.1.2. Direct mail The most common form of direct marketing is direct mail, sometimes called junk mail, used by advertisers who send paper mail to all postal customers in an area or to all customers on a list. If the advertisement asks the prospect to take a specific action, for instance, call a free phone number or visit a website, then the effort is considered to be direct response advertising. It includes advertising circulars, catalogs, free trial CDs , pre-approved credit card applications, and other unsolicited

147 http://en.wikipedia.org/wiki/direct_marketing cxx merchandising invitations delivered by mail to homes and businesses, or delivered to consumers' mailboxes by delivery services other than the Post Office.

2.17.1.3. Telemarketing The second most common form of direct marketing is telemarketing, in which marketers contact consumers by phone. The unpopularity of cold call telemarketing (in which the consumer does not expect or invite the sales call) has led some US states and the US federal government to create "no-call lists" and legislation including heavy fines. This process may be outsourced to specialist call centres. In the US, a national do-not-call list went into effect on October 1, 2003. Under the law, it is illegal for telemarketers to call anyone who has registered themselves on the list. After the list had operated for one year, over 62 million people had signed up. The telemarketing industry opposed the creation of the list, but most telemarketers have complied with the law and refrained from calling people who are on the list. India has passed legislation to create a similar National ‘Do Not Call’ List with effect from 5 th June, 2007 by TRAI notification act. 148 In other countries, it is voluntary, such as the New Zealand Name Removal Service .

2.17.1.4. Email Marketing E-mail marketing is a form of direct marketing which uses electronic mail as a means of communicating commercial or fund raising messages to an audience. In its broadest sense, every e-mail sent to a potential or current customer could be considered e-mail marketing. It is sending e-mails with the purpose of enhancing the relationship of a merchant with its current or previous customers and to encourage customer loyalty and repeat business, sending e-mails with the purpose of acquiring new customers or convincing current customers to purchase something immediately, adding advertisements to e-mails sent by other companies to their customers, and sending e-mails over the Internet , as e-mail did and does exist outside the Internet.

148 www.ndceregistry.gov.in cxxi

Researchers estimate that United States firms alone spent US$400 million on e-mail marketing in 2006.149

149 The Power of Direct Marketing. ROI, Sales, Expenditure and Employment in the U.S. – 2006-2007 edition.” Direct Marketing Association, (October 2006). cxxii

2.17.1.5. Broadcast faxing A fourth type of direct marketing, broadcast faxing, is now less common than the other forms. This is partly due to laws in the United States and elsewhere which make it illegal. When sending documents to people at large distances, faxes have a distinct advantage over postal mail in that the delivery is nearly instantaneous, yet its disadvantages in quality have relegated it to a position beneath email as the prevailing form of electronic document transferal.

2.17.1.6. Voicemail marketing A fifth type of direct marketing has emerged out of the market prevalence of personal voice mailboxes, and business voicemail systems. Voicemail marketing presented a cost effective means by which to reach people with the warmth of a human voice. Abuse of consumer marketing applications of voicemail marketing resulted in an abundance of "voice-spam", and prompted many jurisdictions to pass laws regulating consumer voicemail marketing. More recently, businesses have utilized guided voicemail (a application where pre-recorded voicemails are guided by live callers) to accomplish personalized business-to-business marketing formerly reserved for telemarketing. Because guided voicemail is used to contact only businesses, it is exempt from ‘Do Not Call’ regulations in place for other forms of voicemail marketing.

2.17.2. Couponing Couponing is used in print media to elicit a response from the reader. An example is a coupon which the reader cuts out and presents to a super-store check- out counter to avail of a discount. Coupons in newspapers and magazines cannot be considered direct marketing, since the marketer incurs the cost of supporting a third- party medium (the newspaper or magazine).

2.17.3. Direct television response marketing Direct marketing on TV has two basic forms. They are long form (usually half-hour or hour-long segments that explain a product in detail and are commonly referred to as infomercials) and short form which refers to typical 0:30 second or cxxiii

0:60 second commercials that ask viewers for an immediate response. A related form of marketing is infomercials. They are typically called direct response marketing rather than direct marketing because they try to achieve a direct response via broadcast on a third party's medium, but viewers respond directly via telephone, SMS or internet.

2.17.4. Direct selling Direct selling is the sale of products by face-to-face contact with the customer, either by having sales people approach potential customers in person. Direct selling is a retail channel for the distribution of goods and services. At a basic level it may be defined as marketing and selling products, person-to-person away from a fixed retail location. Sales are typically made through party plan and other personal contact arrangements. The direct personal presentation, demonstration, and sale of products and services to consumers, usually in their homes or at their jobs. The industry is global and growing. Recent figures show almost fifty-five million people are involved and in 2007 it is estimated that worldwide retail sales accounted for more than US$111 Billion. 150

2.17.5. Integrated Campaigns A comprehensive direct marketing campaign employs a mix of channels. It is not unusual for a large campaign to combine direct mail, telemarketing, radio and broadcast TV, as well as online channels such as email, search marketing, social networking and video. In a survey conducted by the Direct Marketing Association, it was found that 57 per cent of the campaigns studied were employing integrated strategies. Of those, almost half (47%) launched with a direct mail campaign, typically followed by e-mail and then telemarketing.151

2.17.6. Direct response marketing

150 http://en.wikipedia.org/wiki/direct_selling. 151 “The Integrated Marketing Mix.” BtoB Magazine (July 14, 2008) Available online at www.scribd.com/19408443/marketing.> cxxiv

Direct response marketing is a form of marketing designed to solicit a direct response which is specific and quantifiable. The delivery of the response is direct between the viewer and the advertiser, that is, the customer responds to the marketer directly. Marketers use broadcast media to get customers to contact them directly. It is direct response marketing because the communications from the customer to the marketer is direct. Direct response seeks to elicit action. It is inherently accountable since results can be tracked and measured. Furthermore, direct response campaigns perform best if the underlying strategies and tactics are highly competitive.

2.17.7. Database marketing Database marketing is a form of direct marketing using databases of customers or potential customers to generate personalized communications in order to promote a product or service for marketing purposes. The “database” is usually name, address, and transaction history details from internal sales or delivery systems, or a bought-in compiled “list” from another organization, which has captured that information from its customers. Typical sources of compiled lists are charity donation forms, application forms for any free product or contest, product warranty cards, subscription forms, and credit application forms. Advertisers often refine direct mail practices into targeted mailing, in which mail is sent out following database analysis to select recipients considered most likely to respond positively. For example a person who has demonstrated an interest in receiving credit cards may receive direct mail for credit cards related products or perhaps for goods and services that are appropriate for cardholders. This use of database analysis is a type of database marketing .

2.17.8. Personalized marketing Personalized marketing (also called personalization , and sometimes called one-to-one marketing ) is an extreme form of product differentiation . Whereas product differentiation tries to differentiate a product from competing ones, personalization tries to make a unique product offering for each customer. Personalized marketing as a four phase process are identifying potential customers, determining their needs and their lifetime value to the company interact with cxxv customers so as to learn about them, and customize products, services, and communications to individual customers.

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2.17.9. Customer Relationship Management (CRM) CRM is a term applied to processes implemented by a company to handle their contact with their customers. CRM software is used to support these processes, storing information on customers and prospective customers. Information in the system can be accessed and entered by employees in different departments, such as sales , marketing , customer service , training , professional development , performance management, human resource development , and compensation . Details on any customer contacts can also be stored in the system. The rationale behind this approach is to improve services provided directly to customers and to use the information in the system for targeted marketing and sales purposes.

2.17.10. Johnson Box System 152 A Johnson Box is a box commonly found at the top of direct mail letters, containing the key message of the letter. The purpose of it is to draw the reader’s attention to this key message first, and hopefully grab their attention, enticing them to read the rest of the letter.

2.18. CREDIT CARD SERVICES IN INDIA Indian credit card market is growing upwards due to the global business environment. This is not only new but also benefit to the existing and new cardholders by giving the important innovative services offered under the following heads.

2.18.1. Merchant establishment services Wider acceptance of credit cards, discount facility offered to the customers and quick processing of transactions for the credit cardholder is the important services made by the merchant establishment at their PoS. Credit cards give the cardholders the facility of anytime cash and convenience of using it anywhere in the world and a whole bunch of benefits. These benefits range from lifetime free cards, Global emergency assistance service, discounts, utility payments, Travel discounts

152 www.google.com. cxxvii and a lot more. Bank Credit Cards Special Offers include payment in monthly EMIs on their Credit Card, Family - a complete insurance plan that is flexible enough to cover every member of the family. Heavy Discounts, Best Shopping Deals Ever, Exclusively for Bank Credit Card Holders. Banks Gold Cards are welcomed at all Merchant Establishments displaying the VISA logo - over 1,10,000 and MasterCard logo - over 77,000 establishments across India and Nepal and the Silver and Gold Cards are accepted globally by over 22 million VISA Card and 22 million MasterCard accepting establishments.

2.18.2. Insurance services Once own a credit card, there are some insurance benefits available to us who come along with the newly-issued credit card, we will find an insurance company that is offering various kinds of covers. The best part is that the insurance company pays for these covers by purchasing group insurance schemes. The insurance benefits include the following are (i) Credit insurance (ii) Personal accident insurance (iii) Lost baggage insurance (iv) Purchase protection ( v) Health insurance ( vi) Protection Plus (vii) Credit Shield.

2.18.3. Convenience Services The following important credit card services are more convenient for the use of credit cardholders such as: 2.18.3.1. Auto Debit facility If credit card customers have an account with any bank branch, the bank provides the cardholders the added convenience of paying their bills (either the Minimum Amount Due or the Total Amount Due) directly through their bank account. It offers cardholders for convenience and bank can save the effort of issuing a cheque every month towards payment of credit card dues. Cardholders can pay their credit card dues directly from his account, but need to authorize the bank to claim the amount directly from their bank account every month and bank will credit his card account on the payment due date. All additional facilities is provided free of cost. cxxviii

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2.18.3.2. Payment options: Cash/Cheque/Draft/Phone/ATM /Internet The following are important credit cards payments services: i. Cash payment: The credit cardholders of the respective banks may deposit cash towards their credit card payment at any of their bank branches. The payment would reflect in their account within 24 hours. At present, banks cash payment of credit card bills entails a service charge per payment. For example ICICI bank charges Rs.100 per payment. Bankers are advised to inform sufficiently in advance to avoid late payment charge and interest charge. ii. Cheque/Draft/Phone/ATM: Bank cheques will take three days for clearance. Cardholders are advised to drop cheques/drafts well in advance to avoid any late payment charge and interest charge. They may even pay over the phone if they hold a savings account with the credit card bank, by calling at any of their 24-hour customer care numbers. It will take three business days for the payment to reflect in their credit card account. Presently, payment through ATM accessible for some banks, for example SBI cardholders can make credit card payment due through their ATM centres across the country.153 iii. Internet: Cardholders can have online payment through savings accounts, go to Bank website and transfer funds from his savings account to credit card account using bill pay facility. If a cardholder do not have a savings account payment through net banking. And another important mode of payment if customer have an account with any Bank branch, can make payment of their monthly credit-card bill (either the minimum amount due or the total amount due) by direct debit to concerned bank account.

2.18.3.3. Email statement Statement Online is a very simple, powerful and convenient way to access our Credit Card statement details instantly without any postal delays. Simply sign up for Statement Online and get faster, reliable access to our account statement . 2.18.3.4. Mobile alerts: Mobile alerts from Bank provide us with information about bank Credit Card even when the cardholders are on the move. This service provides

153 www.sbicard.com. cxxx with information about Bank Credit Card account. Customers would now no longer miss a payment or exhaust Credit limit without a warning. Currently, customers having credit card account can subscribe to the following alerts. (i) Due date remainder and (ii) Approaching credit limit and payment received alert reminder.

2.18.3.5. Transact on line Enjoy the freedom and convenience of anywhere, anytime banking with “Bank Internet Banking” services, the range of online services available to the credit card customers to secure access to information on Credit Card transactions on the web. The following information can be accessed online: Account information - current and last statement, Payment status, Monthly statement by email, request for a duplicate PIN Record, a change of address, Dial a draft, Auto debit, request for a replacement Card, Request for an “Add-on” Card, apply for an add-on Card, Access and redeem online from the Rewards point, subscribe to statement by e-mail, subscribe to e-mail and mobile alerts.154

2.18.4. Value added Services 155 The following are the important facilities give more value for the card and its cardholders such as:

2.18.4.1 Utility bill payment /Bill pay service Utility bill payment /Bill pay service is simple, convenient and secure way to pay utility bills such as electricity, telephone, insurance, gas, and other payments by using Credit Cards. Some banks offering cash back and waiver of charges. For example Barclays bank cards offers 10 per cent, Standard chart cards offers 5 per cent cash back to their cardholders to pay utility bill through their credit cards. The card issuers offering to the customer for tracking and paying multiple bills service. The Bill Pay Service is a simple and convenient service through which we can set up a Standing Instruction on Bank Credit Card for payment of their utility

154 www.icicibank.com 155 Ibid. cxxxi bills. Simply enroll for Bill Pay service and leave where worries over bill payments to bankers. This offers only to Visa- and MasterCard-holders.

2.18.4.2. Balance transfer facility Bank's Balance Transfer facility gives cardholders the option of transferring outstanding balances from one banks card to any other bank's credit card. It can enjoy an interest rate as low as 0 percent on the transferred amount for 3 months option or 0.75 per cent rate of interest (9% p.a.) for 6 months, followed by 1.49 per cent rate of interest (17.88% p.a.) after 6 months - This is the Life Time Balance transfer option along with the zero documentation and speedy draft delivery make the Bank Credit Card balance Transfer programme. To avail of Balance Transfer customer should contact 24-hour Customer Care of the banks. This benefit of it to save on interest cost, pay back in easy EMI of 6 months, 12 or 24 months. Banks reserves the right to modify or change the balance transfer offering at any point of time within the terms and conditions of bank balance transfer facility.156

2.18.4.3. Cash advance facility Cash advances are convenient and easiest facility to draw cash for the cardholders’ urgency. Banks in India charge a transaction fee as well as service fee / interest charge on cash advances. This service fee accrues from the date of the advance (as soon as they receive the cash) to the date of full payment. The charges vary from banks to banks. Cash advance facility is a part of the overall credit limit assigned to a cardholder. The limit is of cash advance is 30 percent to 40 percent of total credit limit approved by the banks it may vary and is always lesser than the borrowing limit or the credit limit.

2.18.4.4. Dial-a-draft facility In order a draft from the convenience of customers’ home or office. The cardholders simply call their bank 24 hours Customers Care numbers and ask for a draft, payable anywhere in India. If any company or individual can order a draft up

156 www.icicibank.com cxxxii to the available cash limit on the cardholders account. The draft will be delivered to the credit cardholders mailing address. For each draft request, a transaction fee of 2.5 percent of the amount withdrawn, subject to a minimum of Rs. 300, will be levied. In addition to the transaction fee, an interest charge will also be levied from the date of Transaction to the date of repayment. The amount of the draft will be billed in banks monthly Credit Card statement.

2.18.4.5. EMI on Call EMI-on-call gives credit cardholders the option to pay back credit card purchases in easy installments. Now they can convert any credit card purchases of over Rs. 2,000 into EMI-on-call with just a phone call, can avail of the EMI-on-call facility instantly without submitting any documents. Simply call 24-hour customer care and put request within 15 days of buying. The cardholders benefits are ease of repayment and pay back in 6, 12, 18 or 24 months easy instalements, flat interest rate of 10 per cent per annum. It may be subject to change and for selected customers.

2.18.4.6. “Cash-in” – Personal loan Cash-in is a personal loan on credit card. The loan can be against the credit / cash limit or over and above the credit limit. Not only is Cash –In pre-approved, it can be availed without submitting any documents. Cardholders need to do call their 24 hours customer care /send SMS to the banks at any time. Any where facility provided to the cardholders they have used their card for at least six months.

2.18.4.7 Express Rewards Programme Under the new Xpress Rewards Programme, Credit Cardholders spend more on this card greater are the rewards, For example ICICI Bank Credit Cards Rewards Programme, is an exclusive initiative aim at rewarding customer relationship with ICICI Bank. This is the widely accepted reward program in the country that allows cardholders to earn up to 10 reward points for every Rs.200 spent and redeem these cxxxiii points against exciting options. All we need to do is collect a minimum of 500 points and start redeeming them for gifts, great benefits and services.157

157 Ibid., www.ICICI.com cxxxiv

2.18.5. Benefit services The following credit card services give more benefits to the cardholders based on the variety of services offered by the issuers to cardholders such as:

2.18.5.1. Add-on-card/ Bandhan Credit cardholders can freely present a maximum of two add-on Cards to their wife, sisters, brothers, parents or children above 18 years of age. The unique feature of an add-on card is the preset limit, which allows the customer to empower their family with the flexibility and convenience of a card that allows cardholders to control spending. They can increase or decrease this limit according to their wish. To apply for this add-on Card, referred to as “Bandhan”, just call the 24-hour banks Customer Care Centre and place their request with an executive.

2.18.5.2. Monthly Self-set/pre-set spending limits The cardholders can limit their monthly spending. Any transactions over the specified 'Spend Limit' will be declined. This helps them to control their expenses. They can always increase or decrease this limit, which can be reset every billing cycle. The card that allows the customers to pre-define their own credit limits. Customers can request for a limit lower than what they are eligible for banks can even preset the monthly spending limits on the “Bandhan” card. This monthly spending limit can be reset every billing cycle by just calling the Bank 24-hour Customer Care Centre and place request with the executive. Cardholders spending limit will be changed on-line and come in to force from the next billing cycle.

2.18.5.3 Temporary credit limit enhancement There will be times when cardholders feel the need for an increase in his credit limit to enable customers to make increased purchases on their Card. To avail of the temporary credit limit enhancement, all the cardholders need to do is to call Customer Call Centre and make request. The bank executive will be able to increase the limit on-line. Please note that this facility is available only after nine months of membership and based on credit history.

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2.18.5.4. Permanent credit limit enhancement There will be times when cardholders often feel the need for an increase in their credit limit to enable to make increased purchases on Card. To avail of a permanent credit-limit enhancement, all the customers need to do is to call our 24-hour Customer Care and make request.

2.18.5.5. Limited lost card liability In case the Card is lost or stolen, call the Banks 24-hour Customer Care Centre and report the loss of our Card. A new Card will be sent to the customers within 72 hours of reporting this loss. Banks are protected from any financial liability arising out of transactions done on missing Card, from the time customer report the loss to the banks. Customers are covered from any unauthorized transactions on the card after the customers’ report of loss. But customers will have to bear the charges of the transactions made before the report of the loss.

2.18.5.6. Revolving credit facility Revolving credit is a type of credit that does not have a fixed amount of payments. Examples of revolving credits used by consumers include credit cards. The issuer of the card grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant . As a cash advance to the use, credit cards allow the consumers to ‘revolve’ their balance, at the cost of having interest charged. Cardholders receive the bill need not pay the entire amount. Banks have the flexibility of selecting any of the following payment options: to pay the total amount due, or Pay only the minimum amount due (5% of the bill amount subject to a minimum of Rs 200) and the balance can be carried forward to subsequent statements then to pay any amount ranging from the minimum amount due to the total amount due to the issuers of the cards.

2.18.5.7. Interest free credit period The payment due date on the credit card is 18 days from the statement date. There is an interest free credit period ranges between 18 and 48 days (applicable only on-retail purchases and if previous month’s balance outstanding is paid in full). cxxxvi

However for cash advances and revolving balances, interest is charged from the date of transaction. The internet free credit-periods varies from one bank card to another bank card.

2.18.5.8. Cash back offer Petrol and all products/services sold at petrol pumps zero per cent surcharge for single transaction spend between Rs.500/- and 3,000/- in SBI cardholders, subject to maximum surcharge waiver of Rs.100 per month per credit card account. In ICICI cardholders zero per cent at select HPCL pumps on select cards (maximum of Rs.3,000/- per transaction).

2.18.5.9. Toll free 24 hours customer care Credit card issuers operate toll free customer service centre with Automatic Voice Response (AVR) facility. Phone banking officer works through out the years, 24 hours and 365 days handling cardholders’ grievances.

2.18.6. Global assistance services Global credit card offers the following for those assistances for the benefit of the cardholders travel abroad. The important services such as global acceptance of cards, global ATM access, global travel assistance. The cardholders who travel abroad have the option of using the Global Emergency Assistance Services provided by Visa\Master card. These can be availed for reporting lost/stolen credit cards, Requesting for an emergency card replacement. Emergency ATM cash advance and miscellaneous enquiries. The toll free telephone numbers for accessing these emergency assistance Help lines are available in local telephone directories/yellow pages and other local listings in each country. For availing Visa Global Assistance Services, charges as applicable including telecom costs will be charged to their Card Account.158

158 www.icicibank.com cxxxvii

2.18.7. General services The following are the important general services which gain the more advantages to cardholder convenience and for safety. They are separate card for the house wife, automatic renewal of credit cards. No fee for the registration, renewal and annual, online marketing services, Photo card options and signature digitally imprinted.

2.19. CREDIT CARDS FRAUD is a wide-ranging term for theft or fraud committed using a credit card or any similar payment mechanism as a fraudulent source of funds in a transaction. The purpose may be to obtain goods without paying, or to obtain unauthorized funds from an account. Credit card fraud is also an adjunct to identity theft . The cost of credit card fraud reaches into billions of dollars annually. In 2004, the cost of fraud is high in the UK; it was over £500 million. Fraud in the United Kingdom alone was estimated at £500 million, or US$750-830 million at prevailing 2006 exchange rates.159

Stolen cards can be reported quickly by cardholders, but a compromised account can be hoarded by a thief for weeks or months before any fraudulent use, making it difficult to identify the source of the compromise. The card holder may not discover fraudulent use until receiving a billing statement, which may be delivered infrequently.

2.19.1. Types of card fraud 2.19.1.1. Cardholders’ fraud The most common type of fraud against credit cards is cardholders falsifying applications to get higher credit limits than they can afford to pay, or to get multiple cards that they cannot afford to pay off. Those who intend to defraud generally use the multiple-card approach. They givefalse names and financial data on several (sometimes as many as hundreds) of applications. Often, the address of a vacant

159 http://www.apacs.org.uk cxxxviii house that the criminal has access to is given, making it difficult to track the criminal's real identity.

2.19.1.2. Third party frauds The simplest way for a third party to commit fraud is for them to get their hands on a legitimate card. There is a large black market for credit cards obtained from hold-ups, break-ins and muggings. Perhaps one of the cruelest methods of getting a card is a “Good Samaritan” scams. In such a scam, credit cards are stolen by pick-pockets, purse-snatchers. The same day, someone looks up cardholders’ number in the phone book and calls up. If such thing happens to us as if you can come and pick the cards up immediately.

2.19.1.3. Merchants’ fraud There are many urban rumours of merchants imprinting a card multiple times while the cardholder is not looking, and then running through a bunch of charges after the cardholder leaves. We do not know of any case where this is an official policy of a merchant, but this is certainly one technique a dishonest cashier could use. The cashier can then take home a bunch of merchandise charged to his account. Although some people are afraid of this happening in a restaurant, where a waiter takes our card away for a while, it's actually less likely there, since there is not anything the waiter can charge against our card and take home.

2.19.1.4. Acquirer and issuer fraud The place to make really big bucks in fraud is at the acquirer or issuer, since this is where we can get access to large amounts of money. Fortunately, it's also fairly easy to control things here with audit procedures and dual control. People working in the back offices, processing credit slips, bills have a big opportunity to "lose" things, introduce false things, artificially delay things, and temporarily divert things. Most of the control is standard banking staff, and has been proven effective for decades, so this isn't a big problem. A bigger potential problem to the consumer is the possibility of an employee at the issuer or acquirer selling PANs to crooks. cxxxix

This would be very hard to track down, and could compromise a large part of the card base.

2.19.1.5 Stolen card fraud When a credit card is lost or stolen, it remains usable until the holder notifies the bank that the card is lost most banks have toll-free telephone numbers with 24-hour support to encourage prompt reporting. Still, it is possible for a thief to make unauthorized purchases on that card up until the card is cancelled. In the absence of other security measures, a thief could potentially purchase thousands of dollars or rupees in merchandise or services before the card holder or the bank realize that the card is in the wrong hands.

2.19.1.6. Compromised accounts Card account information is stored in a number of formats. Account numbers are often embossed or imprinted on the card, and a magnetic stripe on the back contains the data in machine readable format. Fields can vary, but the most common include Name of card holder, Account number, Expiration date, Verification/CVV code . Many Websites have been compromised in the past and theft of credit card data is a major concern for banks. Data obtained in a theft, like addresses or phone numbers, can be highly useful to a thief as additional card holder verification.

2.19.1.7. Mail/Internet order fraud The mail and the Internet are major routes for fraud against merchants who sell and ship products as well as Internet merchants who provide online services. The industry term for catalog order and similar transactions is “Card Not Present” (CNP), meaning that the card is not physically available for the merchant to inspect. The merchant must rely on the holder to present the information on the card by indirect means, whether by mail, telephone or over the Internet when the cardholder is not present at the point of sale.

2.19.1.8. Identity theft cxl

There are two types of fraud within the identity theft category - application fraud and account takeover. Application fraud occurs when criminals use stolen or fake documents to open an account in someone elses name. Criminals may try to steal documents such as utility bills and bank statements to build up useful personal information. Alternatively, they may create counterfeit documents. Account takeover involves a criminal trying to take over another person's account, first by gathering information about the intended victim, then contacting their bank or credit issuer — masquerading as the genuine cardholder — asking for mail to be redirected to a new address. The criminal then reports the card lost and asks for a replacement to be sent. The replacement card is then used fraudulently.

2.19.1.9. Skimming Skimming is the theft of credit card information used in an otherwise legitimate transaction. It is typically an "inside job" by a dishonest employee of a legitimate merchant, and can be as simple as photo copying of receipts. Common scenarios for skimming are restaurants or bars where the skimmer has possession of the victim's credit card out of their immediate view. The skimmer will typically use a small keypad to unobtrusively transcribe the 3 or 4 digits Card Security Code which is not present on the magnetic strip.

2.19.1.10. Carding Carding is a term used for a process to verify the validity of stolen card data. The thief presents the card information on a website that has real-time transaction processing. If the card is processed successfully, the thief knows that the card is still good. The specific item purchased is immaterial, and the thief does not need to purchase an actual product; a Website subscription or charitable donation would be sufficient. The purchase is usually for a small monetary amount, both to avoid using the card's credit limit, and also to avoid attracting the bank's attention. A website known to be susceptible to carding is known as a cardable website.

2.19.1.11. Credit Card Hijacking cxli

Credit Card Hijacking is the term used when a person’s credit card information is used for undesired charges for goods or services where the credit card owner has trouble reasserting control. This can be occur in the following are the three major forms. (i) The first form of credit card hijacking is basically identity theft , which is the deliberate assumption of another person's identity . (ii) The second form of credit card hijacking, which most people have fallen victim to, is the continued charging of a person’s credit card for a subscription to goods or services no longer desired by the credit card owner. (iii) Third form of hijacking is negative option billing is a business practice of sending goods automatically and billing the recipient unless the recipient is proactive in declining the goods before they are sent.

2.19.1.12. Friendly fraud Friendly fraud has been widespread on the internet, affecting both the sale of physical products and digital transactions. To combat digital transaction fraud, prepaid cards have been offered as an effective alternative to ensure customer payment. South Korean software developers such as Nexon implemented a prepaid system in 2007 to combat friendly fraud, selling prepaid cards in stores such as Target .

2.19.1.13. Internet fraud The term "Internet fraud" generally refers to any type of fraud scheme that uses one or more online services - such as chat rooms, e-mail, message boards, or Web sites - to present fraudulent solicitations to prospective victims, to conduct fraudulent transactions, or to transmit the proceeds of fraud to financial institutions or to others connected with the scheme.

2.19.1.14. Phishing Phishing is the criminally fraudulent process of attempting to acquire sensitive information such as usernames, passwords and credit card details by masquerading as a trustworthy entity in an electronic communication. Communications purporting to be from popular social web sites. Phishing is cxlii typically carried out by e-mail or instant messaging , and it often directs users to enter details at a fake website whose URL and look and feel are almost identical to the legitimate one. Phishing is an example of social engineering techniques used to fool users, and exploits the poor usability of current web security technologies.

2.20. FRAUD IN THE UNITED KINGDOM The cost of fraud was high in the UK, in 2007. It was reported £535 million from £427 m in 2006, it was increased by 25 per cent in a year and more than four times for the past ten years.160 Credit card companies generally guarantee the merchant will be paid on legitimate transactions regardless of whether the consumers pay their credit card bill or not. Majority types of frauds from Phone, internet and mail order fraud (Card-not-present fraud) which were grown at 37 per cent in a year.

TABLE 2.4 Credit and debit card fraud losses on the UK-issued cards (In million)

2006 2007 Fraud Type +/ (06/07) (%) (£) (£) Phone, internet and mail order fraud (Card-not- 212.7 290.5 37.0 present fraud) Counterfeit (skimmed/cloned) card fraud 98.6 144.3 46.0 Fraud on lost or stolen cards 68.5 56.2 -18.0 Card ID theft 31.9 34.1 07.0 Mail non-receipt 15.4 10.2 -34.0 Total 427.0 535.2 25.0 Source: http://www.cardwatch.org.uk

2.21. INTERNET CRIME COMPLAINT CENTRE (IC3) The Internet Crime Complaint Center (IC3) was established as a partnership between the Federal Bureau of Investigation (FBI) and the National White Collar Crime Center (NW3C) to serve as a means to receive Internet related criminal complaints and to further research, develop, and refer the criminal complaints to federal, state, local, or international law enforcement and/or regulatory agencies for any investigation they deem to be appropriate. The IC3 was intended, and continues

160 http://www.cardwatch.org.uk cxliii to emphasize, serving the broader law enforcement community to include federal, as well as state, local, and international agencies, which are combating Internet crime and, in many cases, participating in Cyber Crime Task Forces. Since its inception, the IC3 has received complaints crossing the spectrum of cyber crime matters, to include online fraud in its many forms including Intellectual Property Rights (IPR) matters, Computer Intrusions (hacking), Economic Espionage (Theft of Trade Secrets), Online Extortion, International Money Laundering, Identity Theft, and a growing list of Internet facilitated crimes. Since June 2000, it has become increasingly evident that, regardless of the label placed on a cyber crime matter, the potential for it to overlap with another referred matter is substantial. Therefore, the IC3, formerly known as the Internet Fraud Complaint Center (IFCC), was renamed in October 2003 to better reflect the broad character of such matters having an Internet, or cyber, nexus referred to the IC3, and to minimize the need for one to distinguish "Internet Fraud" from other potentially overlapping cyber crimes.

2.22. PREVENTION OF CARD FRAUD The following are the important credit card fraud prevention steps: (i) Ask for and check other identification (ii) Examine the signature on the card (iii) Compare signatures (iv) Check the security features of the credit card (v) Check the credit card’s embossing (vi) Check the presented card with recent lists of stolen and invalid credit card numbers (vii) Call for authorization of the credit card (viii) Destroy all carbon copies of the credit card transaction to ensure that no one can steal the credit card information and help prevent future credit card fraud.

It’s also very important to be sure that merchants’ staff is educated about credit card fraud, Merchant establishments can use the points above as a “to do” list for dealing with credit card transactions. Considerable time and money in controlling credit card frauds. Some of the other methods used in prevention of frauds are: a. Maintaining details of fraudulent application files, preferably in an automated environment. cxliv

b. Establishment of Credit Information Bureau which provide the credit card history of individual borrowing through credit reports. c. Education of cardholders on the card frauds and creating awareness about measures to prevent frauds. d. Designing systems to monitor cardholders’ activity and identity unusual spending behaviour like Personal Identification Numbers (PIN).

2.23. RBI MEASURES FOR FRAUD PREVENTION The Central Bank has finally woken up and has recommended measures to prevent Credit Card Frauds or at least minimize the same. RBI has recommended the following measures to be taken by every credit card issuers. (i) Mandatory SMS facility for Online Transactions over Rs 5,000 [However, some banks like ICICI are sending the SMS for every Online Transaction and it is a good move] with effect from 1 st September, 2009. (ii) Separate Password protection for all Online Transaction. CVV is not enough; the hacker will need a password as well. [Recall we have already written about this feature with effect from HDFC Bank Cards - MasterCard Secure Code for Online Transactions] (iii) Secured Transaction mechanism for customers doing business on IVR - Interactive Voice Response Systems. (iv) RBI measure in internet security. All these measures have to be fully implemented by each and every credit card company operational in India under the guidelines of RBI.161

2.24. LOSS REDUCTION STEPS TAKEN BY THE BANKS 2.24.1. Chargeback insurance The Chargeback insurance refers to an insurance coverage protecting a merchant who accepts credit cards. The coverage protects the merchant against

161 www.rbi.org.in cxlv cardholder fraud s in a transaction where the use of the credit card was unauthorized, and covers claims arising out of the merchant’s liability to the service bank . This coverage can apply under a number of circumstances, including a credit card lost or stolen and used before the cardholder can report it. Identity theft s Post-purchase "slip to information changes.”

2.24.2. Credit card security The low security of the credit card system presents countless opportunities for fraud . This opportunity has created a huge black market in stolen credit card numbers , which are generally used quickly before the cards are reported stolen. The goal of the credit card companies is not to eliminate fraud, but to “reduce it to manageable levels.” This implies that high-cost low-return fraud prevention measures will not be used if their cost exceeds the potential gains from fraud reduction. Most internet fraud is done through the use of stolen credit card information which is obtained in many ways, the simplest being copying information from retailers, either online or offline . Despite efforts to improve security for remote purchases using credit cards, systems with security holes are usually the result of poor implementations of card acquisition by merchants.

2.24.3. Warning Warning describes various methods of perpetrating fraud against credit and charge card issuers, acquirers, and cardholders. Legal penalties for using various methods to commit fraud are severe. The reason for sharing this information is that the consumers will be aware of the importance of security and be aware of the procedures used by financial institutions to protect against fraud. Neither bankers nor their employers advocate the use of the fraudulent methods described herein. All the information here is publicly available from other sources. Unnecessary detail is purposely not included, particularly as it is applied to detection and prevention of fraud.

2.24.4. Other measures cxlvi

The issuers of credit cards have taken various steps in order to reduce losses as far as possible, resulting from loss or stolen cards. These loss reduction measures enable the issuers of cards to reduce losses to be bone by them to a minimum level. Some of the important loss reduction measures taken by the issuers of credit cards with the help of following are: (i) Photo cards with signature digitally imprinted (ii) Integrated circuit cards, (iii) Authorization of transaction (iv) Users limit, (v) Merchants education, (vi) Help of Credit Industry Fraud Avoidance (CIFAS) in U.K., (vii) Private Investigations agencies like started in U.K., (viii) PIN, (ix) Prevention of application frauds, (x) Prevention of fraud delinquency are taking important measures to reduce or minimize to prevent credit cards frauds in the market.