Credit Card - a Theoretical Framework
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lxxxv Chapter II CREDIT CARD - 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. American Express 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 India, 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 grace period, and other features. Credit card debt 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 bankcard 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 United States. 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 trademark 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" charge card , 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, credit limit 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.