CHANAKYA NATIONAL LAW UNIVERSITY

ECONOMICS

PROJECT WORK

TOPIC:-EXPANSION OF CREDIT CARD MARKET IN INDIA

SUBMITTED BY:AKASH RAJ

ROLL:-516

ACKNOWLEDGEMENT

This is to state that I (AKASH RAJ, ROLL 516) completed my Fourth semester
project work of ECONOMICS on topic EXPANSION OF CREDIT CARD
MARKET IN INDIA
This project would have not come to an end successfully without the help of many
distinguished and undistinguished personalities. I sincerely acknowledge the help
rendered to me by our faculty of ECONOMICS, MRS. SHIVANI MOHAN
. she has helped me a lot whenever I needed any sort of assistance and guidance
related to the topic. I acknowledge the sincere help of our library staffs and our net
center in charge, who by rendering me help in locating appropriate resources to
collect materials. It is a good platform to recognize the help and guidance
furnished to me by many persons I this regard; I heartily acknowledge their help
and support rendered to me, without the help of the above mentioned personalities
and many unrecognized people this project would never been completed.

TABLE OF CONTENT

Acknowledgement
1.introduction
2. origin
3.credit card as a transactional medium
-cash
-cheque
-credit card
4.expansion of credit card in india
5.conclusion
6.bibliography

INTRODUCTION

The credit card industry in India has registered an encouraging growth in recent
times, but the usage pattern of credit cards remains a point of concern, those in the
industry say. Seven years back, India had a base of around five lakh credit cards.
There has been a seven-fold increase, with the number of cardholders touching
over 38 lakh. These figures point towards the fact that the credit card industry in
India is growing at a brisk annual rate of 30 per cent and is expected to grow at a
similar rate in the coming years. This fortifies the view that conservative
purchasing ideas are giving way to the big in-thing. But it is the usability that
raises doubts.
According to a survey by the Credit Card & Management Consultancy (CCMC),
71 per cent of first time credit card applicants in the country have expressed the
need for advice on appropriate card selection despite the plethora of cards available
in the market. It has come to realize a long felt need of potential and existing
cardholders for advice on suitable selection of a credit cards. The whole idea
behind the introduction of the credit cards was to increase the purchasing capacity
of the cardholder. With this in mind, the foreign banks launched a credit card
blitzkrieg on the Indian customer.The innovations have already begun to show
their effect. The Standard Chartered Bank has seen its credit card base shoot up
after the launch of its Global Rupee Card in March last year.It has seen the fresh
issuance of global card increase by more than one lakh, and the bank now has a
base of more than half a billion. But the real challenge for the banks is to make the
holder spend more on the card. Going by estimates, India has a long way to be
anywhere near the matured markets. The markets like the United States and
England have an average annual card spend of 1,300 and 3,600 dollars
respectively.The credit card players will have to think about simplifying the
foreign exchange transactions. When one uses the card, it is entirely his
responsibility to make sure that exchange controls have been complied with. The
banks that issue the cards have made it abundantly clear that one has to look out
for him. It is upon him to find out the facts of regulatory life. The real point of
worry is the spending on the credit cards. According to estimates, the average card
spending in India is even less than that in Indonesia. Those in the credit card

business say that per capita credit card spending in India is about 500 dollars ,
whereas in Indonesia, it is about 678 dollars. At present there are over a dozen
players in the credit card market in India, and the fact is the foreign banks are
clearly the leaders. The leaders will surely be identified by the innovations for the
card users .But the alarm has been raised for the banks by the figures that show that
while the average usage in Malaysia is 27 times annually, in India it is only 11
times. Some of the key factors impacting the cards business in India are limited
credit, wide geographical spread, limited telecommunication infrastructure and
emerging regulatory controls. The other players feel that the card acceptance base
in India has to be widened. Suggestions include credit card usage at petrol pumps
and railway bookings .They also point out that though the cards business has been
in the country for long, but even today the insurance premium cannot be paid by
card. Though LIC is talking about the introduction of this facility to customers, but
its turning into reality may take time. There is talk of widening the card business
with new features, but the present scenario does not paint a positive picture, with
many loopholes remaining to be plugged .Of the twenty million taxpayers in India,
more than ten per cent of them are cardholders. Those in the industry point out that
this figure is not bad, considering the fact that; the cards business is still in its
initial stages. However, the players feel that the business has not reached an
optimum level to say that they are making money. Even the largest player in the
Indian market does not still have the economies to make the card business really
profitable in India, despite the fact that it has more than one million credit card
holders. Less than two per cent of private consumption spending in India is done
on cards .While issuing the cards may seem to be easy, the challenge for the banks
lies in being able to manage their portfolios by keeping the delinquency levels at
the lowest. Huge investments in systems and infrastructure are, therefore, a
necessity. The increase is being attributed to new ideas such as round-the-clock
functioning of card issuing banks and pulling out all stops even at a loss, to grab a
sizeable share of the expanding pie.

origin

The credit card boom began in earnest in the 1960s, when bank-issued cards from
MasterCard and Visa became popular. By harnessing the electronic transaction
ability of large banks, MasterCard and Visa eclipsed the previously dominate
Diners Club, a company which processed transactions independently. More access
to processing systems meant that consumers could use cards at more retailers and
restaurants; the more establishments that accepted credit cards, the more popular
they became.
In the 1980s, American Express, which was originally marketed to businesspeople,
and Discover became market forces. Consumers could now choose between bankand store-issued cards, as well as independent credit card companies like American
Express and Discover.

credit card as a transactional medium

The primary use of credit cards today is as a transactional medium, not as a source
of credit. Over half and probably as much as 68% of credit card users should be
considered convenience users, who use credit cards primarily as a transactional
medium and who pay off their balances in full each month. Moreover, convenience
use of credit cards is rising much faster than revolving use of credit cards,
increasing 20% in one year alone1. According to a recent Visa study it is also
estimated that almost 60 percent of total bankcard volume generates no interest,
up from roughly 50 percent six years ago.The high rate of convenience use of

1 1 (ascribing the rise in convenience to use to a growth in the number of retailers accepting
credit cards and the popularity of co-branded cards among consumers); see
also Pozdena, supra note 4 (noting that the use of credit cards as a payment device is
growing at a rate of
about 10% per year and the amount of credit card debt outstanding is growing at only 6%
per year).

credit cards relative to revolving use reflects the attractiveness of credit cards as a
transactional medium. This attractiveness stems from two basic sources. First,
credit cards enable individuals to minimize their cash balances, thereby allowing
them to shift their assets into higher-return investments. Second, there has been an
explosion in consumer demand for credit card use, largely as the result of the
convenience of using credit cards as a mechanism for conducting transactions.In
any given transaction, a consumer will have any number of options as to how to
pay for the purchase.2 Consumers will choose their transactional medium according
to the relative costs and benefits of using one method over another. Three basic
forms of transactional media are available: cash, direct claims against a bank
(checks or debit cards), or credit cards. The attractiveness of credit cards relative to
these other media explains the rise of credit cards as a dominant method of making
transactions.

2 DAVID S. EVANS & RICHARD L. SCHMALENSEE, THE ECONOMICS OF THE PAYMENT CARD
INDUSTRY (1993) [hereinafter EVANS & SCHMALENSEE] (giving a similar discussion to that
presented here).

1. cash

A consumer can use cash. Obtaining and using cash to finance transactions has
very few benefits in the modern era relative to the alternatives. There are also
substantial transaction costs associated with acquiring cash, most notably the
requirement to actually go to the bank to withdraw it. Although this cost has
declined with the spread of automatic teller machines (ATMs), withdrawals from
the ATMs of other banks requires the payment of a fee. Overall, the transaction
costs of obtaining cash at the margin makes cash relatively less attractive than
alternatives that do not require this.Cash is also unattractive as a primary
transactional medium in that it earns no interest when it is in your wallet. Indeed,
because of inflation, cash carried in your wallet earns a negative rate of return.Cash
also has limited utility for conducting many transactions. For instance, cash cannot
be used to pay bills or make purchases through the mail. Other cash transactions
require the creation of a formal receipt to memorialize the transaction. . Even in
1976, before the rise of credit cards and electronic commerce, cash was used
primarily only for small transactions. 3 Larger transactions at that time were
conducted by checks.

2.cheques

Cheques have traditionally served as the primary transactional mechanism for

larger consumer purchases. One suspects, however, that this primacy has been by
default there were many transactions for which cash was simply not a viable
alternative, and hence were conducted by cheque. These include paying bills by
mail and making larger purchases for which one did not want to carry cash
balances on ones person.

3 e Kenneth E. Scott, Electronic Commerce Revisited, 51 STAN. L. REV. 1333, 1339

(1999).

Again, using 1976 as a benchmark, although 66% of transactions at that time were
conducted by cash, over 90% of dollar payments were carried out by checks. 4
Because checks were a higher-transaction cost medium, they were used primarily
for larger-value purchases that justified using these higher transaction-costs.The
problem with checks, however, is that they are fundamentally in the nature of a
credit transaction.5 By writing a check, an individual is representing that she has
sufficient funds to cover the check when it is drawn. The merchant, however, has
no way of confirming this fact at the time the check is written. Moreover, even if
there are sufficient funds at the time the check is written, there may not be
sufficient funds at the time the check goes to the bank to be cleared. As a result,
merchants suffer potentially large risks of nonpayment from the use of a check.

41 EVANS & SCHMALENSEE, 455

5 Notes of Committee on the Judiciary, Senate Rep. 95-989 (1978) (Normally, a check is a
credit transaction.).

3.credit cards

Recent decades have seen a massive expansion in the use of credit cards as a
transactional medium. Some commentators have incorrectly ascribed this
explosion to the efforts of deregulated card issuers to push credit cards on
unsuspecting consumers. This argument lacks merit and will be discussed in some
detail below. A more plausible explanation for the rise of credit cards as a
transactional medium is their convenience and the other benefits they offer. In
particular, credit cards have increasingly supplanted checks as the preferred
medium for transactions traditionally conducted by check. Thus, it is likely that the
explosion in consumer demand for credit cards is the result of rational consumer
choice, rather than improper creditor action .Credit cards offer two transactional
advantages over cash and checks. First, unlike cash and checks, credit cards make
it unnecessary to maintain cash reserves sufficient at all times to cover current
expenditures. Second, credit cards offer several ancillary benefits unavailable to
cash and credit cards.Credit cards provide flexibility for consumers in matching
their income and expenditure streams by alleviating the need to maintain sufficient
funds at all times to cover current expenditures. Rather than necessitating an
ongoing maintenance of cash balances, credit cards necessitate holding only
enough cash to cover a check to pay the credit card bill once a month. It is only
when that single check is presented for clearance that the consumer must ensure
that she has sufficient funds to honor the cheque .The simple convenience of being
able to make a purchase today without having to worry about the exact amount of
funds available makes credit cards a convenient transactional medium6. They
estimate that if bank accounts are earning a real interest rate of 4.2% annuall
6 o Donald D. Hester, Monetary Policy in the Checkless Economy, 27 J. FIN. 279, 285-86
(1972) ([T]he charge card allows [its owner] to shift the burden of carrying zero-interestbearing

(higher than most money market and passbook accounts today), and credit card
balances accrue interest at 19.6% annually (several points higher than the
prevailing norm today), and credit cards begin to accrue interest immediately when
charges are made (which is rarely the case because most cards do not charge
interest until after the close of the credit cycle and the end of a subsequent grace
period), credit cards would still be predicted to be used to finance about 23% of
consumer transactions. As suggested, this number certainly understates the realworld percentage of transactions rationally7 financed by credit cards, as it
overstates the attractiveness of holding money balances, overstates the interest rate
on credit cards, and unrealistically assumes that balance begin to accrue interest
immediately.
Perhaps most fundamentally, critics and regulators of the credit card industry must
keep in mind that most credit card users are convenience users. By focusing solely
on the smaller group of credit card owners who revolve balances, bankruptcy
theorists and government regulators truly are studying the tail, rather than the dog.
Regulators must be certain that in trying to regulate revolving credit use, they do
not interfere with convenience use of credit cards.

transaction balances from himself to those issuing the card for at least a month. With a
charge card he
can reduce his demand account balance[s] . . . [and] it is less important to waste time and
effort trying to
minimize them.)

7 Federal Credit Union v. Melancon

CONCLUSION

The main benefit to each customer is convenience. Compared to debit cards and
checks, a credit card allows small short-term loans to be quickly made to a
customer who need not calculate a balance remaining before every transaction,
provided the total charges do not exceed the maximum credit line for the card.
Credit cards also provide more fraud protection than debit cards. For merchants, a
credit card transaction is often more secure than other forms of payment, such as
checks, because the issuing bank commits to pay the merchant the moment the
transaction is authorized, regardless of whether the consumer default son the credit
card payment (except for legitimate disputes, which are discussed below, and can
result in charges back to the merchant). 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. But the real challenge for the banks is to make
the holder spend more on the card. Going by estimates, India has a long way to be
anywhere near the matured markets. The markets like the United States and
England have an average annual card spend of 1,300 and 3600 dollars
respectively.The credit card players will have to think about simplifying the
foreign exchange transactions. When one uses the card, it is entirely his
responsibility to make sure that exchange controls have been complied with. The
banks that issue the cards have made it abundantly clear that one has to look out
for him. It is upon him tofind out the facts of regulatory life. The real point of
worry is the spending on the credit cards. According to estimates, the average card

spending in India is even less than that in Indonesia. Those in the credit card
business say that per capita credit card spending in India is about five hundred
dollars (Rs 21,500), whereas in Indonesia, it is about 678 dollars (Rs 29,154). At
present there are over a dozen players in the credit card market in India, and the
fact is the foreign banks are clearly the leaders. The leaders will surely be
identified by the innovations for the card users. But the alarm has been raised for
the banks by the figures that show that while the average usage in Malaysia is 27
times annually, in India it is only 11 times. Some of the key factors impacting the
cards business in India are limited credit, wide geographical spread, limited
telecommunication infrastructure and emerging regulatory controls.

SCENARIO IN INDIA

In India the situation is far from satisfactory to use the credit cards as a means of
making payments for online purchases for the following reasons;
1.Use of credit cards is popular to only a few thousands of executives,
businessmen, etc from big cities
.2.That any person using credit card is liable to declare IT made many people
surrendering their cards. In other words if credit card is made the payment
mechanism, only IT payers will be eligible to buy goods online.
3.Still many leading credit card companies are yet to install their infrastructure to
process the online payments.
4.Then there is the question of sales tax laws Each State has its own rate of tax
structure for each and every commodity. How to charge tax when a transaction
takes place online and at what rate will pose problems of billing.
5.Many establishments do not like to offer credit card facility due to the service
charges to be paid to card companies. They get the payment only after a certain
period of time once the goods are sold. Both of them make the profit margin less .
As mentioned earlier, the fraud element is applicable to India also .In view of all
these factors, in India; Use of credit cards cannot be expected to boost the sales of
online sales, particularly business to customer

Bibliography

Books:1.Marketing management: Philip Kotler

2.Financial Management: Khan & jain
3.Business Statistics: K.K.Khanna & Jagjit Sing

Online sources:Strategic marketing magazine.com

India infoline.com
Indiatimes.com