PTVAs Institute of Management RESERCH REPORT ON EVALUATION AND PERFORMANCE OF CREDIT CARD IN INDIA SUBMITTED TO: Prof.

SHALINI KAKKAR SUBMITTED BY: SANDEEP HOLGUNDE ROLL NO. 20 SUNIL TENGALE ROLL NO. 55 Table of contents S. No. Name Page 1 Introduction to the topic 2 Credit card industry 3 Participants 4 5 6 7 8 9 Credit Card Industry Status Quo Credit Card Business Model Highlights Credit Card Industry Top 5 IT Initiatives Research Objective and Methodology Findings Technology as a Key Business Process Enabler in the Credit Card Industry

10 Executive summary 11 Bibliography Introduction to the topic The Credit Card Industry ________________________________________ The Credit Card Industry is a global, multi-lingual, multi-currency based financ ial services business. This business is dominated by a few key players like Vis a, MasterCard who provide the infrastructure for credit card transactions and ca rd issuers like MBNA, Citibank and American Express who provide the credit card and credit to the customer. They may also play the role of an acquirer for enab ling credit card transactions with merchants and banks. The Business Model has fixed ongoing infrastructure costs that are a part of running the business. The Credit Card Vendors are looking for a better ROI on these fixed costs as compet ition increases, brand loyalty decreases, margins decline and customers and merc hants are increasingly savvy about their credit card benefits. A new threat in the form of debit cards has also impacted this mature Industry. ________________________________________ Participants Merchant: m of payment. A vendor of goods or services who accepts a credit card as a for

Acquirer: An acquiring financial institution (or "acquirer") contracts wit h the bank, card issuers and merchants to enable credit card transactions. The a cquirer deposits the daily credit card totals and debits the end-of-month proces sing fees from the merchants accounts. Customer: An individual or a business that uses a credit card to procure g oods and services. Network: A company that is authorized by the acquirer to capture, authori ze and process merchant transactions. Card Issuer: An organization that issues cards to card holder and is responsi ble for billing the card holder.

Association/Private Label: An organization like Visa, Master Card or Americ an Express, Diners or Discover which provides the brand names under which credit cards are issued. The associations market their brands along with the card issu ers and share in the marketing costs. Visa and MasterCard are industry standard and sponsored by a consortium of banks to ensure fairness in the credit card bu siness. The Transaction: A merchant is a company accepting credit cards for retail, mail order, or Intern et transactions. The merchant has a deposit account with a merchant bank. The me rchant has a contractual relationship with an acquirer who assigns them a mercha nt ID, purchases the merchant s credit card transactions at a discount, and depo sits funds into the merchant s bank. The merchant must choose an authorization network supported by, and paid by, the acquirer. The issuing bank makes the cred it decision to issue the card to the merchant s customer, sets their credit limi t, and maintains all the details related to the card transactions. The cardholde r applied for the card and is responsible for paying the bill from the issuing b ank. Only an authorization network has direct access to issuing banks computers to process credit card authorization requests. To authorize a customer s card, the merchant creates an authorization request. T his transaction contains the card number, expiration date, amount, address verif ication service (AVS) data, the CVV2 number from the signature area of the card, and other fields. The merchant sends the transaction using a device or software certified by the a uthorization network. The system dials the authorization network and sends the t ransaction to the authorization network host computer. The network then inquires of the issuing bank, which authorizes or declines the transaction. For the merc hant to be paid for the transaction, settlement must occur. The settlement is do ne the same day on the Point of Sale or when fulfillment occurs. Credit Card Industry Status Quo This industry has matured in the US with a few big players like Citibank, MBNA, JPMC and Bank One dominating the landscape. American Express and Discover Card are also major players with their own private labels and not under the Visa and MasterCard Umbrella. Growth is limited in the US although global opportunities abound. Credit Card Usage has burgeoned in the US and stiff competition has lim ited margins. The customer has benefited with lower interest rates and other pe rks. The credit card business is still subject to the vagaries of the economy. In a competitive industry segment, the acquirers, issuers, associations and the networks play one or all of the roles. American Express for Instance plays all t he above mentioned roles to maximize participation in the credit card transactio n process. Key Credit Card Metrics (US 2001) Top 10 Credit Card Vendors Citibank MBNA Bank One Discover Chase Capital One American Express

 Bank of America Providian Fleet Securitization: Citigroup: $204 Billion. MBNA: $73 Billion. JPM/Chase: $75 Billion. Fraud/Revenue Loss (Annual) Stolen Cards $ 1 Billion Bankruptcy $ 3 Billion Credit Card Fraud $ 10 Billion Some Big Numbers Total Available Credit $ 1.8 trillion Total Credit Card Debt - $660 billion Sales Volume of o VISA $2.1 trillion o MC - $986 billion o AMEX - $298 billion Credit Card Spending 1.3 trillion Sub Prime Accounts 70 million Credit Card Consumers 185 million Credit Card Business Model Highlights Securitization Credit card receivables owed by customers to card issuers are treated as assets a nd securities are issued against those assets. The securities are traded as bon ds and hence the term securitizing. Investors such as money market funds and pe nsion plans buy these securities. That provides finance for lenders who recycle that into more credit card debt for customers by issuing more cards or higher c redit limits. Sub Prime Cards Individuals with less than stellar credit histories are targeted with credit car d offerings. These credit card offerings are accompanied by high interest rates and excessive fees. Providian pioneered this approach and did well until the e conomy slowed down which made it for difficult for these individuals to pay off their credit card bills. The securitization of these credit card receivables an d the securities issued against them are analogous to junk bonds in the credit m arket. Sub Prime Lending has come under the scrutiny of federal regulators beca use of the lenders predatory lending practices. Also, banks are required to kee p sub-prime lending under limits by federal laws. Affinity and Co-Branded Cards MBNA pioneered this approach by marketing credit cards to professional and other communities which are relatively affluent. The members of these communities ha ve better credit histories which improves the quality of the credit card receiva bles and its securitization. These cards are called affinity cards because they affiliate with a group of people. Co-Branded cards are cards which are issued on behalf of another brand to leverage the potential of both the card issuing ve ndor and the partner. Citibank for instance has partnered with American Airline s to offer a credit card to its frequent flyers. Citibank lets users collect on e American Airline Mile for every dollar spent which influences the customer to spend on this co-branded card hence enhancing the profitability of the card. Credit Card Industry Top 5 IT Initiatives Fraud Detection Visa and MasterCard have reduced credit card fraud to 6 cents for every 100 doll ars of credit card transaction. Though this might seem small, the numbers are s taggering as credit card usage soars to 5 trillion dollars or more globally. Cr edit card companies and credit card infrastructure providers invest significant ongoing resources in identifying credit card fraud. The internet has contribute d to a rise in credit card fraud and investment in this area continues as a cost of running the business. Call Center Productivity/Customer Experience Credit card companies have significant call centers cists which operate 7/24/365 . Automating the customer experience and reducing the talk time is a high prior

ity for credit card companies. The internet has provided a framework for reduci ng call center costs as customers are lured to use the web for the customer expe rience. IT investment in this area has increased lately due to efficiencies i n customer using the web instead of the call center and opting for web statement s instead of paper statements. Up Selling and Cross Selling Customers have different vendors for different financial services. Credit Card companies have become a play as being acquirers or acquires for the customer bas es to up sell other financial services like brokerage, insurance, mortgage and i nvestment advice. Citibank and American Express are setting the trend by up-sel ling to their customer. Cross selling has become another profitable source of revenue for credit card companies as they leverage their customer base informati on by selling products for other vendors and charging a portion of sales and cha rging a fee. Mining the (un)Profitable Customer A profitable customer for a credit card company is somebody who charges a lot to the credit card and faithfully pays his credit card dues over a long period of time. Students, people who have just graduated and people with several other pr ofiles fit this description. An intelligent scan of the customer base will yiel d targeted lists which can be leveraged and incentives like lower interest rates can be given to these customers as teasers and enticing them to spend and pay. Customers who have a potential for going bankrupt should also be able to be ide ntified so they can be incented with lower rates to pay off their credit card ba lances or they can be denied further credit. Smart Cards A Wild Card Smart Card which is popular in Europe has yet to catch up in the US due to sever al reasons, cultural and technological. Several Vendors, Financial Service Provi ders, Merchants, IT Providers, regulatory authorities have to come to terms with a common definition of a smart card and its capabilities. The battle for a com mon definition of a smart card continues....This is a big opportunity for vendor s to play a key role in defining the capabilities of such a card as we have the infrastructure to do so across the enterprise. Debit Card Threat Debit cards have become increasingly popular with customers these days instead o f paying with checks. This has posed a threat to the credit card industry from a revenue perspective. Since the debit card directly debits the customers bank ac count, the risk is reduced in the transaction and hence a debit card transaction is cheaper than a credit card transaction. Fortune magazine documented this in a recent article and the diagram below explains it all. Although one can have a Visa debit card which is Accepted Anywhere Visa Is Accepted, a visa debit card i s more expensive for the merchant than a regular debit card. Battle Lines have been drawn between Visa and the merchants in this case. As can be seen clearly, everybody benefits from a debit card transaction. The c redit card has its place for certain transaction types.

Research Objective and Methodology TO evaluate & find why credit cards are not performing well as a good loan mediu m to customers. Findings Number of questioners asked in research & we got particular findings from custom ers.

Q.1

medium selected for making payment

Q2. Do you know the different between credit card and debit card? Q3. Which credit card you prefer the most for making payment? Q4. WHICH CREDIT CARD HOLDING YOU feels MORE SECURE?

Q5.WHY DO YOU PREFER FOR CREDIT CARD RATHER THAN OTHER CARDS?

Q6. WHICH CREDIT CARD YOU PREFER MOST?

Q7. WHERE DO YOU FEEL MOST SECURE USING OF YOUR CREDIT CARDS? Q8. DOES BONUS POINT IS NECESSARY AT THE TIME OF SHOPING THROUGH CREDIT CARD FOR YOU? Q9.Does financial institution follows the norms of RBI regarding recovering of l oan? Q10. HAVE YOU MET WITH AN ACCIDENT OF HACKING OF YOUR CREDIT CARD ACCOUNT? Q11. DO YOU FEEL USING CREDIT CARD IS NECESSARY TO ALL FOR MAKING PAYMENT IN PLA STIC PAYMENT WORLD? Q12 Do you feel that banks will able to cover rural market rapidly

Age Occupation

Annual income

Technology as a Key Business Process Enabler in the Credit Card Industry Citibank in India has pioneered the use of Wireless Technology to authenticate c redit card transactions. The Indian Telephone and Communications Network is ver y cumbersome and expensive to use in big cities because the lines may be busy or the merchant may not be able to procure a telephone or network line because of the delays and the reliability of the government owned network. Hence using an EDC terminal is not a feasible option for a lot of merchants. These merchants h ad to use a manual process which increased the potential for fraud until now. W ireless technology is however private and readily available and state of the art . The Merchant has a cell phone with a high capacity SIM Card. The phone has sp ecial software which can accept card numbers and other card information. This i nformation is transmitted to the Bank as an SMS message. The bank reads the mes sage and check whether this card can be accepted or not and send another SMS mes sage back to the merchant indicating acceptance or denial of the charge. If the card is accepted, the merchant continues the transaction and the regular transa ction process of the credit card follows. Technologically, the convergence of mobile phone and SMS technologies with card payment systems was a significant challenge. It meant de veloping the application on the SIM Card while ensuring data security and converting the SMS standard into the appropriate format recogn izable by the Cards Switch for an authorization.

Executive Summary The credit card industry is consolidating with a few major players dominating th e landscape. These players are trying innovative financial instruments to lever age their portfolios. Securitization of credit card receivables is one such exa mple. This has come under increasing scrutiny from federal regulators because o f their accounting treatment. Technology could be used as a significant differ entiator in this mature industry for the major participants to take market share from the other players. Citibank is a pioneer in this area as shown in the sec tion above. The internet, wireless, messaging and smart cards could be a major factor in the next generation of credit cards. Bibliography 1) Fortune Magazine 2) www.slideshare.net 3)google news