“Why has India been slow to adopt cards? Mostly because there were no guidelines and no standards, so it was natural for the banks and other people to wait and watch.”

- M.N. Gopinath, Executive Vice-President, ICICI Bank, in May 2000.

In the late 1990s, the plastic cards market in India, comprising credit cards, smart cards, debit  cards, charge cards, stored value cards and others, picked up momentum like never before, growing at an annual rate of 25%. Analysts attributed this growth largely to the rapidly increasing user base of debit cards.

Though initially, there were only two players, (HDFC and Citibank), the debit card market base grew considerably through 1999 and reached the 3 million mark in March 2000. The usage figures indicated a very healthy growth of the market in future, as seven out of 10 cardholders were reportedly using their card regularly. The annual spending through debit cards in India reached over Rs 5 billion. The growth of debit cards was all the more impressive considering the fact that credit cards, introduced in the country in the early 1980s, had managed to reach the 10 million-user base level only in 2000. Thus, the debit card user base had reached one-third of the credit card user base in just around one-tenth of the time.

Also, smart cards introduced in the late 1990s, had become very popular, especially in the financial services, banking, healthcare, transport and telecommunication businesses. The demand for co- branded cards during 2001 was a further indication of the fact that the Indian market had finally realized the potential of plastic money.

The evolution of plastic money dates back to the 1920s, when the first payment card was introduced in the USA. Diners Club and American Express launched the world’s first plastic card in the USA, in 1950. The first credit card was introduced by Diners Club in 1951. However, the plastic cards began to be widely used only after 1970, when the specific standards for magnetic strip were set. In the late 1990s, plastic cards became very common and by 2001, plastic money had become an essential form of ‘ready money’ (See Exhibit I for different forms of plastic money).

The global card market is dominated by two US-based players, Visa and MasterCard. Visa introduced its first credit card, BankAmericard in 1958, which went on to become a great success, acquiring universal merchant acceptance. Visa’s card base increased significantly through the decades and reached the one billion mark in 2000. MasterCard International was established in the 1970s. The first MasterCard was issued in 1988, in Soviet Union. By 2000, MasterCard had over 30 offices around the world in various countries like India, Thailand, Chile, U.S., China, Europe, South Korea, Taiwan and others.

In the 1990s, having covered a majority of US and European markets, Master Card and Visa shifted their focus to the East, especially the Asia Pacific region. By 2000, MasterCard and Visa had established their debit cards as well in the Asia Pacific region. In 2000, Visa debit cards reached the 48 million mark in the Asia Pacific region, while the MasterCard debit card base touched the 37 million mark. MasterCard’s credit card base touched 80 million during the period.

Credit Cards

Credit cards are electronic cards that enable the holders to pay for their purchases without physically carrying cash. The issuer of the cards gives a short-term loan to the cardholders, enabling them to make purchases and pay for them later, by giving them an interest free credit period of 30 to 50 days. Credit cards bear many numbers that stand for different features. Usually, the first digit in the credit card number denotes the card system it uses, for example, the digit 3 stands for travel/entertainment cards, 4 for Visa cards and 5 for Master Card. The structure of the card number differs with the card system. For example Diners Club card numbers start with 38 and American Express card numbers with 37. For American Express, digits three and four signify card type and currency, five to eleven, the account number, twelve to fourteen, the card number in the account and fifteen, the check digit. Similarly for Visa, digits two to six denote the bank code, seven to twelve, the account number and thirteen to sixteen, a check digit.

The reverse side of the credit card carries the magnetic stripe, also known as a magstripe. The magnetic stripe is built from minute iron-based magnetic particles embedded in a plastic like film. Each particle is a bar magnet, about 20-millionths of an inch in size. The tiny bar magnets can be magnetized in both the north and south directions, which enables writing of the stripe. The stripe contains three tracks, each track one-tenth of an inch wide. The ISO/IEC1 standard 7811 is the typical magnetic stripe technology used by the banks. Generally, credit cards only use tracks one and two. The third track is a read/write track that includes the encrypted Personal Identification Number (PIN), currency units, country code and the amount authorized. This third track is used less as its usage is not standardized among banks.

A credit card transaction requires five players to execute the transaction - a cardholder, a merchant or sales outlet, the merchant acquirer (an acquirer is the firm that segregates credit authentication requests and guarantees payment to the merchants), the card issuer (bank or other organization that issued the card to the holder) and the card scheme network. A typical transaction involving a credit card takes place is in the following manner:

• When a purchase is paid for by a credit card, the merchant sends details of the transaction to the merchant acquirer.
• The acquirer controls all card transactions of the merchant, regardless of which organization issued the card.
• The acquirer credits the merchant’s account with the amount of the purchase or transaction along with a nominal service fee.
• Details of the transaction are transferred to the organization that issued the card, at times through the card scheme networks.

Authentication is a key step in the processing of a credit card transaction. The process of authentication includes verifying the identity of the holder, ascertaining whether the cardholder is within the stipulated credit limit and checking other related information. The process includes the following steps:

• When the credit card is swiped through the card reader, the Electronic Data Capture (EDC) software on the point-of-sale (POS) terminal dials a stored telephone number through a modem to call the acquirer. On obtaining the credit-card authentication request, the acquirer company checks the transaction, with help of the data on the magnetic stripe, for the merchan identification, valid card number, credit-card limit, balance on the card and its expiration date. Single dial-up (telephone) transactions are processed at a speed of 1,200 to 2,400 bps and the direct Internet attachment uses even higher speeds.
• For authentication the cardholder is required to enter his/her personal identification number (PIN) using the keypad. The PIN is present in an encrypted form either in the bank’s database or on the card itself. The conversion system used in this type of cryptography is known as one way, which means, it is easy to decrypt the PIN when the bank code and the cardholders PIN are given, but technically impossible to decrypt it when only the bank code is given. The one-way technology ensures the safety of the bank’s computer files. The communication between the bank’s central computer and the ATM3 is also encrypted.
• Once the transaction is authenticated, the Electronic Funds Transfer at the Point of Sale machine records the authentication on the sales voucher.

Debit Cards

Debit cards, also called ‘check cards,’ appear similar to an ATM or a credit card. Though a debit card serves the same purpose as a credit card, unlike a credit card, it does not offer any credit facility, but entails a debit to the holder’s bank account every time it is used. In other words, the debit card works like a chequebook, giving the holder access to his bank account at all hours. It makes sure the holder spends only the balance available in his account and also keeps track of his purchases (See Exhibit II for a diverse features of credit and debit cards).

There are two types of debit cards – direct debit cards (on-line debit cards) and deferred debit cards (off-line debit cards). In the case of direct debit cards, the money is electronically transferred from the cardholder’s account to the merchant’s account, on entry of the holder’s PIN in the store’s terminal. In the case of deferred debit cards, the transaction gets recorded in the merchant’s terminal and is executed in two-three days following the actual transaction. Currently, only direct debit cards are in use in India.

The debit card design is similar to that of any credit card or an ATM card and follows the same process of authentication. A typical debit card transaction includes the following steps:

• When the card is presented for payment at the payment counter, it is swiped through the reader.
• The card gets connected to the cardholder’s bank account and the holder is required to enter his ATM PIN to forward the transaction.
• The bank debits the cardholder’s account with the value of the goods or services purchased, fee, charges, cash and other payments made by the cardholder through the card.
• The transactions appear in the account statement of the accounts related to the card.

Citibank and HSBC were the pioneers in the Indian credit card market in the 1980s. Over the next two decades, the number of players increased to more than ten in 2000. The credit card market registered a healthy annual growth rate of over 25% during 1987-2001. Besides Citibank and HSBC, the other leading players in the market were SBI, ICICI, Bank of India and Standard Chartered Bank. A wide variety of cards were introduced in the market during this period ranging from gold, silver and smart to global, affinity to secure cards (See Exhibits III & IV).

The credit card issuers principally targeted the upper and middle classes. However, while the middle class population was around 300 million in 2001, the total credit card users amounted to only over 10 million. Identifying the vast potential for growth in the middle class segment, many players entered the fray. This intensified the competition, and forced the players to enhance their product and service offerings (through co-branded cards), enhance their card technologies, expand their reach through increased number of card operating outlets and extend the card facilities to smaller cities, apart from the metros and tourist centers.

Though the growth of the Indian credit card market grew at a steady rate, most analysts felt that it was not growing at the expected pace. The slow growth was attributed to the following:

• Aversion to debt: The average Indian consumer was found to be averse to the concept of utilizing debt to meet his needs. As the credit card business offered short-term loans, Indian customers were slow to respond to the concept.
• High Interest Rates: The short-term credit offered to the holders was to be repaid within a stipulated time-period, failing which the cardholder had to pay a high interest over the amount not repaid. Carry forward of payments past the scheduled limit at times resulted in a debt trap for the cardholder. The interest reached 36%-40% per annum in some cases.
• Limited number of card operating outlets and their location: Until the late 1990s, the credit card market in India was largely confined to the metros and other major cities. The number of outlets offering the service was also limited.

In addition, the lack of adequate technology to prevent tampering and other card-related frauds acted as a major hindrance. Lack of standardized security measures resulted in security breaches, causing losses to cardholders on many occasions. Stolen credit cards could easily be used for making purchases. Also, unfair and fraudulent practices by various card companies, which allegedly offered critical consumer data to other target marketers contributed to the restricted growth of the card market.

However, in the early 21st century, efforts were made to control the costs and dangers of fraud related to the cards. Card issuers began to adopt advanced technology to prevent malpractices. (See Exhibit V).

Establishing the identity of the card-user was identified as a crucial need for secure card transactions. This was usually done by checking the signature and/or photograph of the cardholder on the card and the usage of PINs at the point of sale. Advanced technology like biometric techniques5 that included voice recognition, finger scanning and use of computers to check signatures, were available only with chip cards.

To reduce the risk of fraud, retailers usually set a limit on the amount spent that can be spent on a card. If the transactions exceed this limit, they had to be authorized by the card issuer. By 2001, many of the retailer terminals acquired the technology to authorize transactions electronically. The rise in the increased number of authorizations is dealt with help of the computers, using artificial neural networks (ANN) that are enabled to identify the patterns in the behavior of the cardholders. The ANNs help the card issuers monitor the spending patterns of people and spot the cards possibly used by fraudsters, based on any irregularities on spending. Credit card issuers offer multi-layered card security including firewalls and filtering routers that prevent the unauthorized access to the cardholder’s account. The access to the account is kept highly secure, and the account can only be accessed if the Internet password is known. This is made available only to the cardholder. For instance, Citibank is offering 128-bit SSL Verisign Authentication technology, which is billion trillion (a one followed with 26 zeroes) of times more secure than the normal 40-bit encryption.

While companies were putting in place various measures to address security issues, the debit card market was having a smooth run in India. After being introduced in the mid 1990s, debit cards acquired popularity and user acceptance at a rapid pace. A major reason for the quick popularity gained by debit cards was the absence of the credit component that resulted in elimination of interest charges or monthly card bills.

By 2001, many banks had replaced their standard ATM cards with new ones that also included the debit card features. However, industry analysts believed that the Indian plastic money market would pick up real momentum once smart cards became popular and widely available. The memory and processing capacity of a smart card is around 10-times greater than that of conventional magnetic-stripe cards. A smart card is capable of performing various applications that eliminates the need to carry different cards for different purposes (See Exhibit VI).

Though growth in the market for smart cards was very slow, most analysts agreed that with their advanced technologies and the corresponding benefits, it would not be long before smart cards established themselves in India. In late 2001, most of the companies had announced plans to convert their credit/debit cards to smart cards by replacing the magnetic stripes in them with computer chips and incorporating latest encryption technologies.

1. Discuss the growth of plastic money in India. What are the distinguishing features of credit cards, debit cards and smart cards?

2. Explain how a typical plastic money transaction is carried out. Do you think the credit card market faces a serious threat from the debit card business?

3. Why did the plastic money market in India not grow as expected? Critically comment on the measures being put in place by the major players for making card transactions more secure.

4. Do you think smart cards are going to revolutionalize the plastic money market? What are the additional benefits that a smart card offers to the issuers as well as the cardholders?

Exhibit I
Types of Plastic Cards

Source: IBS Center for Management Research

Exhibit II
Diverse Features of Credit & Debit Cards

Source: IBS Center for Management Research

Exhibit III
Indian Credit Card Market (1999-2000)

Source:www.personalfn.com

Exhibit IV
Different Credit Cards Available

Source: www.indiainfoline.com

Exhibit V
Measures for Plastic Card Protection

Source: www.pbs.org

Exhibit VI
Smart Cards

Source: IBS Center for Management Research