PLASTIC MONEY

1

INDEXCHAPTERNO.

TITLE PAGE NO.

1 MONEY-HISTORY & EVOLUTION OF MONEY 7

2 PLASTIC MONEY OVERVIEW 22

3 MAIN KINDS OF PLASTIC MONEY 43

4 PLASTIC MONEY: A KEY ELEMENT OF ELETRONIC BANKING

50

5 GROWTH & IMPACT OF PLASTIC MONEY ON BANKING IN INDIA

58

6 CONCLUSION 62

7 BIBLIOGRAPHY 64

2

CHAPTER 1

MONEY-HISTORY & EVOLUTON OF MONEY

Money is any item or verifiable record that is generally accepted as payment for goods and

services and repayment of debts in a particular country or socio-economic context, or is

easily converted to such a form. The main functions of money are distinguished as: a

medium of exchange; a unit of account; a store of value; and, sometimes, a standard of

deferred payment. Any item or verifiable record that fulfills these functions can be

considered money.

Money is historically an emergent market phenomenon establishing a commodity money,

but nearly all contemporary money systems are based on fiat money. Fiat money, like any

check or note of debt, is without intrinsic use value as a physical commodity. It derives its

value by being declared by a government to be legal tender; that is, it must be accepted as a

form of payment within the boundaries of the country, for "all debts, public and private".

Such laws in practice cause fiat money to acquire the value of any of the goods and

services that it may be traded for within the nation that issues it.

The money supply of a country consists of currency (banknotes and coins) and, depending

on the particular definition used, one or more types of bank money (the balances held in

checking accounts, savings accounts, and other types of bank accounts). Bank money,

which consists only of records (mostly computerized in modern banking), forms by far the

largest part of broad money in developed countries.

HISTORY OF MONEY

Non-Monetary Exchange

Barter

The Greek philosopher Aristotle contemplated on the nature of money. He considered that

every object has two uses, the first being the original purpose for which the object was

designed, and the second possibility is to conceive of the object as an item to sell or barter.

The assignment of monetary value to an otherwise insignificant object such as a coin or

promissory note arises as people and their trading associate evolve a psychological

capacity to place trust in each other and in external authority within barter exchange.

3

With barter, an individual possessing any surplus of value, such as a measure of grain or a

quantity of livestock could directly exchange that for something perceived to have similar

or greater value or utility, such as a clay pot or a tool. The capacity to carry out barter

transactions is limited in that it depends on a coincidence of wants. The seller of food grain

has to find the buyer who wants to buy grain and who also could offer in return something

the seller wants to buy. There is no agreed standard measure into which both seller and

buyer could exchange commodities according to their relative value of all the various

goods and services offered by other potential barter partners.

Criticisms

David Kinley considers the theory of Aristotle to be flawed because the philosopher

probably lacked sufficient understanding of the ways and practices of primitive

communities, and so may have formed his opinion from personal experience and

conjecture.

In his book Debt: The First 5000 Years, anthropologist David Graeber argues against the

suggestion that money was invented to replace barter. The problem with this version of

history, he suggests, is the lack of any supporting evidence. His research indicates that "gift

economies" were common, at least at the beginnings of the first agrarian societies, when

humans used elaborate credit systems. Graeber proposes that money as a unit of account

was invented the moment when the unquantifiable obligation "I owe you one" transformed

into the quantifiable notion of "I owe you one unit of something". In this view, money

emerged first as credit and only later acquired the functions of a medium of exchange and a

store of value.

Gift Economy

In a gift economy, valuable goods and services are regularly given without any explicit

agreement for immediate or future rewards (i.e. there is no formal quid pro quo).Ideally,

simultaneous or recurring giving serves to circulate and redistribute valuables within the

community.

There are various social theories concerning gift economies. Some consider the gifts to be

a form of reciprocal altruism. Another interpretation is that implicit "I owe you" debt and

social status are awarded in return for the "gifts".[9] Consider for example, the sharing of

food in some hunter-gatherer societies, where food-sharing is a safeguard against the

failure of any individual's daily foraging. This custom may reflect altruism, it may be a

form of informal insurance, or may bring with it social status or other benefits.

4

Commodity Money

Bartering has several problems, most notably that it requires a "coincidence of wants". For

example, if a wheat farmer needs what a fruit farmer produces, a direct swap is impossible

as seasonal fruit would spoil before the grain harvest. A solution is to trade fruit for wheat

indirectly through a third, "intermediate", commodity: the fruit is exchanged for the

intermediate commodity when the fruit ripens. If this intermediate commodity doesn't

perish and is reliably in demand throughout the year (e.g. copper, gold, or wine) then it can

be exchanged for wheat after the harvest. The function of the intermediate commodity as a

store-of-value can be standardized into a widespread commodity money, reducing the

coincidence of wants problem. By overcoming the limitations of simple barter, a

commodity money makes the market in all other commodities more liquid.

Many cultures around the world eventually developed the use of commodity money.

Ancient China, Africa, and India used cowry shells. Trade in Japan's feudal system was

based on the koku – a unit of rice. The shekel was an ancient unit of weight and currency.

The first usage of the term came from Mesopotamia circa 3000 BC and referred to a

specific weight of barley, which related other values in a metric such as silver, bronze,

copper etc. A barley/shekel was originally both a unit of currency and a unit of weight.

Wherever trade is common, barter systems usually lead quite rapidly to several key goods

being imbued with monetary properties. In the early British colony of New South Wales,

rum emerged quite soon after settlement as the most monetary of goods. When a nation is

without a currency it commonly adopts a foreign currency. In prisons where conventional

money is prohibited, it is quite common for cigarettes to take on a monetary quality.

Contrary to popular belief, precious metals have rarely been used outside of large societies.

Gold, in particular, is sufficiently scarce that it has only been used as a currency for a few

relatively brief periods in history.

5

Standardized Coinage

Greek drachm of Aegina. Obverse: Land turtle / Reverse: ΑΙΓ(INA) and dolphin. The

oldest turtle coin dates 700 BC

A 640 BC one-third stater coin from Lydia.

From approximately 1000 BC money in the shape of small knives and spades made of

bronze were in use in China during the Zhou dynasty, with cast bronze replicas of cowrie

shells in use before this. The first manufactured coins seems to have taken place separately

in India, China, and in cities around the Aegean sea between 700 and 500 BC. While these

Aegean coins were stamped (heated and hammered with insignia), the Indian coins (from

the Ganges river valley) were punched metal disks, and Chinese coins (first developed in

the Great Plain) were cast bronze with holes in the center to be strung together. The

different forms and metallurgical process implies a separate development.

The first ruler in the Mediterranean known to have officially set standards of weight and

money was Pheidon. Minting occurred in the latter parts of the 7th century amongst the

cities of Grecian Asia Minor, spreading to Aegean parts of the Greek islands and the south

of Italy by 500 BC. The first stamped money (having the mark of some authority in the

form of a picture or words) can be seen in the Bibliothèque Nationale of Paris. It is an

electrumstater of a turtle coin, coined at Aegina island. This coin dates about 700 BC.

Other coins made of Electrum (a naturally occurring alloy of silver and gold) were

manufactured on a larger scale about 650 BC in Lydia (on the coast of what is now

Turkey). Similar coinage was adopted and manufactured to their own standards in nearby

cities of Ionia, including Mytilene and Phokaia (using coins of Electrum) and Aegina

(using silver) during the 6th century BC. and soon became adopted in mainland Greece

itself, and the Persian Empire (after it incorporated Lydia in 547 BC).

6

The use and export of silver coinage, along with soldiers paid in coins, contributed to the

Athenian Empire's 5th century BC, dominance of the region. The silver used was mined in

southern Attica at Laurium and Thorikos by a huge workforce of slave labour. A major

silver vein discovery at Laurium in 483 BC led to the huge expansion of the Athenian

military fleet.

It was the discovery of the touchstone which led the way for metal-based commodity

money and coinage. Any soft metal can be tested for purity on a touchstone, allowing one

to quickly calculate the total content of a particular metal in a lump. Gold is a soft metal,

which is also hard to come by, dense, and storable. As a result, monetary gold spread very

quickly from Asia Minor, where it first gained wide usage, to the entire world.

Using such a system still required several steps and mathematical calculation. The

touchstone allows one to estimate the amount of gold in an alloy, which is then multiplied

by the weight to find the amount of gold alone in a lump. To make this process easier, the

concept of standard coinage was introduced. Coins were pre-weighed and pre-alloyed, so

as long as the manufacturer was aware of the origin of the coin, no use of the touchstone

was required. Coins were typically minted by governments in a carefully protected process,

and then stamped with an emblem that guaranteed the weight and value of the metal. It

was, however, extremely common for governments to assert that the value of such money

lay in its emblem and thus to subsequently reduce the value of the currency by lowering the

content of valuable metal.

Gold and silver were used as the most common form of money throughout history. In many

languages, such as Spanish, French, and Italian, the word for silver is still directly related

to the word for money. Although gold and silver were commonly used to mint coins, other

metals were used. For instance, Ancient Sparta minted coins from iron to discourage its

citizens from engaging in foreign trade. In the early seventeenth century Sweden lacked

more precious metal and so produced "plate money", which were large slabs of copper

approximately 50 cm or more in length and width, appropriately stamped with indications

of their value.

Gold coinage began to be minted again in Europe in the thirteenth century. Frederick the II

is credited with having re-introduced the metal to currency during the time of the Crusades.

During the fourteenth century Europe had en masse converted from use of silver in

currency to minting of gold. Vienna transferred from minting silver to instead gold during

1328.

Metal based coins had the advantage of carrying their value within the coins themselves –

on the other hand, they induced manipulations: the clipping of coins in the attempt to get

and recycle the precious metal. A greater problem was the simultaneous co-existence of

gold, silver and copper coins in Europe.

7

English and Spanish traders valued gold coins more than silver coins, as many of their

neighbors did, with the effect that the English gold-based guinea coin began to rise against

the English silver based crown in the 1670s and 1680s. Consequently, silver was ultimately

pulled out of England for dubious amounts of gold coming into the country at a rate no

other European nation would share. The effect was worsened with Asian traders not

sharing the European appreciation of gold altogether — gold left Asia and silver left

Europe in quantities European observers like Isaac Newton, Master of the Royal Mint

observed with unease.

Stability came into the system with national Banks guaranteeing to change money into gold

at a promised rate; it did, however, not come easily. The Bank of England risked a national

financial catastrophe in the 1730s when customers demanded their money be changed into

gold in a moment of crisis. Eventually London's merchants saved the bank and the nation

with financial guarantees.

Another step in the evolution of money was the change from a coin being a unit of weight

to being a unit of value. A distinction could be made between its commodity value and its

specie value. The difference is these values isseigniorage.

TRADE BILLS OF EXCHANGE

Bills of exchange became prevalent with the expansion of European trade toward the end

of the Middle Ages. A flourishing Italian wholesale trade in cloth, woolen clothing, wine,

tin and other commodities was heavily dependent on credit for its rapid expansion. Goods

were supplied to a buyer against a bill of exchange, which constituted the buyer's promise

to make payment at some specified future date. Provided that the buyer was reputable or

the bill was endorsed by a credible guarantor, the seller could then present the bill to a

merchant banker and redeem it in money at a discounted value before it actually became

due. The main purpose of these bills nevertheless was, that traveling with cash was

particularly dangerous at the time. A deposit could be made with a banker in one town, in

turn a bill of exchange was handed out, that could be redeemed in another town.

These bills could also be used as a form of payment by the seller to make additional

purchases from his own suppliers. Thus, the bills – an early form of credit – became both a

medium of exchange and a medium for storage of value. Like the loans made by the

Egyptian grain banks, this trade credit became a significant source for the creation of new

money. In England, bills of exchange became an important form of credit and money

during last quarter of the 18th century and the first quarter of the 19th century before

banknotes, checks and cash credit lines were widely available.

8

TALLIES

The acceptance of symbolic forms of money opened up vast new realms for human

creativity. A symbol could be used to represent something of value that was available in

physical storage somewhere else in space, such as grain in the warehouse. It could also be

used to represent something of value that would be available later in time, such as a

promissory note or bill of exchange, a document ordering someone to pay a certain sum of

money to another on a specific date or when certain conditions have been fulfilled.

In the 12th century, the English monarchy introduced an early version of the bill of

exchange in the form of a notched piece of wood known as a tally stick. Tallies originally

came into use at a time when paper was rare and costly, but their use persisted until the

early 19th Century, even after paper forms of money had become prevalent. The notches

were used to denote various amounts of taxes payable to the crown. Initially tallies were

simply used as a form of receipt to the tax payer at the time of rendering his dues. As the

revenue department became more efficient, they began issuing tallies to denote a promise

of the tax assessee to make future tax payments at specified times during the year. Each

tally consisted of a matching pair – one stick was given to the assessee at the time of

assessment representing the amount of taxes to be paid later and the other held by the

Treasury representing the amount of taxes be collected at a future date.

The Treasury discovered that these tallies could also be used to create money. When the

crown had exhausted its current resources, it could use the tally receipts representing future

tax payments due to the crown as a form of payment to its own creditors, who in turn could

either collect the tax revenue directly from those assessed or use the same tally to pay their

own taxes to the government. The tallies could also be sold to other parties in exchange for

gold or silver coin at a discount reflecting the length of time remaining until the taxes was

due for payment. Thus, the tallies became an accepted medium of exchange for some types

of transactions and an accepted medium for store of value. Like the girobanks before it, the

Treasury soon realized that it could also issue tallies that were not backed by any specific

assessment of taxes. By doing so, the Treasury created new money that was backed by

public trust and confidence in the monarchy rather than by specific revenue receipts.

GOLDSMITH BANKERS:

Goldsmiths in England had been craftsmen, bullion merchants, money changers and money

lenders since the 16th century. But they were not the first to act as financial intermediates;

in the early 17th century, the scriveners were the first to keep deposits for the express

purpose of relending them. Merchants and traders had amassed huge hoards of gold and

9

entrusted their wealth to the Royal Mint for storage. In 1640 King Charles I seized the

private gold stored in the mint as a forced loan (which was to be paid back over time).

Thereafter merchants preferred to store their gold with the goldsmiths of London, who

possessed private vaults, and charged a fee for that service. In exchange for each deposit of

precious metal, the goldsmiths issued receipts certifying the quantity and purity of the

metal they held as a bailee (i.e. in trust). These receipts could not be assigned (only the

original depositor could collect the stored goods). Gradually the goldsmiths took over the

function of the scriveners of relending on behalf of a depositor and also developed modern

banking practices; promissory notes were issued for money deposited which by custom

and/or law was a loan to the goldsmith, i.e. the depositor expressly allowed the goldsmith

to use the money for any purpose including advances to his customers. The goldsmith

charged no fee, or even paid interest on these deposits. Since the promissory notes were

payable on demand, and the advances (loans) to the goldsmith's customers were repayable

over a longer time period, this was an early form of fractional reserve banking. The

promissory notes developed into an assignable instrument, which could circulate as a safe

and convenient form of money backed by the goldsmith's promise to pay. Hence

goldsmiths could advance loans in the form of gold money, or in the form of promissory

notes, or in the form of checking accounts. Gold deposits were relatively stable, often

remaining with the goldsmith for years on end, so there was little risk of default so long as

public trust in the goldsmith's integrity and financial soundness was maintained. Thus, the

goldsmiths of London became the forerunners of British banking and prominent creators of

new money based on credit.

10

DEMAND DEPOSITS

The primary business of the early merchant banks was promotion of trade. The new class

of commercial banks made accepting deposits and issuing loans their principal activity.

They lend the money they received on deposit. They created additional money in the form

of new bank notes. The money they created was partially backed by gold, silver or other

assets and partially backed only by public trust in the institutions that created it.

Demand deposits are funds that are deposited in bank accounts and are available for

withdrawal at the discretion of the depositor. The withdrawal of funds from the account

does not require contacting or making any type of prior arrangements with the bank or

credit union. As long as the account balance is sufficient to cover the amount of the

withdrawal, and the withdrawal takes place in accordance with procedures set in place by

the financial institution, the funds may be withdrawn on demand.

11

BANKNOTES

100 USD Banknote

Paper money was introduced in Song Dynasty China during the 11th century. The

development of the banknote began in the seventh century, with local issues of paper

currency. Its roots were in merchant receipts of deposit during the Tang Dynasty (618–

907), as merchants and wholesalers desired to avoid the heavy bulk of copper coinage in

large commercial transactions. The issue of credit notes is often for a limited duration, and

at some discount to the promised amount later. The jiaozi nevertheless did not replace

coins during the Song Dynasty; paper money was used alongside the coins. The central

government soon observed the economic advantages of printing paper money, issuing a

monopoly right of several of the deposit shops to the issuance of these certificates of

deposit. By the early 12th century, the amount of banknotes issued in a single year

amounted to an annual rate of 26 million strings of cash coins.

In the 13th century, paper money became known in Europe through the accounts of

travelers, such as Marco Polo and William of Rubruck. Marco Polo's account of paper

money during the Yuan Dynasty is the subject of a chapter of his book, The Travels of

Marco Polo, titled "How the Great KaanCauseth the Bark of Trees, Made into Something

Like Paper, to Pass for Money All Over his Country." In medievalItaly and Flanders,

because of the insecurity and impracticality of transporting large sums of money over long

distances, money traders started using promissory notes. In the beginning these were

personally registered, but they soon became a written order to pay the amount to whoever

had it in their possession. These notes can be seen as a predecessor to regular banknotes.

The first European banknotes were issued by Stockholms Banco, a predecessor of the Bank

of Sweden, in 1661. These replaced the copper-plates being used instead as a means of

payment, although in 1664 the bank ran out of coins to redeem notes and ceased operating

in the same year.

Inspired by the success of the London goldsmiths, some of which became the forerunners

of great English banks, banks began issuing paper notes quite properly termed ‘banknotes’

which circulated in the same way that government issued currency circulates today. In

England this practice continued up to 1694. Scottish banks continued issuing notes until

1850.

12

In USA, this practice continued through the 19th Century, where at one time there were

more than 5000 different types of bank notes issued by various commercial banks in

America. Only the notes issued by the largest, most creditworthy banks were widely

accepted. The script of smaller, lesser known institutions circulated locally. Farther from

home it was only accepted at a discounted rate, if it was accepted at all. The proliferation

of types of money went hand in hand with a multiplication in the number of financial

institutions.

These banknotes were a form of representative money which could be converted into gold

or silver by application at the bank. Since banks issued notes far in excess of the gold and

silver they kept on deposit, sudden loss of public confidence in a bank could precipitate

mass redemption of banknotes and result in bankruptcy.

The use of bank notes issued by private commercial banks as legal tender has gradually

been replaced by the issuance of bank notes authorized and controlled by national

governments. The Bank of England was granted sole rights to issue banknotes in England

after 1694. In the USA, the Federal Reserve Bank was granted similar rights after its

establishment in 1913. Until recently, these government-authorized currencies were forms

of representative money, since they were partially backed by gold or silver and were

theoretically convertible into gold or silver.

13

EVOLUTION AND FUNCTION OF MONEY:

Evolution of money:

Barter system

Commodity money

Paper money

Demand deposits

E-money

14

E-MONEY

PLASTIC MONEY

PAPER CURRENCY

METALLIC COINS

BARTER SYSTEM

Barter system:

Direct exchange of goods and services for other goods and services

Difficulties in barter system:

Lack of double co-incidence of wants.

Lack of common measures of values.

Difficulties in storing values.

Deferred of payments / Absence of loaning, Indivisibility of certain goods.

Commodity Money:

Commodity money is money whose value comes from a commodity of which it is made.

Commodity money consists of objects that have value in themselves as well as value in

their use as money.

15

Paper Money:

Paper currency that is circulated for transaction-related purposes. The printing of paper

money is typically regulated by a country's central bank/treasury in order to keep the flow

of money in line with monetary policy

Demand Deposits:

Demand Deposit refers to a type of account held at banks and financial institutions that

may be withdrawn at any time by the customer. The majority of such Demand Deposit

accounts are checking and savings accounts.

16

E-Money:

All types of money which people deal with it electronically, far from traditional ways of

payment like banks, cheques, paper money and coins, e-Money allow users through

internet or wireless devices to pay the charges of their purchases directly from their bank

accounts by electronical ways such as Smart cards, Digital wallets and micropayments.

17

CHAPTER 2

PLASTIC MONEY OVERVIEW

Plastic money is the name given to all types of plastic bank cards. Holders of a valid

card have the authorization to purchase goods and services up to a predetermined

amount, called a credit limit.

MEANING OF PLASTIC MONEY:

The term plastic money has been used in different settings to describe a wide variety of

payment systems and technologies(. “Stored-value” products are generally prepaid

payment instruments in which a record of funds owned by or available to the

consumers is stored on an electronic device in the consumer’s possessions, and the

amount of “stored value” is increased or decreased, as appropriate, whenever the

consumer uses the device to make a purchase or other transaction. By contrast,

“access” products are those typically involving a standard personal computer, together

with appropriate software, that allow a consumer to access conventional payment and

banking products and services, such as credit cards or electronic funds transfers,

through computer networks such as the internet or through other telecommunications

links.

According to Basel, plastic/electronic money refers to “stored value” or prepaid

payment mechanisms for executing payments via point of sale terminals, direct

transfers between two devices, or over open computer networks such as the internet.

Stored value products include “hardware” or “Card-based” mechanisms (also called

“electronic purses”), and “Software” or “network-based” mechanisms (also called

“digital cash”). Stored value cards can be “single – purpose” or “multi-purpose”.

Single-purpose card (e.g. telephone cards) are used to purchase one type of good or

services, or products from one vendor, multi-purpose cards can be used for a variety of

purchases from several vendors.

18

Also, RBI quoted European central Bank definition which states that plastic money

is an electronic store of monetary value on a technical device used for making

payments to undertakings other than the issuer without necessarily involving bank

accounts in the transaction, but acting as a prepaid bearer instrument. Basle (1998)

argues that banks may participate in electronic money schemes as issuers, but they may

also perform other functions. Those include, distributing electronic money issued by

other entities; redeeming the proceeds of electronic money transactions for merchants,

handling the processing, clearing, and settlement of electronic money transactions; and

maintaining records of transactions.

Plastic money which includes stored value card could be of three types–single– purpose

card, closed-system or limited-purpose card and general-purpose or multi- purpose

card. The single-purpose card generally with a magnetic chip recording the amount of

fund therein is designed to facilitate only one type of transaction e.g., telephone calls,

public transportation, laundry, parking facilities etc. Here, the distinguishing point

is that the issuer and the service provider (acceptors) are identical for the cards. These

cards are expected to substitute coins and currency notes. The closed system or the

limited-purpose cards are generally used in a small number of well-identified points of

sale within a well-identified location such as corporate/ university campus. The

multi-purpose card on the other can perform variety of functions with several

vendors viz., credit card, debit card, stored value card, identification card, repository of

personal medical information etc. These cards may reduce demand for currency

accounts in the bank for likely reduction in transaction costs, and prudent portfolio

management.

PROPERTIES OF PLASTC MONEY:

When implementing an plastic money a big effort has been made to make an plastic money

as close as possible to real, physical money. Okamoto and Ohta presented the following six

properties of an ideal electronic payment system:

• The security of plastic money does not depend on a special physical conditions. No

special hardware is necessary and money can be sent over the network.

• Plastic money cannot be copied, modified, or double-spent.

• Anonymity and non-traceability. Privacy of user is protected. No-body can deduce

the link between user and his payment. The customer may perform operations

anonymously.

• The Protocol for plastic payment between customer and merchant can be performed

off-line. No direct link to third party (e.g. bank) is necessary.

• The plastic money can be transferred to any other user.

19

• The plastic coin C can be divided to any number of other coins. Any of these coins

can have any value, smaller than C, and the sum of value of these coins is equal to the

C.

HISTORY OF PLASTIC MONEY:

History of Credit Card

The word Credit comes from a Latin word meaning trust. In the 21st century using

credit cards seems to be a way of life that is generally taken for granted. Whatever

needs or wants cannot be met with cash, can easily be obtained via credit, credit cards

per se, however, have quite an interesting history. Credit was first used in Assyria,

Babylon and Egypt 3000 years ago. The bill of exchange-the forerunner of banknotes

was established in 14th century. Debts were settled by one-third cash and two-thirds

bill of exchange. Paper money followed only in the 17th century. The first

advertisement for credit was placed in 1730 by Christopher Thornton, who offered

furniture that could be paid off weekly. He introduced the idea of ‘have now and pay

later’. Since clearly, this is an appealing idea to all parties involved, the idea was easily

accepted and adopted by others. Credit cards date back to 1914 when western union

provided metal cards giving free, deferred-payment privileges to preferred customer.

These cards came to be called “metal money.” In 1924, general petroleum corporation

issued the first metal money for gasoline and automotive services first to employees

and select customers and later to the general public. In the late 1930’s, American

Telephone and Telegraph (AT and T) introduced the “Bell system credit card.” Soon,

rail roads and airlines introduced similar cards. Credit cards grew in popularity until

the beginning of world war II when ‘Regulation w’ restricted the use of such Cards

during the war and temporarily suppressed the growth of this new payment

alternative. But this only heightened people’s desire to be allowed to ‘charge it’ once

the war was over. People were ready to move on with life, travel, have nice things in

their homes, have nice vehicles and they wanted it sooner rather than later. Credit made

this possible on a restricted budget. The American banks recognized the need to satisfy

private credit purchasing particularly for consumer durable items. Many banks entered

the field in the late 1950s and early 1960s but there was no co-ordination for

widespread acceptance. Though many banks had ceased to issue cards by early 1960s

the elements for success were present in a system created by the Bank of America in

California. Bank card association began in 1965 when Bank of America formed

licensing agreements with other banks. This enabled them to issue Bank Americard and

interchange transactions among participating banks.

20

By 1966, fourteen US (United States) bank formed interlink, a new association with

the ability to exchange information on credit card transactions. In 1967, four California

banks formed the Western States Bankcard association and introduced the

MasterCharge program to compete with the Bank Americard program. As the

bankcard industry grew, bank interested in issuing cards became members of either

Bank Americard or mastercharge. Their members shared card program costs, making

the bankcard program available to even small financial institutions. Master charge and

Bank Americard developed rules and standardized procedures for handling the bank

card paper flow in order to reduce fraud and misuse of cards. The two associations also

created international processing systems to handle the exchange of money and

information and established an arbitration procedure to settle disputes between

members. In 1977, Bank Americard became VISA, and in 1979, Master Charge

changed its name to Mastercard.

Both VISA and Mastercard are non-profit organization which credit cards, set and

maintain the rules for processing. Both of these are run by board members who are

mostly high-level executives from their member bank. These two international cards

are very popular and are accepted and honoured all over the world in 170 countries.

These two independent card companies led to latest innovations in the credit card

business. Now, the credit card system has become universally popular throughout the

world including the communist countries. Credit cards are now issued by most banks to

customers with sound credit ratings. Although it is claimed that the idea of credit card

was first developed by a Bavarian Farmer and Franz Nesbitum, the credit card first

appeared in U.S.A. and is now spreading throughout the developed countries.

United States: The departmental stores in U.S.A. were issuing regular customers, as

early as 1915, with what they called ‘credit coins’. During the 1920s, the oil companies

came up with the idea of ‘courtesy cards’, which were initially honoured at company

stations only. Gradually, more and more garages began to honour the courtesy cards as

the companies came to reciprocal arrangements. However, it must be stressed that these

cards were merely an extension of the monthly account system which had been running

from time immemorial, in as much as full settlement was expected at the end of each

month. It has been the check trading system which led to ‘extended credit’ as we know

it and in 1946 John C. Briggin of Flatbush National Bank, New York, introduced his

‘Change-it’ plan. The plan, in principle, was little different from Provident Clothing’s

scheme, with the important exception that the finance was provided by a bank. During

the early 1950s came ‘sales draft principle’ which can be said to be the rationale behind

modern bank credit cards. In the mean time, in 1950, the Diner’s Club was launched,

which has a story behind it, it is claimed that McNamara, an American businessman

once found himself without cash at a week-end resort and founded the Diner’s Club.

21

The Diner’s Club was the logical extension of the monthly accounts system and the

first of the ‘Travel and Entertainment’ i.e. T and E cards. The next decade witnessed

the floating of American Express and Carte Blanche cards. The importance of Diner’s

Club in historical terms is immeasurable as it was the first card system to be

run independently of a retail organisation. The bank credit card as we know it today

was made possible by the invention of the sales draft principle in 1951, by William

Boyle of the Franklin National Bank of Long Island, New York. The sales draft

principle combined the best elements of the check trading scheme and the monthly

account system, in that it provided a fixed line of credit which operated on a revolving

basis. The customers were provided the facility of using their cards to make purchases

upto their ‘credit limit’, and they could continually ‘top up’ to this limit as long as they

made a minimum monthly repayment. Thus, the idea of extended credit was

introduced whereby the consumer can opt to pay back only part of the debt to the card

company, and pay interest on the remainder. In 1952, the Franklin National Bank

launched the first bank credit card, and in the next few years over 100 other banks in

the USA started up schemes of their own. The commercial banks and non-banking

companies adopted the idea of credit cards to develop their business. But, many of

these schemes never got off the ground since the problems of running such

schemes were grossly under estimated by the pioneers in the field.

The credit card system began to work earnestly with the stepping in by the big banks.

In 1958, the Bank of America, launched the Bank Americard. In 1966, the Western

States Bankcard Association set up the Mastercharge, the great rival of Bank

Americard. These banks aiming at international market, the banks of Americard

network later went on to form IBANCO, and those involved with Mastercharge

founded Interbank. Thus, by the end of 1960s, the USA had seen the development of

three very distinct types of Credit, viz., the T and E cards, the department store type

cards, and the bank credit cards. The T and E cards had grown steadily over this period

but then have changed little since their inception in 1950. The three main cards, viz.,

Diner’s club, American Express and Carte Blanche, are basically very similar in their

method of operation. Their card holders all have to pass a rigid credit test, involving a

minimum level of income and a spotless credit record. The main source of income of

these card companies is from the annual fee charged to the cardholder, and the service

charge on the retailer goes towards operational costs. The bills are generally payable

once a month on receipt. But there is a time gap before interest charges become liable

and all the cards are accepted worldwide by hotels, airlines, car-hire firms and shops.

There is no ‘credit limit’ as such and none of the cards provide a general ‘extended

credit’ scheme although there are exceptions.

22

For example, payment of air tickets through American Express cards can be met over

3, 6, 9 or 12 months with a monthly interest. Basically, all the cards are intended

mainly for the well travelled executive, who finds them invaluable for entertaining

clients. Because of this only, the cards have obtained the nick name of ‘Travel and

entertainment’ cards. They are used for convenience, and not as means of obtaining

extended credit. By the 1960s, the T and E cards were busily engaged in extending

their operations overseas. By the end of 1960s, the American Express, had more than

900 offices worldwide, and was expanding into such areas as travellers cheques and a

poste restante address service. At the same time, the American Departmental stores

were forging ahead with their own systems. By 1970, Interbank and bank Americard

possessed a virtual monopoly by sharing 90 per cent of the US outstanding bank credit

card debt and by 1972 credit business in America through cards rose to 10 billions

dollars. By 1980s the big struggle for supremacy was between the two giants, VISA

and Master card. Visa Cards were sponsored by Visa USA, a non- profit corporation

owned by issuing bank and the Master card was sponsored by Interbank Card

Association, a non-profit organisation whose member banks share operating revenues

and costs. Both these organisation charge cardholders interest in case of non-payment

beyond a certain period and the goods and services at many stores that honour credit

cards are priced higher to cover the service charge fee ranging from 3 to 5 per cent

per sale collected by credit card companies. By 1985, VISA and Mastercard

together accounted for business worth about 40 billion dollars annually. About 18

million families were owning three or more cards and were doing credit business of 50

billion dollars per year. United Kingdom: The extent of the acceptance of the ‘plastic

money’ as the credit cards came to be referred, by the British public who are

traditionally less consumer oriented than the Americans, was not as great as was in the

USA. The most widespread card system in Britain is the Barclaycard. Although it was

the first British bank credit card, there is an erroneous belief that it was Britain’s first

credit card. During the early 1960s the British public were not very much aware of the

credit cards and most of them thought that they were something like hire purchase.

However the first credit cards in England had made their entry about fifteen years

before Barclay card was launched. A year after the Diner’s club scheme was introduced

in USA, the Finders Service Club in London, during 1957 sought the permission of

Diner’s Club, to start up a similar scheme, in Britain. The Diner’s club also agreed with

the condition that Finders should also act as their agents in England. In the same year,

finders began to issuing their own cards. Membership costing two guineas per year,

was made available to almost anyone with credit at a bank. Soon afterwards Credit

Card Facilities (CCF) company was set up. In 1962, the two companies merged, and

went public in April, 1964 as Diner’s Club of Great Britain. Then the Westminister

Bank of England took a 49 per cent stake the following year.

23

In 1963, the American Express set up office in England and by 1967 it was being

promoted by Lloyds and Martin’s Banks. By this time, the British banks, which were

doing consumer lending since the early 1960s, began to show interest in the booming

trade of credit cards in a variety of ways. The National Provincial Bank, introduced the

first cash card in September, 1965. Reacting to the introduction of Barclaycards, four

other banks brought out cheque guarantee cards. Though a rival to Barclaycard was not

thought necessary during the 1960s, as Westminister Bank had stakes in Diner’s Club,

the Lloyds in American Express and the Midland was using cheque cards through its

subsidiary, Forward Trust. In 1972 the Access Credit Card was issued by three major

clearing banks. In conformity with the international Blue, White and Gold system

originated by Bank Americard, the Barclays set up the Barclaycard which had an

original target of one million cardholders and 30,000 merchants. By 1972, it had over

1.7 million cardholders and 52000 merchant outlets, and after several years of

operation it was beginning to make a profit. Its usage for direct cash withdrawals on the

card account itself was turning it into an increasingly versatile monetary instrument.

The Lloyds, Midland and National Westminister, along with nine other banks appraised

the situation and as a result the Access card was launched. At the same time, in

response to pressures from customers, in 1974, Barclays incorporated a cheque

guarantee facility into the Barclaycard. As Barclaycard had overseas links for

sometime with Bank Americard/IBANCO, the Access also began to have its overseas

links through the Mastercharge/Interbank network. Parallel to the American situation

the credit card systems of department stores and retailing chains also steadily grew

over this period. The mid 1980s have seen the introduction of international cards, such

as Eurocards, which are becoming more and more common.

India: In India, the foreign banks and organisation forayed first into the credit card

market. The pioneer in the Indian field is the Citibank’s Diner’s Club Card which

entered in 1969. Recognising the potentiality of the credit cards, a few Indian banks

took early initiative to introduce them. However, it was only during 1981, when

Andhra Bank introduced its own credit card, did the Indian Banks constructively enter

the field. Andhra bank is the first nationalised bank to introduce it along with the

Vijaya Bank. In the same year, the Central Bank of India in association with Vysya

Bank, United Bank of India issued the Central Card. In 1985, the Bank of Baroda along

with Allahabad Bank launched the Bobcard. The Mercantile Credit Corporation

Limited’s Mercard came in 1986. The Canara Bank made later entry into the credit

card business in 1987 and the Bank of India issued its own card, India card in 1988.

Among the foreign banks the ANZ Grindlays Bank came with Visa Classic Card by

1989. Citibank’s Master and Visa Cards appeared in 1990 along with Taj Premium

Card of the Bank of India which has also issued the ATM Card. Apart from these the

Bank of Madura and Bank of Maharashtra also tied up with Canara Bank and Bank if

India respectively for issuing their cards.

24

The Indian Credit card market turned busy with all the twenty eight public sector

banks operating in it. The State Bank of India has introduced also the State Bank

cheque card. However, credit cards should not be confused with cheque cards, as they

perform a quite different function, although certain credit cards can be used also as

cheque cards. In 1992, the Hong Kong Bank entered the field with its Visa

International and Mastercard International and recently it has launched the Hyatt

Regency Preferred Gold Card.

History of Debit Card

ATM and debit card transactions take place within a complex infrastructure. To the

consumer and merchant, they appear to be seamless and nearly instantaneous. But, in fact,

a highly complex telecommunications infrastructure links consumers, merchants,

ATM owners and banks. The common attribute of all ATM and debit card transactions is

that the transaction is directly linked to the consumer’s bank account – that is, the amount

of a transaction is deducted (debited) against the fund in that account. A Debit card

transaction involves the purchase of goods or services. In this case, the consumer present a

debit card (which again was issued by the bank holding the checking account) to a

merchant, and the consumer either enters a PIN (online debit) or signs a receipt (offline

debit) to verify the consumer’s identity. The merchant, in turn, sends information about the

transaction across one or more debit card networks, and if the transaction is approved,

the consumer receives the goods or services and the checking account is

correspondingly debited. The merchant is reimbursed by a credit to its bank account. An

ATM card is typically a dual ATM /Debit card that can be used for both ATM and debit

card transactions. Many ATM/Debit cards offer the consumer both types of debit card

transactions, online and offline.

The history of debit cards is an interesting one. The late 1960s marked the beginning of

modern ATM and Point of Sale (POS) systems, although the concept of ATMs and debit

cards existed prior to this. It might be argued that the first ATMs were cash-dispensing

machines. England’s Barclays Bank, for example, installed the first cash dispenser in 1967.

But it did not use magnetic-stripe cards. Customers were issued paper vouchers after that

were fed into the machine, which retained the voucher and dispensed a single £10 note.

Don Wetzel has been credited with developing the first modern ATM. The idea came to

him in 1968 while waiting in line at a Dallas bank, after which he proposed a project to

develop on ATM to his employer, Docutel. A major part of the development process

involved adding a magnetic stripe to a plastic card and developing standards to encode and

encrypt information on the stripe.

25

A working version of the Docutel ATM was sold to New York’s Chemical Bank, which

installed it in 1969 at its Rockville center (Long Island, N.Y.) office. Although the Docutel

ATM did the modern magnetic stripe access card, the technology remained primitive

compared with today’s. The Docutel ATM only dispensed cash and was an offline

machine. To enable payment processing, the machine printed a transaction record that

was MICR encoded. By the early 1970 ATM technology advanced to the system. ATMs

were first accessed primarily with credit cards, but in 1972, City National Bank of

Cleveland successfully introduced a card with an ATM but on debit card function. ATMs

were developed that could take deposits, transfer money from cheque to saving or savings

to cheque, provide cash advances from a credit card, and take payments. ATMs also were

connected to computers, allowing real-time access to information about card holder

account balances and activity. By connecting a string of ATMs to a centralized computer,

banks established ATM network. At first, ATMs were located on the premises of bank

offices, but off-premises ATMs soon followed. Grocery stores and convenience stores

quickly recognized the benefits of installing ATMs on their premises.

Grocery stores also led in installing POS debit systems, starting with the Massachusetts

grocery chains of Angelo’s and star markets in 1976. By the early 1980s, serious testing of

POS debit began at many of the large gas station chains. However, throughout the 1980s

and into the 1990s, the volumes of POS debit transactions remained modest, mired by

conflicts between merchants and banks over payment of transaction fees and the cost of

POS terminals, and by the existence of multiple technical standards. The 1980s marked

several important developments for Electronic Fund Transfer (EFT) networks. In contrast

to POS debit, the ATM system was flourishing. In 1982, VISA acquired ownership

positions in the regional network plus and began to build a national EFT network. Perhaps

more important, in 1985 the U.S. Supreme Court held that ATM’s did not represent bank

branches. Until the time there had been considerable legal uncertainty about the legal status

of ATMs. If ATMs were considered branches, the limitation on interstate branching would

affect their placement and, in turn, might put any EFT network that operated across state

lines in legal jeopardy. The decision by the U.S. Supreme Court encouraged interstate EFT

networks. By removing a potential barrier to forming networks across state lines, it also

was a factor in beginning a trend toward consolidation of shared networks. In the mid-

1990smost of EFT development was in the debit arena. The impasse between merchants

and banks finally broke down as merchants sought to reap the benefits of on line debit and

banks pushed for more efficient payment systems. Debit terminal installation

accelerated and the number of online and offline debit transactions grew rapidly.

Perhaps following the trend toward consolidation of ATM networks, POS networks started

to consolidate.

26

Debit cards have been used more extensively in recent years for a number of possible

reasons. It is relatively easy to add a debit function to an ATM card and because the base

of ATM card holders was well established in the 1980s, it was not difficult for banks to

establish a similar base of debit cardholders. Aggressive marketing on the part of banks

helped familiarize debit card holders with the instrument, as did the emergence of Visa and

Mastercard’s offline debit products, which opened up their credit card infrastructures to

debit cardholders.

HISTORY OF SMART CARDS:

The proliferation of plastic cards started in the USA in the early 1950s. The first all-plastic

payment card for general use was issued by the Diners Club in 1950. Acceptance of

these cards was initially restricted to more select restaurants and hotels, which led to this

type of card being referred to as a ‘travel and entertainment card’. The entry of VISA and

Mastercard into the field led to a very rapid proliferation of plastic money, at first in the

USA, with Europe and the rest of the world following a few years later. At first, the cards’

functions were quite simple. They initially served as data carriers that were secure against

forgery and tampering. General information, such as card issuer’s name, was printed on the

surface, while personal data elements, such as the cardholder’s name and the card number,

were embossed. Furthermore, many cards had a signature field, in which the cardholder

could sign his or her name for reference. In these first-generation cards, protection against

forgery was provided by visual features, such as security printing and the signature field.

With increasing proliferation in card use, these rather basic features no longer proved

sufficient, all the more so since treats from organized crime were growing apace.

The first improvement consisted of a magnetic strip on the back of the card. This allowed

digital data to be stored on the card in machine-readable form, as a supplement to the

visual data. However, the customer’s signature on a paper receipt, as a form of personal

identification, still remains a requirement in a classical credit card applications. New

applications can however be devised in which paper receipts are unnecessary. The use of a

secret personal identification number (PIN) that it compared to a reference number has

become generally accepted. The embossed card with a magnetic strip is still the most

commonly used type of payment card. Magnetic strip technology suffers from a crucial

weakness, however in that the data stored on the strip can be read, deleted and rewritten at

will by anyone with access to the appropriate equipment. It is thus unsuitable for the

storage of confidential data. Additional techniques must be used to ensure confidentiality

and to protect against tampering. For example, the reference value for the PIN can be

stored either in the terminal or in the host system in a secure environment, instead of on the

magnetic strip. Most systems that employ magnetic-strip cards thus have on-line

connections to the system’s host computer for security reasons. However, this generates

considerable data transmission costs.

27

In order to reduce costs, solutions must be sought that allow card transactions to be

executed off-line without putting the system’s security at risk. The development of the

smart card, combined with the expansion of electronic data processing, has created

completely new possibility for solving this problem. Enormous progress in

microelectronic in the 1970s made it possible to integrate data storage and arithmetic

logic on a single silicon chip measuring a few square millimeters. The idea of

incorporating such an integrated circuit into an identification card was contained in a patent

application field by the German investors Jurgens Dethloff and Helmut Grotrupp as early

as 1968. This was followed in 1970 by a similar patent application, made by

KunitakaArimura in Japan. However, the first real progress in the development of Smart

card came when Roland Morena registered his smart card patents in France in 1974.

Since the basic inventions in smart card technology come out of Germany and France,

it is not surprising that these countries played the leading role in the development and

marketing of smart cards. The great break through was achieved in 1984, when the French

Postal and telecommunications services (PTT) successfully carried out a field trial with

telephone cards. In this field trial, the smart cards immediately proved to meet all

expectations with regard to protection against tampering and high reliability. A pilot

project was conducted in Germany in 1984-85, using telephone cards based on the variety

of technologies.

Magnetic-strip cards, optical-storage (halographic) cards and smart cards were used in

comparative tests. The smart card proved to be the winner in this pilot study. In addition to

a high degree of reliability and security against tampering, smart card technology promised

greatest flexibility in future applications. Further developments followed the successful

trials of telephone cards, first in France and then in Germany, with breathtaking speed. By

1986, several million ‘smart’ telephone cards were in circulation in France alone. The total

number reached nearly 60 million in 1990 and several hundred million worldwide in 1997.

Germany experienced a similar development, with a time lag of about three years. These

systems were marketed throughout the world after the successful introduction of the public

smart cards in France and Germany. Telephone cards incorporating chips are currently

used in over 50 countries. Progress was significantly slower in the field of bank cards,

which is partly due to their greater complexity in comparison to telephone cards. With the

general expansion of electronic data processing in the 1960s, the field of cryptography

experienced a sort of quantum leap. Cryptography had previously been a covert science in

the private reserve of the military and secret services.

28

The smart card proved to be an ideal medium. It made a high level of security (based on

cryptography) available to everyone, since it can safety store secret keys and also execute

cryptographic algorithms. The French banks were the first to introduce this fascinating

technology in 1984, following a trial with 60,000 cards in 1982-83. It took another 10 years

before all French bank cards incorporated chips. In Germany, the first field trials took place

in 1984-85 with a multifunctional payment card incorporating a chip. However, the

ZentraleKreditaussechub (ZKA), which is a committee of the leading German banks, did

not manage to issue a specification for multifunctional Eurocheque cards incorporatings

chips until 1996. In 1997, all German savings associations and many banks issued the new

Smart Cards. In the 2000, multifunctional Smart Cards with POS functions, an

electronic purse and optional additional applications were issued in all of Austria. This

made Austria the first country in the world to have a nationwide electronic purse system.

An important milestone for the future worldwide use of smart cards for financial

transactions was the completion of the EMV specification, which was a product of the joint

effort of Europay, Mastercard and VISA. The first version of this specification was

published in 1994. It contained detailed descriptions of credit cards incorporating

microprocessor chips and it guaranteed the mutual compatibility of the future Smart

cards of the three largest credit card organizations. Electronic purse systems have proven to

be an additional drawing card for the international use of Smart cards for financial

transactions. The first such system, called Donmont, was put into operation in

Denmark in 1992. There are currently more than 20 national systems in use in Europe

alone, many of which are based on the preliminary European standard prEN 1546. The use

of such systems is also increasing outside of Europe. Even in the USA, where Smart card

systems have hardly taken root up to now a smart card purse system was tried out by visa

during the 1996, Olympic Summer Games in Atlanta. However, the problems associated

with making small payments securely but anonymously throughout the world via the public

internet have not yet been solved in a satisfactory manner. Smart Card could play a

decisive role in the solution of these problems. Yet another application has meant that

almost every German citizen these days owns smart card. When health insurance cards

incorporating chips were introduced, more than 70 million smart cards were issued to all

persons covered by the national health insurance plan. The smart card’s high degree

of functional flexibility, which even allows a card already in service to be reprogrammed

for new applications, has opened up completely new areas of use that extend beyond

traditional card applications.

29

DEVELOPMENT OF PLASTIC MONEY:

Plastic money is gradually strengthening its position with the potential of further growth in

the future. It is worthwhile to observe how plastic money will evolve in the future in a

competitive environment in terms of safety, efficiency and convenience. The use of

plastic money has been expanding quite rapidly and its development is a prominent

trend in the area of retail payment. There are many evident advantage of an electronic

mode of transfer as compared to conventional clearing house because banks are

increasingly turning to technology for managing their payments. Some of the value

attributes include secure payments, cost-cutting, payment on due date and easier cash

management compared to conventional systems. Plastic money in recent years is

gaining momentum in India as merchant establishments and customers are realizing the

safer mode of making payments compared to conventional payment. Financial institutions

have realized the acceptance of traders and customers, which has motivated them in

leveraging on these systems. The plastic culture is influencing into the daily purchasing

habits of Indian customers and the payment card business is growing as never before. Over

the past few years, customer attitude towards the use of traditional cash and cheques

payments has changed drastically leading to improved way of making payment. With the

change in technology and the improvement in the payment system has lead to further

development in plastic money. This development in plastic money helps the customers to

satisfied their ever changing needs. The development in plastic money in the modern era is

as follow:

Debit Card:

Debit cards are designed for customers who like paying by placard but do not want credit.

A debit card is a plastic card which provides an alternative payment method to cash when

making purchases. Functionally, it is similar to writing a cheque as the funds are

withdrawn directly from either the bank account or from the remaining balance on the

card. The debit card is thus ideal for those who have a tight budget and want to keep within

it. There are two types of debit cards, namely, on-line debit cards and off-line debit cards.

Making a purchase with an online debit card is similar to withdrawing cash from an

Automated Teller Machine (ATM). The card is passes to a traditional magnetic reader,

which is connected by a phone to a computer. On entering the personal identification

number (PIN), computer verifies the PIN and checks to see if one has enough money in the

bank to cover the transaction, all of which will not take more than a few seconds. Off-line

debit cards work more like cheques, because there is no direct connection between store

and bank. Off-line debit cards can be used wherever VISA or MASTER CARD are

accepted.

30

Charge Card:

A charge card is a mean of obtaining a very short term (usually around 1 month) loan for a

purchase. Thus, a charge card is a convenience instrument, not a credit instrument. Under

this facility, the cardholder needs to make a consolidated payment to the issuer for all

purchases effected with the card during a specified period of time.

There is no “minimum payment” other than full balance. A partial payment (or no

payment) result in a severe late fee and the possible restriction of future transactions and

risk of potential cancellation of the cad. The Diner’s club card of Citibank, American

Express, Travel and entertainment cards falls under the category of charge card.

Combi Card:

These are magnetic stripe plastic cards with a microprocessor chip attached to them. They

can work as normal credit cards and also have an additional function of storing information

which store loyalty points, information about balance etc. ABN- Amro and ICICI bank

have already launched this card which can store loyalty points for customer and customers

can redeem their points from the card itself.

Smart Card:

Smart cards, sometimes called chip cards, contain a computer chip embedded in the plastic.

It has the capacity to store upto 80 times more information than other magnetic stripe

cards. Smart cards carry the electronic proof of its holder’s identity enabling its holder to

make secure purchases anywhere on the globe, leading to a dramatic increase in electronic

commerce. It is estimated that by the year 2018, five billion smart cards will be in use in

over 100 countries covering 24 percent of the world populations. Presently, smart cards are

used primarily for telephones, healthcare, transportation, movies, fast food outlets, internet

banking and loyalty programs. There are two types of Smart cards. First, contact Smart

cards that requires insertion into a reader and contact less smart cards which requires only

close proximity to an antenna via radio waves.

In-Store Card:

also known as in-house cards. These cards are issued to customers by a retailer or company

and in general can only be used in that retailers outlet or for purchasing the company’s

products. Store cards are enticing because they offer shoppers discounts for signing up,

such as 10% or 15% off the first item cardholder buy. After that cardholders receive special

offers and membership evenings to be a part of their little club.

31

Affinity Card

A card offered by two organisation, one a lending institution, the other a non- profit group.

Non-profit groups, schools, pro-wrestlers, popular singers and airlines areamong those

featured on affinity cards. Usually, use of the card entitles holders to special discounts.

Card users benefit from most of the facilities such as frequent flyer miles or reward points,

the non-profit organisation receives some special incentives such as fraction of the annual

fee or a small amount per transaction and the card company benefits from brand loyalty. In

short, all three wins. Some affinity cards are also a mechanism to donate money to a

charity or cause. For every rupee that cardholder spend on the card, a percentage is

donated.

Travel and Entertainment Card (T and E)

These are primarily for travel and entertainment purposes and known as ‘T and E’ cards.

They are a method of payment rather than a source of credit and did not provide a credit

limit. In this category, the Diner’s club was the first to appear in America and was

introduced to Great Britain in 1951, a year after its launch in America. These cards only

offer credit for the brief period between purchase and billing. If full settlement is not made

on time, resulting in an overdue account and penalty is normally imposed. However, no

interest is charged-instead a joining or annual fees is levied. Additional revenue is

generated from the ‘T and E’ company by charging merchants a commission on the sales,

charged to the card.

Co-Branded Card

A credit or debit card issued jointly by a member bank, and a non financial organization,

bearing a ‘brand’ of both. Co-branding is essentially two major brands covering to enhance

the usefulness and image o the product. The benefit to the card- holder comes mainly in the

form of reward schemes and discounts offered by the credit- card company. Co-branding,

apart from the reward schemes with a number of redemption options, also allows for

discounts at specific outlets when using the card, free merchandise, frequent buyer

programme similar to frequent flyers points. For example, Bharat BOBCARD premium is

a co-branded card issued in association with Bharat Petroleum Corporation Ltd. Stan chart

and Hindustan Lever Ltd. have a co- branded card to sell Aviance beauty products.

Student Credit Card

Students generally have little or no credit history. This type of credit card is set up to help

students build up the credit history that most of them do not already have. If used wisely, a

student can take the first step towards building a solid credit history with student credit

card.

32

Farmers Green Card/Rural Card

Farmer green card can be issued to parties for undertaking any activities coming under the

purview of direct finance to agriculture. The scheme enables the cardholder to get instant

credit from the branch which has issued the card. These cards provide farmers to buy

agricultural inputs without repeating visits to the bank branch. Dena Bank took the

initiative to launch Rural card. Presently banks like Canara Bank, Corporation Bank,

are also providing the same.

Credit Cards for Bad Credit

Credit can easily go from good to bad with poor judgement, mismanagement of credit

cards or simply a change in job or financial situation. This does not mean one’s cannot get

a credit card. There are several options available for the people who had bad credit in the

past and for these who are currently trying to “rebuild” poor credit histories-There are:

1. Secured Card 2. Prepaid Card

Secured Credit Card Secured credit cards requires collateral for approval. With secured

credit card, a security deposit of a predetermined amount is needed in order to secure the

credit card. Generally, the security deposit needs to be of equal or greater value to the

credit amount. Collateral comes in the form of a car, a boat, a jewellery, stocks as anything

else of monetary value. Secured credit cards are for people with either no credit or poor

credit who are trying to build credit history. Prepaid card are, infact, not credit cards at all

but rather are used like credit cards, whenever credit cards are accepted. Prepaid cards are

multipurpose payment cards that can be obtained by paying cash upfront. These cards can

be used to make bill payments such as telephone bills or to make purchases at shops. These

can only be used at point-of-sale terminals and for making payments but not for

withdrawing cash. Some of the bank that issue prepaid cards are ICICI Bank, HDFC Bank,

Kotak Mahindra Bank and Axis Bank.

Cheque Card

The card issued by a bank which guarantees the payment of a cheque within prescribed

limit, whether presented for cash at a branch of a paying bank or to a trader for goods or

services. The first cheque card was introduced by National Provincial Bank in October

1965, guaranteeing payment of cheque upto £ 30. A cheque guarantee card is essentially

therefore an abbreviated portable “letter of credit” granted to a qualified depositor,

providing that when he is paying a business by cheque and the retailer writes a card

number in the back of the cheque. The cheque was signed in the retailer presence and the

retailer verifies the signature on the cheque against the signature on the card, then the

cheque cannot be stopped and payment cannot refused by the bank. Cheques drawn against

insufficient funds in this manner can result in an overdraft with penalty interest.

33

Switch Card

It is an electronic debit card which enables holder to make payments at retail outlets. The

payments are directly to the retailer’s bank account from the cardholder bank account. It

will be an extension of the debit card which may get into the market in the near future.

ADVANTAGE S O F PLASTIC MONEY

• Purchasing Power: Credit or Debit cards made it easier to purchase things. Now

we don’t have any need to carry hard cash in a large amount. Plastic money is

accepted everywhere, anytime.

• Time Saving: Through a credit card or debit card you can purchase anything

from anywhere without spend money on fare or cash transition. Just provide your card

details to seller store or companies and finalize your order. Now you don’t have need to

worry about time wastes. Use internet for minimum time consuming.

• Extra Safety: While you are not carrying cash, how can it be lost? But if your card

has lost, just contact to your bank or financial institution, which provide you cards. It

will block the account and nobody can draw a single coin without your permission. So

it is 100% safe without any tension.

DISADVANTAGE S OF PLASTI C MONEY

• Shops Using Other Vendors: There are numerous shops which accept credit

cards of a specific company only. In this situation the cash is the only way of payment for

those who use a credit card of another company.

• Less Global Availability: there are many cases where various companies do

not permit their cards to be used in areas where they have a regional dispute with.

• Worn out Magnetic Strip: The magnetic strip of a credit card can get worn out

due to massive use. If such a condition happens while travelling, and this is the only way

of cash that the consumer has, then he or she has to wait till the time they receive a new

card, which can take a minimum of 48 hours.

• Increased Debt and High Interest Rates: Credit Card provider financial

institutions and companies charge high interest rates (may be 10% to 25%) on extra

money if you fail to pay off up to the fix date of the month. This interest is their

earning, for which they give you extra buying limits then your money. This is not a

good idea that you owe loan on high interest rates and spend it in unnecessary things or

purchasing. This is complete money wastages.

•

34

Fraud: Credit cards can be stolen. A thief may be use them directly or to get their

information (which is required in money exchange). In today’s technical intelligence it

is also possible to get a clone of any credit card or debit card, which works like original

and they can be give you a heavy financial loss. So be aware from credit cards fraud as

they are like stolen your money from your pocket without your information.

OPERATION OF PLASTIC MONEY:

Figure 1 illustrates the general structural model common to most electronic money

systems, including participants and their in-tractions.

Cardholder is the person in whose name the card is and who being in possession of the card

is legally entitled to buy goods and services from merchant establishment and is under an

obligation to pay for the goods and services. The cardholder is an agreement with the issuer

to pay for the goods and services bought on the card along with the various applicable

charges and the interest due on the card. This agreement is known as the ‘cardholder

agreement’ and is ratified by the cardholder as soon as he receives his card and sign on

it.Merchant establishment (MEs) is a shop or establishment which accept the card offered

by the cardholder as a mean of payment for the goods and services provided. The merchant

establishment (MEs) enters into an agreement with a bank, known as acquiring bank (since

it acquires the business from the MEs). Under this agreement, the merchant establishment

provides goods and services to the cardholder on credit and receives money from the

acquiring bank within the few days (generally 1-4 days). The MEs has to pay the

commission to the acquirer for the services provided. The commission generally

ranges between 2%-5% of the total sales value.

MEs can be divided into two main categories based on the machines provided to them by

the acquirers. The machines are provided based on the volumes of the sale of the MEs. A

high volume MEs provided with an electronic data capture (EDC) machine while a low

volume MEs is provided generally with an imprinters are known as ‘manual merchant’.

Such merchants are given ‘floor limits’ by the acquirers. The floor limit is an amount

specified by the acquirer, below which the merchant need not take an approval but he must

refer to hot card bulletin. If the transaction amount is above the floor limit, the merchant

must take approval from his acquiring bank.

Acquiring bank is retained by the retailer or merchant to process the payment card

transaction on their behalf and licenses the merchant to accept credit cards of one or more

of the worldwide issuing bodies such as VISA, MASTER,DISCOVER etc. The acquirer

need not always be a bank but can be a financial institution. In India, acquirers are known

to be banks alone. The acquirers that processes the transaction, routes the authorization

request to the card issuing bank.

35

The merchant provides his acquirer with the chargeslips for the day’s transaction,

irrespective of whether the acquirer was the issuer of the cards accepted by the merchant.

Thus, it is clear that the acquirer need not necessarily be an issuer of the card which will be

accepted at the MEs. The acquirer pays the merchant the total transaction value minus a

commission, known as a service fee, which is agreed upon when the negotiations for the

acquiring of the merchant were taking place. The merchant thus gets the instant

reimbursement for the goods sold.

Issuer/Issuing Bank is an institution which has issued the card to the cardholder. The issuer

has the responsibility for transaction that are put through on cards that they have issued and

responsible for debiting funds from the relevant cardholder’s account. The card cycle

works when cardholder buys certain goods at a shop and pays through his card. The

merchant has three copies of the chargeslips. One for his own records, one for the customer

(which he signs), and one for his acquirer. The merchant present the copy of the charge slip

to his acquiring bank. The acquiring bank pays the merchant, on the basis of charge slip

the amount of transaction minus its own commission. The rate of this commission is

lesser than the rate of the merchant commission. The issuer consolidates all transaction

for each card issued and presents the charges to the cardholder in the form of monthly bill

or ‘statement’.

The cardholder has two options on receiving the statement. One is that he can pay off the

full amount due on his card on or before the due date, in which case, he is said to using his

card as a charge card rather than a credit card since he is not utilising card facility on his

card. The second option is that he pays the minimum amount due (MAD) before the due

date, or any percentage greater than the MAD but lesser than the total amount due and ‘roll

over’ or carry over the balance amount to the next month for a small finance amount

charge. The small finance charges generally varies between 1.5%-3% per month. In USA

there is law which prohibits issuers from charging a finance charges 4% or more per

month, unfortunately there is no such law in existence in India at the moment.

Of course, if cardholder fails to pay even the MAD, he has to pay either a service charge or

fixed finance charge(depending on the rules of the issuer) plus the interest charges. In the

certain cases, where the acquirer and the issuer are the same, the cycle have the three

players instead of four. In this case, the issuer makes a little more profit than with the

presence of an acquirer in the cycle, since he doesn’t have to pay the commission to the

acquirer. When translated over a transactions per day, this means a lot of saving to the

issuer. Thus there are many issuers who are vigorously pursuing the business of acquiring

too.

36

The actions in this model are: credit (loading) means transferring the monetary value from

the issuer to the payment instrument (e.g. electronic purse) of client. Debit (purchase,

payment) means transferring the monetary value from payment instrument of client to the

payment instrument of merchant (that is usually payment terminal). In the terminal is then

created payment transaction that contains the electronic money and other payment details.

Transaction collecting means transferring the payment transactions from the merchant to

the acquirer Payment clearing means clearing of payment request between acquirer and

issuer.

From the security point of view the most sensitive operations are credit and debit. The

main threats are concentrated in these two operations. These threats include using of fake

payment instrument, modifying communications of payment instrument, and illegal

crediting. Other two operations are less sensitive and the probability of security incident

during these operations is much smaller. Physical devices, such as smart cards or personal

computers, are held by clients and by merchants. Merchants interact with clients and with

their acquiring bank or other collection point, such as a third-party payment processor.

Issuers receive funds in exchange for prepaid balances distributed to clients and manage

the “float” in the system that provides financial backing for the “value” issued to

consumers. In some cases, other intermediaries, such as banks, retailers or service

providers, distribute stored-value devices and balances directly to consumers. The system

may include a central clearing house or system operators.

Fig. 1 General Structure of Electronic Payment System in Plastic Money

37

NEED OF STUDY AND RESEARCH GAP

Banks are trying to lure the customers with a number of innovative schemes. Inspite of

innovative schemes and aggressive efforts of banks, a vast majority of the Indian

population is yet to come to the grips of plastic money. However, the plastic money

business is not without its risk. The original risk was that the conservative customers might

not respond to the expensive campaigns launched to introduce cards; the other hazards that

remain are those inherent to this type of business, viz. legislative controls, frauds and bad

debts.

The proposed study will try to find out spending habit pattern of consumers and why they

do not use plastic money in their lives. Since the present study deals with banking sector,

which is a service industry, the observation of customers is also required to be taken,

which was not part of earlier studies. The need for such study becomes all the more

important because identity theft becomes fastest-growing financial crime. Identity theft

is a problem largely because financial institutions, merchants credit bureaus and the

government do not adequately safeguard vast data base and other records containing

consumers’ sensitive information, making it relatively easy for thieves to access these data.

Thus, the finding of the proposed study may prove useful for users, non users, authorities

concerned and persons dealing with plastic money. During the last few years, attempts

have been made to visualise the use of plastic.Further, the existing studies have

concentrated their attention mainly on the usage of either debit cards or credit cards but

mostly neglected the joint effect and new innovative cards.

There is a great need to find out the speed at which these new technological capabilities are

accepted and to know the continually changing consumer and social attitudes to ‘Plastic’

technology as well as an extent to which banks and credit card groups find mutual

system(s) to develop and integrate their ideas in order to expand or for the penetration in

the existing market.

OBJECTIVES OF THE STUDY

1. To trace out the origin and development of plastic money.

2. To study the procedural aspect in the operation of plastic money.

3. To analyse the risk factors involved in the usage of plastic money and legal protection

available to card holders.

4. To judge the comparative spending pattern of active and inactive card holders.

5. To study the role of member establishments in the progress of plastic money inIndia.

6. To examine the present position and future prospects of plastic money in India.

38

CHAPTER 3

MAIN KINDS OF PLASTIC MONEY

Plastic money is a term that is used predominantly in reference to the hard plastic cards we

use everyday in place of actual bank notes. They can come in many different forms such as

cash cards, credit cards, debit cards, pre-paid cash cards and store cards.

Cash Card or ATM Card

An ATM card (also known as a bank card, client card, key card, or cash card) is

a payment card provided by a financial institution to its customers which enables the

customer to use an Automated Teller Machine (ATM) for transactions such as: deposits,

cash withdrawals, obtaining account information, and other types of banking transactions,

often through interbank networks.

A card that will allow you to withdraw money directly from your bank via an

Automated Teller Machine (ATM) but it will not allow the holder to purchase

anything directly with it.

Unlike a debit card, in-store purchases or refunds with an ATM card can

generally be made in person only, as they require authentication through a

personal identification number or PIN. In other words, ATM cards cannot be

used at merchants that only accept credit cards.

In some countries, the two functions of ATM cards and debit cards are

combined into a single card called a debit card or also commonly called a bank

card. These are able to perform banking tasks at ATMs and also make point-of-

sale transactions, both functions using a PIN.

Misuse:

Due to increased illegal copies of cards with a magnetic stripe, the European Payments

Council established a Card Fraud Prevention Task Force in 2003 that spawned a

commitment to migrate all ATMs and POS applications to use a chip-and-PIN solution

until the end of 2010. 

39

The "SEPA for Cards" has completely removed the magnetic stripe requirement from the

former Maestro debit cards, and the savings banks have announced that they will ship their

debit cards without a magnetic stripe beginning in 2012, making them unusable in any

ATM or merchant that is only capable of reading a magnetic stripe card.

Credit Card:

A credit card can be viewed as a payment mechanism which enables the holder

of the card to purchase goods (or services) without parting with immediate cash;

and make a one-time payment at the end of a specified period (known as the

billing cycle which is usually a month) with a provision for spreading this

payment over several easy installments.

Again this card will permit the card holder to withdraw cash from an ATM, and

a credit card will allow the user to purchase goods and services directly, but

unlike a Cash Card the money is basically a high interest loan to the card

holder, although the card holder can avoid any interest charges by paying the

balance off in full each month.

A credit card is a small plastic card issued to users as a system of payment. It

allows its holder to buy goods and services based on the holder's promise to pay

for these goods and services. The issuer of the card creates a revolving account

and 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 cash advance to the user.

The Credit Card is built around the revolving credit concept.

The card carries a preset limit for spending which can be utilized by the

cardholder during the specified period.

At the end of the month, the holder needs to pay about 5 to 10 percent of the

outstanding value of purchases and liquidate the balance in easy installments

over the next few months.

The balance outstanding at the end of a month carries a rate of interest of 2

percent to 3 percent per month.

40

Parties involved:

Cardholder: The holder of the card used to make a purchase; the consumer.

Card-issuing bank: The financial institution or other organization that issued the

credit card to the cardholder.

Acquiring bank:The financial institution accepting payment for the products or

services on behalf of the merchant.

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 Card association: An association of card-issuing banks such as Discover,

Visa, MasterCard, American Express, etc. 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.

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

Insurance providers: Insurers underwriting various insurance protections offered

as credit card perks.

Merits and Demerits to Customer:

Merits:

o Convenience

o Allows a short term credit to customer

o Provide more fraud protection than debit cards.

o Many credit cards offer rewards and benefits packages

Demerits:

o High interest and bankruptcy

o Inflated pricing for all consumers

o Weakens Self-regulation.

41

Debit Card:

A Debit Card (also known as a Bank Card or Check Card) is a plastic payment

card that provides the cardholder electronic access to his or herbank account at a

financial institution. Some cards have a stored value with which a payment is made,

while most relay a message to the cardholder's bank to withdraw funds from a payer's

designated bank account. The card, where accepted, can be used instead of cash when

making purchases. In some cases, the Primary Account Number is assigned exclusively

for use on the Internet and there is no physical card.

In many countries, the use of debit cards has become so widespread that their volume

has overtaken or entirely replaced Cheques and, in some instances, cash transactions.

The development of debit cards, unlike Credit Cards and Charge Cards, has generally

been country specific resulting in a number of different systems around the world,

which were often incompatible. Since the mid-2000s, a number of initiatives have

allowed debit cards issued in one country to be used in other countries and allowed

their use for internet and phone purchases.

Unlike credit and charge cards, payments using a debit card are immediately

transferred from the cardholder's designated bank account, instead of them paying the

money back at a later date. Debit cards usually also allow for instant withdrawal of

cash, acting as the ATM Card for withdrawing cash. Merchants may also

offer cashback facilities to customers, where a customer can withdraw cash along with

their purchase.This type of card will directly debit money from your bank account, and

can directly be used to purchase goods and services. While there is no official credit

facility with debit cards, as it is linked to the bank account the limit is the limit of what

is in the account, for instance if an overdraft facility is available then the limit will be

the extent of the overdraft.

42

Types of Debit Card Systems

Online Debit System:Online debit cards require electronic authorization of every

transaction and the debits are reflected in the user’s account immediately.

Offline Debit System: This type of debit card may be subject to a daily limit,

and/or a maximum limit equal to the current/checking account balance from which

it draws funds. Transactions conducted with offline debit cards require 2–3 days to

be reflected on users’ account balances.

Electronic Purse Card System : Smart-card-based electronic purse systems (in

which value is stored on the card chip, not in an externally recorded account, so that

machines accepting the card need no network connectivity)

Merits and Demerits to Customer:

Merits

Customer having poor credit worthiness can opt for debit card.

Instant finalization of accounts

Less identification and scrutiny than personal checks, thereby making transactions

quicker and less intrusive.

A debit card may be used to obtain cash from an ATM or a PIN-based transaction at

no extra charge

Demerits

Limited to the existing funds in the account to which it is linked

Banks charging over-limit fees or non-sufficient funds fees based upon pre-

authorizations, and even attempted but refused transactions by the merchant

Lower levels of security protection than credit cards. More prone to frauds

43

In-Store Cards:

Store cards are credit cards which can only be used to buy goods in one particular shop or

chain of shops (a number of shops owned by the same company). The store card is

provided by a particular shop that you can use to buy goods at that shop, and you will pay

for the goods at a later date.

These are used by the departmental stores mainly as marketing tools to retain

customers and increases turnover. The main features of in-store cards are as below:

Issued by big department stores or retailers.

Can be used only in retailers outlet or for purchasing the company’s products.

Little or no cost to retailers

Usually developed by the traders in partnership with banks or financing companies

who undertake the administration and sometimes the financing involved.

Types on In-store Card:

Budget Card: This card requires monthly payment on behalf of the holders. The

cost of goods purchased is spread over a certain period.

Option Card: Here, payment can be either be made in full or at the cardholder’s

discretion. However, option available is subject to a minimum repayment and

interest charged on the balance outstanding amount.

Monthly Card: The card holder is required to make the payment every month. No

extension of credit is given beyond a month. This card differs for budget card,

where outstanding credit can be settled in 30 monthly statements.

44

Pre-paid Cash Cards:

As the name suggests the user will add credit to the card themselves, and will not

exceed that amount. These are usually re-useable in that they can be 'topped up'

however some cards, usually marketed as Gift Cards are not re-useable and once the

credit has been spent they are disposed of. They provide some specials benefits or

discounts to the holder of the card.

Pre-paid Cash Cards Examples:

• DMRC Smart Cards.

• Pantaloons Green card.

• Cards used in Food courts of Malls.

45

CHAPTER 4

PLASTIC MONEY: A KEY ELEMENT OF

ELECTRONIC BANKING

Money is always regarded as an important medium of exchange and payment tool. Initially

barter system was used as the significant mode of payment. Over the years, money has

changed its form from coins to paper cash and today it is available in formless form as

electronic money or plastic card. Hence, the major changes in banks which has been

brought in by technology is through introduction of products which are alternative to cash

or paper money. Plastic cards are one of those types of innovations through which the

customers can make use of banking services just by owning the card issued by bank and

that too without restricting himself in the official banking hours. Plastic cards as the

component of e banking have been in use in the country for many years now. However, the

card-based usage has picked up only during the last five years. Payment by cards is now

becoming a much preferred mode for making retail payments in the country (Report on

trend and progress of banking in India 2006-07, RBI). Thus, plastic cards are such payment

tool which gives a customer an opportunity of non-cash payment of goods and services and

are designed to facilitate small value retail payments by offering a substitute for bank notes

and coins and thus to complement traditional payment instruments. The role of various

parties involved in plastic cards payment.

(i) Customers or Cardholder: The authorized person holding the card and can use it for

purchase of goods and services also.

(ii) Card Issuing Bank: The bank or institution which issues the card to its eligible

customers.

(iii) Merchants: Entities which sell the goods and services to the cardholder and duly

agree to accept the card for payment.

(iv) Bank Card Association: The associations (VISA, Master Card, American Express)

which act as an intermediate between card issuing bank and merchant's bank and authorize

the transaction.

46

Automated Teller Machine (ATM)

Automatic teller machines played a vital role in the development of plastic cards. In India,

there is a continuous rise in the usage of ATMs by the customers. According to a survey

conducted by Banknet India in 2006, 95% people prefer using ATMs to traditional mode of

banking. Since 2000, sufficient number of ATMs have been installed by various banks in

India while taking into consideration its popularity and usage among the customers. The

ATMs installed by banks in year 2000 was just 1000 in number which increased to 27088

in year 2007 signifying the tremendous growth in 7 years. The group wise share in the

number of ATMs is depicted , according to which the nationalized banks in India has

contributed maximum to the rise of on-site ATMs as well as total number of ATMs. As far

as the growth and number of offsite ATMs are concerned new private sector banks have

led over the other group of banks. At the early stage, customers could only use ATMs of

that respective bank where they are having account. But currently, this constraint has been

weeded out for the convenience of customers as they can use ATMs of other banks also

where they don't have any account. It is known as interbank networks and banks charge

extra fee termed as "inter-change fee" for usage of this service. Reserve Bank has

encouraged the banks to join together in small clusters so that their ATM networks can be

shared. Currently, there are various such ATM network clusters functioning in India. The

number of ATMs shared by these networks is also shown in the which indicates that

National Financial Switch (NFS) is sharing the largest number of ATM with its member

banks while Mitr is having least number of ATMs to be shared with its member banks.

Debit Cards

47

Debit Card is a magnetically encoded plastic card issued by banks which has replaced cash

and cheques. It allows the customers to pay for goods and services without carrying cash

with them. In some cases, debit card is multipurpose which can also be used as ATM for

withdrawing cash and to check account balances. It is issued free of cost with the savings

or current account. Debit card is one of the best online e-payment tool through which the

amount of purchase is immediately deducted from customer account and credited to

merchant's account provided if that much amount is available in customers account. It has

overcome the delayed payment process of cheques, due to which sometimes merchants

have to suffer. To transact through debit card is easy and authentic way in which a card is

swiped through the terminal with magnetic code reader and it records customer's bank and

account number. Customer has to enter the PIN code in the terminal in order to perform the

transaction through which the information is travelled to electronic network linked to the

merchant's bank with the bank that issued debit card to the customer. If the transaction is

approved then the customer account is duly debited and merchant account is credited with

that amount. The whole process is performed instantaneously inspite the involvement of

large number of parties. Hence, debit cards are considered effective where customers value

it as convenience and merchants see it as lowering cost or enhancing sales.

Robust progress can be seen in the usage of debit cards in India as per Table 2, the total

number of outstanding debit cards has been increased to 74.9 million in 2007 from 49.8

million in 2006, which indicates the growth of 41% in a year. The value of transaction

conducted through debit cards also witnessed considerable growth of approx 38% every

year from 2003 to 2007. The growth of merchant establishments has also contributed a lot

in the growth of debit cards usage in India.

Credit Cards

The term "Credit Card" generally refers to a plastic card issued to a cardholder, with a

credit limit, that can be used to purchase goods and services on credit or obtain cash

advances. It is issued by banks holding the logo of one of the bank card association private

and foreign banks, many public sector banks have also entered the Debit card segment

leading to the increase in acceptance and the total base. Most banks now issue Debit cards

in place of ATM cards and have already converted all their ATM cards into Debit cards.

The reason banks are so eager to push debit cards is that it helps them cut costs

significantly. Hence, these days, only a few pure ATM cards can be seen prevailing in the

market like Visa, MasterCard, Dinners club etc. after proper verification of accountholders.

48

Unlike debit cards, credit cards also provide overdraft facility and customer can purchase

over and above the amount available in his account and thus regarded as authentic payment

tool. Interest charges are levied on the unpaid balance after the payment is due.

Cardholders may pay the entire amount due and save on the interest that would otherwise

be charged. Equated Monthly Installments (EMI) scheme is also offered by some banks to

the customers who make huge purchases so that they can feel convenient while paying

back the outstanding amount.

Clearing and settlement through credit card is a simple and reliable process in which bank

play a crucial role. If a customer purchases goods or services from merchant with credit

card, merchant swipes a credit card through a reader, the software at the point-of-sale

(POS) terminal dials a stored telephone number via a modem to call an acquirer. When an

acquirer company gets the credit-card authentication request, it credits the merchant

account and card holder accepts liability by signing the credit receipt. The merchant

acquirer forwards the transaction data to bankcard association, who in turn forwards the

data to card issuer bank. The card issuing bank has to pay the bankcard association, who in

turn pay the outstanding amount to merchant acquirer. The card issuer then adds the

outstanding bill amount to the card holder's monthly statement and card holder duly makes

payment to the issuer afterwards. The credit card business in India has been growing at a

significant pace and that too at the rate of almost 45% every year as depicted. The value of

transactions conducted through credit cards has been almost more than double in last four

years i.e. it has recorded as 176.6 billion in 2003-04 and increases to 413.6 in 2006-07.

Moreover, credit cards are more popular among the Indian customers as compared to debit

cards. The total volume and value of credit card transactions is much higher as compared to

the usage trends of debit cards.

The main reason for the growth of credit cards as compare to debit cards is mainly due to

provision of overdraft facility which facilitates the customers to make purchases and

payment even without having enough money available in their account. The increase in the

number of commercial activities and the growing malls in smaller cities have also

contributed positively in the rise of credit card market.

49

Smart Cards

Smart Cards or Stored Value Cards is relatively new payments technology. It is a plastic

card, with or without magnetic stripe, capable of storing, retrieving and manipulating data

and used in variety of applications. It is also known as Electronic Money or E Purse issued

by banks to its customers having the size as of credit card. A customer needs not to have

currency in his pocket as value or amount is stored in the card itself by transferring it from

his account, due to this feature it is regarded as electronic purse. The emergence of Smart

Card arises in order to issue multipurpose cards which function as credit cards, debit cards

and ATM cards so that it suits all types of customer base and their choice. These are

generally the reloadable cards in which money is loaded into it by transferring the required

amount from customers account via ATMs, telephone or internet.

When a customer makes purchases through smart card, unlike credit card, no validations

and authentications from vendor's bank and bank card association are required as the

money is available in the card itself. Funds are directly deducted from the cards and

transferred to the vendor's terminal.

Future Scenario of Plastic Cards Market in India

The use of plastic cards in India has no doubt in rise from last few years but there is still a

great potential left for the bankers to introduce more attractive services in order to lure the

customers on one side and increase their profits on the other. Some aspects or facts

(organized from various studies and articles) which are contributing to the growth of

plastic cards market and also indicate its growth in the near future are discussed below:

The credit card companies say that consumers spend Rs50,000 crore annually

which is expected to grow at 50% over the next 4-5 years since 2007.

According to CLSA Report, the estimated credit card base in India till 2020 will be

127 million as compared to 23.1 million in 2007.

The number of debit and credit card users in India is anticipated to reach 73.4

million and 406 million by the year 2010 and 2011.

50

According to an RBI announcement, by April 2009, bank customers will able to use

their ATM cards to withdraw cash from any automated teller machine installed by

various commercial banks across the count and too free of cost.

According to a new RBR report on Global ATM Market and Forecasts Till 2011,

India is likely to invest heavily in ATMs till 2011.

Leading Indian banks are said to target a ratio of 1: 2.5 for bank branches v/s ATMs

by 2012. This means the number of ATMs will grow to around 1.75 lakh, assuming

the number of branches remains at the same level.

Now a number of non-banks in collaboration with/without banks are planning to

issue both, limited or multipurpose prepaid cards.

In late 2007, 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. So it would not be

long before smart cards established themselves in India.

A few non-banks have also entered the domain of providing various services like

provision of infrastructure e.g., shared ATM networks POS terminals, cheque

processing centres, etc. which will lead to enhance the potential of plastic cards

market.

A joint venture between Life Insurance Corporation of India (LIC) and GE Money

is likely to launch its first credit card product in 2009 which will be offered only to

LIC customers and policy holders.

In another positive development, ABN AMRO with India's travel portal

MakeMyTrip.com launched a distinctive cobranded credit card, 'Go Card' in 2008.

The card offers special reward benefits and good range of travel-related promotions

and packages.

51

Banks in India are looking at deploying biometric ATMs targeted to reach the

unbanked population in rural India. Using thumbprint and voice guidance in ATMs

reduces literacy requirements to a considerable extent. Thus, establishing the

identity of a rural depositor through biometrics makes it possible for illiterate or

barely literate people to become part of the banking user community.

There are already 1.6 million customers using smart cards banking solution and that

figure will go up to 4 million by the end of March 2009 and will reach to 25 million

in five years.

Hence, the future prospects of plastic cards in India are bright enough to bring paradigm

change in its popularity among customers as well as banks. Also, plastic money has

immense opportunities in a growing economy like India. All types of banks whether

public, private or foreign are contributing positively towards the development of plastic

cards in India. Until now, the growth and usage of plastic cards has been seen more in

urban areas due to existence of more literate people, better infrastructure facilities and

proper awareness as compared to rural areas. The rural people can only understand their

regional language and most of them are even illiterate who are least aware about the

usefulness of plastic cards. Moreover, there is lack of adequate infrastructure to push the

development of cards and induce more innovation. Thus, most of the banks have now

planned to expand aggressively into rural India, where about 60% of the population lives,

using an innovative system based biometric cards through which customers will be able to

do anytime anywhere banking on their own.

The rise in consumerism generated by economic reforms began in 1990's has also sparked

robust demand for plastic cards. The arrival of malls, multiplexes, online shopping stores

and shopping complexes encourage the customers to make use of plastic cards. The

modern day, Indian customers find it easier to make physical payment (credit card or debit

card payments) rather than carrying too much cash contributing to the growth of plastic

money in the country. The prevalence of intensifying competition has further fuelled the

usage of plastic cards in the country like never-before. It benefits the consumer through

enhanced product offerings at a lower cost and that too with lucrative deals delighted with

rewards scheme, loyalty bonus points, promotional campaigns etc. This has been a very

welcome change and the contribution of all the players is very important to continue the

momentum. However, operational risk involved with the usage of plastic cards like

chances of fraud, card damage etc. plays the negative part too.

52

Moreover, some customers are not able to utilise cards effectively due to its complex

nature and they don't actually know how to operate it for specific purpose. Thus, the banks

should give them some training regarding its usage. The banks can also provide them

facility to use plastic cards on trial basis so that they can become more confident while

using their own cards. Cost has also remained an issue in case of credit cards. The interest

levied on outstanding amount is very high which sometimes takes the customers in debt

trap ultimately discouraging the potential customers to make use of it. However, all these

hurdles will diminish over time and positively influencing trends are expected to continue

in the near and far-future. Also, the growth of plastic cards in future would depend upon

the capacity building of the banks to meet the challenges and make use of the opportunities

profitably. However, the kind of technology used and the efficiency of operations would

provide the much needed competitive edge for success in plastic cards business.

Furthermore, in all these customers' interest is of paramount importance.

53

Chapter 5

GROWTH & IMPACT O F PLASTIC MONEY

O N BANKING TRENDS IN INDIA

Due to the technological revolution in financial sector, the payments in banking system

have undergone a tremendous change. The Number of innovative products for making

payment has developed after the privatization and globalization Customers have showed

their preference over the usage of the plastic money generally over a period of time in

the banking process. Plastic money is an alternative to the cash or the standard ‘money’.

Plastic money is referring to the credit cards or the debit cards that we use to make

purchases .Various other types of plastic cards provided by banks in India are ATM

cards, Smart cards. The current study presents an overview of the development of

banking in the plastic cards usage trends since these have been introduced in Indian

banking sector. The study also highlights the role of these cards as electronic payment

tool to be used by customers and discusses the penetration of these cards in replacement

of cash and paper money. The Study is been carried out by taking a survey of 100

respondents by non-probabilistic convenience sampling method from a city of Mumbai

by using structured questionnaire and interview technique. The factors for adoption of

plastic money in replacement of cash and paper money have been identified which

shows the preference of the customers for plastic cards over the cash and paper money.

Some future plans made by various banks and institutions for avoiding the frauds arisen

due to the credit and debit cards are also been discussed in a way that it depicts the

picture of its future growth and prospects in India. As the study is been carried out in a

city of Mumbai the results cannot be generalized.

Introduction:

Indian economy has flourished with the advent of Liberalization, Privatization and

Globalization. Banking sector is not an exception too. These reforms have presented a

challenge before Indian banking sector to shake hands with the pace of new technology.

Without a sound and effective banking system in India it cannot have a healthy

economy. The banking system of India should not only be hassle free but it should be

able to meet new challenges posed by the technology and any other external and internal

factors However, mere technology up gradation or introduction of innovative

products cannot improve the state of affairs until customers don’t respond to it

positively. Hence, it becomes very necessary for the banks to offer the services or

products while taking into consideration the customers’ needs, preferences, perceptions

and convenience.

54

The banks’ services are not just confined to their particular branch customers only.

Customer is now treated as customer of banks as a whole, which means that he is now

capable of enjoying facilities such as anywhere, anytime banking. This concept as

enabled the bankers to establish long term connection with their customers. Hence,

Electronic banking is the new trend significantly adopted by banking sector worldwide

due to its wider scope for the customers as well as banks at large. Various

sophisticated products have been launched by the banks which help them to meet the

basic requirements of their customers. With entry of tech savvy private sector banks and

foreign banks, the competitive environment has started prevailing in banking sector

too. No doubt, Public sector banks have large network of traditional branches to

approach their customers as compared to the private and foreign players. However,

with the help of information technology, it has now become possible for banks to deliver

products and services efficiently and to improve customer base without opening new

branches. Hence, these new private and foreign players are trying to compete with them

on the basis of adoption of new technological services like plastic cards, PC banking,

Electronic Funds Transfer (EFT), Internet banking etc. to approach the maximum

customers inspite of having less physical branches. Due to this reason, public

sector banks are also likely to move towards electronic banking, which ultimately leads

the entire banking sector to the remarkable improvement with respect to its efficiency,

customer services, productivity, profitability etc.

Thus, Banks are now reengineering the way in which their services can be reached to their

customers by bringing in flexibility in their “distribution channels”.

Traditionally, banks were only concerned with acceptance of deposits from customers

and lending surplus money to the suitable customer who want borrow at some rate of

interest. The most products being offered by banks were savings account, current

account, term deposit account and lending products being cash credit and term loans,

Banker’s main purpose was to manage the savings of people through the mobilization of funds.

In the seventies, Banks in India started moving towards the social orientation due to which

nationalization took place in July 1969. The Indian Government nationalized the 14 largest

commercial banks and afterwards nationalization of 6 more commercial banks were

followed in 1980. The main reason for the nationalization was to give the government

more control of credit delivery in order to discharge social obligations. Due to this

effect of nationalization, Banks tried to uplift the neglected areas like agriculture, small

scale industries, tertiary sector, remote areas and weaker section of the society by

providing them with funds at reasonable rates of interest. Thus, till nineties, the

government was having direct control on the 90% of the banking business in India.

55

While fulfilling the social objective, the cost of banking operations increased and

thus profitability of banks declined drastically. To overcome these problems, it became

necessary for the banks to introduce new products and services which are commercially

viable and helped them to improve their profitability and productivity. Hence, modem era

has brought progressive change in banking industry as a whole which is resulted from

disintermediation process and information technology. New entrants (private and foreign

banks) in the banking industry generally known as New Generation tech-savvy banks tend

to introduce various innovative services while incurring minimum cost but also suit the

customer preferences. This is the period when automation of banking operations has

gained much importance. Hence, over last one and a half decades the banking

environment has changed progressively. After financial sector reforms during nineties, the

banking industry in India has witnessed remarkable changes due to information

technology and computer applications. The information technology has replaced the

brick or traditional banking with the wide range of e- banking products and services

like ATM (Automated Teller Machine), Internet Banking, Credit Cards, PC banking,

EFT’s, Debit Cards, Smart Cards etc.

With the effect of this changing environment, Indian banking has witnessed remarkable

growth since 2006 as banking sector is growing by 18% and it is 6 times more than the last

decade growth.

Plastic Money : Sign Of Modernizing Economy

Money is always regarded as an important medium of exchange and payment

tool. Initially barter system was used as the significant mode of payment. Over the years,

money has changed its form from coins to paper cash and today it is available in formless

form as electronic money or plastic card. Hence, the major change in banks which has

been brought in by technology is through introduction of products which are alternative to

cash or paper money. Plastic cards are one of those types of innovations through which the

customers can make use of banking services just by owning the card issued by bank and

that too without restricting himself in the official banking hours. Plastic cards as the

component of e banking have been in use in the country for many years now. However, the

card-based usage has picked up only during the last five years. Payment by cards is now

becoming a much preferred mode for making retail payments in the country (Report on

trend and progress of banking in India 2006-07, RBI). Thus, plastic cards are such payment

tool which gives a customer an opportunity of non-cash payment of goods and services and

are designed to facilitate small value retail payments by offering a substitute for bank notes

and coins and thus to complement traditional payment instruments.

56

The role of various parties involved in plastic cards payment:

Customers or Cardholder: The authorized person holding the card and

can use it for purchase of goods and services also.

Card issuing bank: The bank or institution which issues the card to its

eligible customers.

Merchants: Entities which sell the goods and services to the cardholder

and duly agree to accept the card for payment.

Bank Card Association: The associations

(VISA, Master Card, American Express)

S te p s taken by the other countries towards cashless transaction-

As per a recent Washington post article, in Sweden, only 3% of transactions involve cash.

Credit and Debit cards are dominant in Sweden payment system. Not only in Sweden, but

in most of the developed countries, above 90% of transactions are cashless. Mobile

payment is bringing new way of cashless payment system. Other prominent countries are

Norway, Austria, Finland etc.

In the United States today, only 7 percent of all transactions are done with cash, and most

of these transactions involve very small amounts of money.

Another method that can be used to make financial identification more secure is to use

implantable RFID microchips.

57

CONCLUSION

The plastic money in the form of cards has been actively introduced by banks in India in

1990's. But it was not very popular among Indian consumer at the time of its introduction.

The change in demographic features of consumers in terms of their income, marital status,

education level etc. and upgradation of technology and its awareness has brought the

relevant changes in consumer’s preferences. These changing preferences have also

modified their outlook and decision regarding the acceptance and non- acceptance of

particular product and services in the market. Thus, the plastic cards are gaining popularity

among bankers as well as customers and getting accepted in the market place. It can be

well imagined from the discussion that no doubt, the plastic cards market is growing at a

large pace in India yet it has long way to go as it lacks behind if compared to the usage

trends of other countries. Hence, it has become important that the payment system in India

has to be modernized enough to be at par with the systems prevalent in other countries,

since our domestic financial markets are increasingly getting integrated with markets

abroad. RBI is also taking important steps in order to enhance its usage and popularity

through initiatives like regulating card market to maintain the security levels and to build

up confidence of bankers and customers. Despite the strong advances in e-payments, an

estimated 90 percent of personal consumption expenditure in India is still made with cash ,

which indicates the tremendous growth potential of this business. So this can be considered

as mere beginning which indicates the bright future prospects of plastic card market in

India. In nutshell, we can say that the Indian banking sector is accepting the challenge of

information technology as all the groups of bankers have now recognized it as essential

requirement for their survival and growth in future.

The rise in consumerism generated by economic reforms began in 1990’s has also sparked

robust demand for plastic cards. The arrival of malls, multiplexes, online shopping stores

and shopping complexes encourage the customers to make use of plastic cards. The

modern day, Indian customers find it easier to make physical payment (credit card or

debit card payments) rather than carrying too much cash contributing to the growth of

plastic money in the country. The prevalence of intensifying competition has further fuelled

the usage of plastic cards in the country like never-before. It benefits the consumer through

enhanced product offerings at a lower cost and that too with lucrative deals delighted with

rewards scheme, loyalty bonus points, promotional campaigns etc. But some customers are

not able to utilize cards effectively due to its complex nature and they don’t actually

know how to operate it for specific purpose. Thus, the banks should give them some

training regarding its usage. The banks can also provide them facility to use plastic cards

on trial basis so that they can become more confident while using their own cards. Cost has

also remained an issue in case of credit cards. The interest levied on outstanding amount is

very high which sometimes takes the customers in debt trap ultimately discouraging the

potential customers to make use of it.

58

However, all these hurdles will diminish over time and positively influencing trends are

expected to continue in the near and far-future. Also, the growth of plastic cards in future

would depend upon the capacity building of the banks to meet the challenges and make use

of the opportunities profitably. However, the kind of technology used and the efficiency of

operations would provide the much needed competitive edge for success in plastic cards

business. Furthermore, in all these customers’ interest is of paramount importance.

59

Bibliography

Websites:

www.slideshare.net

www.freepatentsonline.com

www.ijmrbs.com

en.wikipedia.org

www.investopedia.com

60

QUESTIONNAIRE ON

PLASTIC MONY

Q.1) Do You Have Any Idea About Plastic Money? Which?

Q.2) Do You Own Any Kind Of Plastic Money?

Q.3) According To You, Which Is The Most Convenient Way To Pay?

Q.4) How Do You Make Payment For Purchases Of Household Or Luxury/Durable Goods?

Q.5) According To You, While Travelling Which Way Of Payment Do You Prefer?

Q.6) Do You Find Use Of Credit Card/Plastic Money To Be Safest Mode Of Transaction?

Q.7) Do You Find Plastic Money More Reliable And Secured?

Q.8) Do You Think That Plastic Money Will Penetrate In Society More In Future?

Q.9) Do You Think That More Credit Card/Debit Card Transaction In Country Over Cash

Transaction Will Help To Crab Black Money Circulation In Economy?

Q.10) Where Do You See The Future Of Cash And Credit Card/Debit Card?

61

FINDINGS

• The use of Plastic cards is more and more increasing for online payment.

• Around 50% of payments of the customers are done through credit/Debit cards.

Sample survey shows Debit cards are preferred over credit cards.

• The main reason for the increase in plastic money is that the customers are not a

victim of a fraud.

• The customers have rated that the telephonic payment option is average due to long

timeliness and security concern for CCV/PIN number.

• The survey and secondary data suggests that customers have hardly faced any

discrepancies with their bills.

• The introduction of ATM machines has changed the banking process also.

Customers prefer the ATM machines now to days due to that frequency of customers

to visit the banks have become less.

• The use of plastic cards has also been increased because banking industries has

also provided the 24x7 customer service for their customers.

• The factors for adoption of plastic money over the cash and paper money are mon-

Discounts while shopping, No hassles of carrying cash, Security of money, Hassle free

EMI’s, Easy to use, Personal Loan on Credit Card.

62