plastic money


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plastic money

  1. 1. 1 | P a g e CHAPTER 1 PLASTIC MONEY Concept of plastic money Plastic money or polymer money, made out of plastic, is a new and easier way of paying for goods and services. Plastic money was introduced in the 1950s and is now an essential form of ready money which reduces the risk of handling a huge amount of cash. It includes credit cards, debits cards, ATMs, smart cards, etc. This assignment on plastic money is divided into two portions titled Concept and Experiences. The former covers the emergence of plastic money, different types of plastic cards, their growth in India. Plastic money are the alternative to the cash or the standard 'money'. Plastic money is used to refer to the credit cards or the debit cards that we use to make purchases in our everyday life. Plastic money is much more convenient to carry around as you do not have to carry a huge some of money with you. It is also much safer to carry it along or to travel with it as if it is stolen one can consult the bank whose service you are using and get it blocked hence saving your money from getting stolen or even lost. Nowadays even developing countries like India are encouraging the use of these plastic money more than cash due to these reasons. Furthermore these credit and debit cards also have plastic used in their making and that is where the name 'plastic money' has originated from.
  2. 2. 2 | P a g e CHAPTER 2 5 DIFFERENT 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. 2.1 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.
  3. 3. 3 | P a g e 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. 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. 2.2 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.
  4. 4. 4 | P a g e The balance outstanding at the end of a month carries a rate of interest of 2 percent to 3 percent per month. 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
  5. 5. 5 | P a g e 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 2.3 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 her bank account(s) 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 cash back facilities to customers, where a customer can withdraw cash along with their purchase. This type of
  6. 6. 6 | P a g e 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. 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
  7. 7. 7 | P a g e 2.4 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.
  8. 8. 8 | P a g e 2.5 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.
  9. 9. 9 | P a g e CHAPTER 3 EMPIRICAL EVIDENCES A review of theoretical and empirical literature pertaining to the topic of the study is an integral part of any research work. Hence, an attempt has been made in this chapter to present a review of various studies relating to ‗Plastic Money‘, as reported by experts, professionals and researchers at national and international level. Slocum, J. and L-. Mathews (1970)', in their study ― Social class and income indicators of consumer credit beltaviot1t"‖. studied the influence of social and income variables on credit card selection and usage among cardholders in USA. They found that members of the lower socio-economic class tend to use their cards for installment financing much more than higher socio-economic classes. Upper classes tend to use their cards as a convenient method of payment. Lower classes showed more impulse buying than the middle class, who feels that they should save money and postpone purchases. The upper classes do not need to save and defer gratification, and since there is no reason for installments they use credit cards for convenience. It also showed that age, sex and marital status are the significant determinants of credit card selection and its usage. Mandel, L. (l972), in his research ―Credit card use in the US‖, found that primary determinants of credit card usage were family income and education of the cardholders. Higher income and better educated families were more likely to use credit cards than lower income families. This is because credit card was initially marketed to higher income people. Another finding of his research was that families living around the largest cities are more likely to use credit cards. This finding matches with the Greek cardholders demographic profile, where a very high concentration of cardholders is observed in urban areas. He also found that families with different incomes perceived differently the advantages and disadvantages of credit cards. Lower and middle income families considered the credit facility as a definite advantage, while high income families found safety and convenience to be definite advantages. Caskey, John P. and Gordon H. Sellon Jr. (l994)'3 in their article ―ls the debit card revolution finally here‗?‖, analysed the factors that have limited the debit card‘s success and examined the prospects for future growth. They also proposed that consumers who used credit cards for the benefit of having credit available were unlikely to be interested in debit
  10. 10. 10 | P a g e cards. Most consumers based their decision of using debit cards on non-price factors such as convenience and availability. They suggested that convenience users of credit cards might find debit cards desirable because they did not need to write cheques at the end of each month to pay off credit card debits, and convenience users might find debit cards were helpful in controlling their spending since they could spend only what they had in their account. Delner, Ncjdet and Herbert Katzenstein (l994)l4 in their paper ―Card possession and other payment systems: Use patterns among Asian and Hispanic consumers‖, explored the socio- economic and demographic characteristics of Asian and Hispanic credit card holders. lt also outlined a conceptualisation of the relationship between alternative payment systems and various demographic and behavioural variables, which may serve as a preliminary theoretical framework for analysis of payment systems. lt also discussed the implications and their importance to marketers. Worthington, Steve (l994)15, in the paper ―Retailer aspirations in plastic card and payment systems - An international comparison‖, seeks to focus attention on the power relationships between retailers and their suppliers of financial services. Using international example, it draws attention to the different ways in which retailers are seeking to enhance their position in the payment system supply chain. The economics of this supply chain are explained and the rationale behind the acceptance of payment by plastic card is developed. Hypotheses are advanced; for each of international examples, as to how aspirations might affect the payment system, supply chain and the concluded that the balance of power is shifting from traditional payment system provides to the payment system users — the retailers. Puri, Vishal (l997) in his paper ―Smart cards — The smart way for the banks to go?‖, examined the many innovative smart card applications covering areas such as telecommunications. transport, banking, health care and employee/membership schemes. lt looked at how the banks, financial services firms , information companies and card issuers are gradually reconc-eptualising their delivery strategy as well as their businesses to meet the growing need for remote delivery, brand equity and differentiation. Smart cards could act as payment vehicles, access keys, information managers, marketing tools and customized delivery systems. It also explored the possibilities of an electronic purse ranging from a possible stored value and to a re- loadable stored value card, which could literally replace low-value cash transactions. Smart cards would then become integral to the bank‘s concept of remote delivery system in the future, because smart cards are not just a product; they are a new delivery system. Besides, the paper" focused on some of the issues that might be of
  11. 11. 11 | P a g e deeper concern to banks and suggests collaboration between banks and providers in the mass introduction of smart cards.
  12. 12. 12 | P a g e BIBLIOGRAPHY BOOKS: Plastic Money - An Introduction by Mrudula E The Past, Present and Future of Plastic Money by J.B. Forrest Paper Or Plastic:Money Management and Credit Card Education by Nathan B.Hogan LINKS: JOURNALS: Slocum, 1., and L. Mathews. (1 970). Social Class and Income as Indicators of Consumer Credit Behaviour . Journal of Marketing, 34, April, pp.69-74. Mandel, L. (1972). Credit Card Use in the US. Institute of Social Research University ofI/Iichigan, Internal Report, Michigan, IL. Caskey, John P., and Gordon H. Sellon Jr. (1994). ls the Debit Card Revolution Finally Here?. Economic Review, pp. 79-95. Delner, Nejdet, and Herbert Katzenstein. (1994). Card Possession and Other Payment Systems: Use Patterns Among Asian and Hispanic Consumers. Journal oflianlc Marketing, 12 (4), pp. 13-24. Worthington, Steve. (1994). Retailer Aspirations in Plastic Card and Payment Systems — An International Comparison. Journal of Rerailz'ng and Consumer Services, 1 ( I), July, pp. 30-39. Puri, Vishal. (1997). Smart Cards-Thc Smart Way for the Banks to go. lnternalional Journal oflianlc Marlreling, 15 (4), pp. 134-139.