Rise of American Accounts. "Hollywood. "

Banking Innovations

ADVANTAGES TO THE CARD HOLDER

Bank credit card extends the following benefits to the cardholder.

(1) A card is simple to operate, convenient to carry and can be substituted for cash. A cardholder need not carry huge amount of cash with him while going for shopping. A small piece of card serves the purpose.

(2) A card is a convenient method of payment as opposed to cash or cheques. There is no danger of loss of money.

(3) The card holder need not approach a bank for taking credit. He can take credit upto his limit whenever he desires, for making payments.

(4) Credit cards issued by leading banks/institutions are acceptable in so many countries. They are very helpful to the holder during business trip or holiday travel. Cards provides a sense of additional financial security.

(5) The holders can withdraw cash from any branch of the major banks worldwide.

(6) A customer/cardholder can make single payment by cheque for all the purchases made during the month. Thus, it reduces his activities on the bank account. He need not go to bank to withdraw the cash from savings bank a/c.

(7) Protection is given to cardholders because the credit card company is jointly liable with the retailer for any purchases made with its credit card. The SBI card for doctor ensures products purchased on cards such as refrigerators, televisions, washing machines and personal items such as watches, jewellery etc. are protected against burglary and fire in the house, upto Rs 15,000, for 90 days from the date of purchase.

(8) Issuer of credit card provides 24 hour customer helpline/assistant services available across the world in case of any emergency. In case card is lost or stolen during travel outside India, Customer Assistant Services provides emergency assistance to the cardholder. The customer can contact helpline on telephone and report the loss, the bank immediately blocks the account. The emergency helpline numbers are usually provided in the enclosed leaflets or appear on the backside and on the top of the credit card.

(9) Some of banks provide complementary personal accident insurance cover free of cost in the event of loss of life in air accident or rail, road accident. The cardholder nominates as assignee in his application form for obtaining credit card. The assignee must sent a preliminary notice of claim to the specific insurance company within two months of death to record the claim. The assignee also has to fill up a form available from the insurance company and return it duly completed along with additional documents such as : (1) FIR/ police report (2) death certificate (3) post moterm report.

(10) Competition among the various banks has benefited the customers in many ways. In order to attract prospective customers, many schemes , rewards/gifts are being offered by the banks in the form of :

(a) Fee Savings. The banks offer to waive off fees on the primary and add-on-card at the time of renewal.

(b) Discounts. Fabulous discounts are offered on the purchases made using credit card of products of leading international brands like Tanishq, Nike , Levis and Hide design etc.

(c) Attractive gifts. Rewarding points are given on every rupee spent with the use of card. These reward point can be redeemed against superb gifts ranging from Parker pens, travel bags and leather organizers to watches etc.

(11) Credit cards offer great flexibility of payment. With the extended credit option, holders can plan their payments against the Outstanding amount. They can pay any amount from the minimum amount due or a higher amount of up to total outstanding as shown in the monthly statement. Holders can then carry forward the unpaid balance at one of the lowest finance charges available.

(12) Credit cards are designed to suit the holder's needs and give them the flexibility to buy what they want and pay when they want. Ability to use money of the bank upto certain limit enhances their purchasing power. However, the credit limit applies collectively to any additional cards that they may have been issued to the holder.

(13) The cardholders of credit cards enjoy the facility of free credit i.e. without any interest up to certain number of days because :

(1) Accounts are sent out monthly, covering purchases of goods or services since the last monthly statement.

(2) The cardholder is allowed 25-30 days from the date of his or her monthly statement in which to settle the outstanding amount.

As monthly statement is sent on the 15th of each month, any purchases he or she makes on the 16th of the month carry the benefit of 50 days of free credit.

LIMITATIONS TO THE CARDHOLDER

Credit cardholders suffer from certain disadvantages also. The loss or stealing of a credit card may be serious. It may lead one with a liability of several lakhs of rupees. These days, pick pockets prefer credit cards because of unlimited access to money. But now, liability is limited to a maximum of Rs 1000 from the time the complaint is lodged.

ADVANTAGES TO THE MERCHANTS/SHOPKEEPERS

Merchants/Shopkeepers enjoy the following advantages of operating a credit card system.

(1) Guaranteed payment. If a merchant accepts a credit card, it signifies a guarantee of payment. Thus, credit cards provide protection from bad debts.

(2) Increased turnover. A shopkeeper/retailer accepting bank credit cards is likely to have more turnover as compared to the shopkeeper who does not accept the cards. It is more likely to happen in today's world when both retailers and customers have accepted the idea of credit cards.

(3) Lessens the security. Accepting cheques or credit cards instead of cash lessens the security risk of holding cash by retailers.

(4) Help in book-keeping. Reduced security risk as well as easing the difficulty of handling cash, the acceptance of credit card sales can help in the book-keeping process, no doubt at some cost to the retailer.

(5) Overseas visitors may purchase more, providing a new market for the retailer.

(6) Free advertisement. Credit card companies/banks offer discounts on the purchase of products of certain leading brands or on hotel payments or air tickets etc. All these offers are mentioned in the brocher containing the features of credit card. Thus, companies enjoy the benefit of free advertisement of their products or of their organisation.

Thus, the retailers have to keep themselves abreast with the market trend in terms of credit cards failing which they may well lose potential customers.

The disadvantages of bank credit cards as viewed by retailers are very important to know because these factors are to be overcome in any bank credit card marketing and advertising campaign. Retailers are required to pay a certain fee and service charges at an agreed percentage of their credit card sales.

ADVANTAGES TO CREDIT CARD COMPANIES/BANKS

(1)Source of Revenue. A bank enjoys income from the issue of credit cards from different sources such as :

(a) A small joining fee to be paid by card holder at the time of obtaining the card.

(b) An annual fee to be paid by the cardholders each time the card is renewed.

(c) Service charges to be paid by retailers and outlets , at an agreed percentage of their credit card turnover.

(d) Income from interest charged to customers who use their cards to take extended credit.

(2) Planning the marketing strategy. Credit companies providing credit service in the form of credit cards can use the same to determine what merchandise or services the consumer considers chargeable . Once a group of goods has been identified as a potential market, the credit card company has a frame of reference with in which to plan and develop its marketing strategies.

LIMITATIONS FOR CREDIT CARD COMPANIES

(1) Risk of bad debt. One major risk to the credit card companies is that of bad debt. Retailers are protected from this, however the credit card companies are not. In US card companies have suffered bad debt losses as high as 5 percent. In UK , for every $100 spent on a credit card, 20 pence are lost. Moreover, there is the problem of cardholder bankruptcy. Debts that can not be recovered by the banks amount to bad debts or the loss. Credit card companies engaged in aggressive marketing to promote the usage of credit cards should take into consideration this issue.

(2) Risk of fraud. Fraud, theft has risen drastically over the years. No doubt, anti-fraud organisations are there to tackle such kind of misuse of credit cards, still high risk is an unwanted disadvantage to credit card companies/banks.

(3) Monetary controls. Monetary controls either restrictive or expansionary imposed by the government have affected the lending rates and consequently the interest rates on bank credit cards. This is beyond the control of any credit card company.

COSTS OF A BANK'S CREDIT CARD OPERATION

The following are the costs associted with the operation of a bank credit card.

(1) The cost of financing the outstanding balances of cardholders has to be borne by the respective card-issuing banks.

(2) The cost of providing central credit service i.e., when a card issued by one bank can be operated at the other bank. It is applicable to banks in certain card groups and the cost is shared by banks on a agreed basis.

(3) The costs of establishing and running credit card departments which is the responsibility of each bank. A bank has to appoint staff , pay their salaries , telephone/fax bills, depreciation on furniture and equipment provided to staff etc.

(4) The costs of additional services provided by each bank for its own credit operation , both by the head office and the branch network.

2. TRAVEL AND ENTERTAINMENT (T&E) CARDS

Travel and Entertainment (T&E) cards are issued by American Express and Diners Club. The following are the unique features of such cards :

1. Credit is offered only for a short period between purchase and billing.

2.Once billed, the cardholder is expected to settle in full.

3. If full settlement is not made in time, a penalty is imposed.

4. No interest is charged on an overdue account.

5. A joining or annual fee is charged.

6. Additional revenue is generated for the T&E company by charging merchants a commission on the sales charged to the card. Commission rate may go up to 5%.

7. Unlike bank credit cards, the major source of income for T&E company is the commission instead of interests payments.

3. IN-STORE CARDS

The purpose of In-Store Cards issued by retailers or a company differs from that of bank and T&E cards. These are used by the departmental stores mainly as marketing tools to retain customers and increase turnover. The main features of in-store cards are as below :

(1) These are issued by big departmental stores or retailers.

(2) The customer can use these cards only in that retailer's outlets or for purchasing the company's products.

(3) They cost a little or no cost to the retailer.

(4) These are usually developed by the traders in partnership with banks or finance companies who undertake the administration and sometimes the financing involved.

Types of In-Store Cards

Following are the different types of In-Store Cards that are available :

(a) Budget Card. This card requires monthly payments on behalf of the holder. The cost of goods purchased is spread over a certain period.

(b) Option Card. Here, the payment can either be made in full or is at the cardholder's discretion. However, option available is subject to a minimum repayment and interest is charged on the balance outstanding amount.

(c) Monthly Card. The cardholder is required to make the payment every month. No extension of credit is given beyond a month. This card differs from the budget card, where outstanding credit can be settled in 30 monthly statements.

ATM(Automated Teller Machine) CARD Many banks including SBI, Indian bank, HDFC banks etc. have issued ATM cards through which 24 hours banking can be done at specified branches. The ATM cards will allow the customer to withdraw at specified branches through debit to own savings or current accounts by use of ATM's . Here electronically customer card is identified by code number and the customer's account is debited and is handed over to the customer.

DEBIT CARD

A debit card is basically a better way of carrying cash or a cheque book. It is an electronic card that one can be used as a convenient payment mechanism. The card is generally issued by the bank and is connected through the ATM. It allows the holder to spend only what is in his account. Debit card is more advanced than ATM card in that it can be used at specified retail or departmental stores also in addition to specified bank branches. Debit cards are plastic cards containing electromagnetic identification . Banks issue these cards to their customers who use them to pay for their purchases at specified sale terminals. Debit card automatically debits savings bank account or current account in the specified bank. Thus the cards are modes or remotes devices that facilitate the customers to enter transactions on their bank accounts.

Type of Debit Cards

There are two types of debit cards and two types of debit card transactions :

Direct Debit Cards. Direct Debit cards allow only "on-line" transactions, also called point of sale. It is an immediate electronic transfer of money from the customer' bank account to the merchant's account. The system checks customer' account to see if there is enough money to cover the purchase.

Deferred Debit Card. A Deferred Debit Card looks similar to a credit card, bearing a Visa or Master Card logo and can be used wherever customer's card brand name is displayed. It is NOT a credit card. Rather, this card allows "off line" transactions, as well as on-line. Off-line purchases resemble a credit card transactions. The merchant's terminal reads customer's card and creates a debit against his account. However, instead of debiting his account immediately , the transaction is stored for processing later-usually within two to three days.

Regardless of the type of Debit Card a customer had, when he uses it, the money is substracted from his bank account.

Debit cards are growing @25-30% in USA and account for nearly $420 billion of transactions which is more than the total expenditure on personal consumption in India. In the last few years, there has been sharp growth in debit card transactions. Purchases through debit cards at points of sale (POS) has seen a sharp growth of 135% in 2004-2005.

Benefits of Debit Cards

1. Banks issue debit cards free of cost to its customers.

2. It saves the customer from the botheration of carrying cash or a cheque book.

3. Some of the debit cards are valid in international market.

4. Debit cards are readily accepted than cheques by retail merchants.

5. Danger of delayed payment is not there because customer account is debited immediately.

6. Debit cards can be used to make smaller value payments avoiding the need to withdraw cash from the bank for such petty expenses.

7. No interest is charged on the amount debited because it is his own money in the saving account which is being debited.

Drawbacks of Debit Cards

Unlike a credit card, debit card transactions does not give grace period. They are an immediate, pay-now deal and can be used only when sufficient balance is available in the account. The debit card could be a costly affair to have, especially when using an ATM that is not affiliated with customer's bank.

Debit Card v/s Credit Card

(1) In case of debit card, drawl is against own assets or money lying in the savings bank account whereas in case of credit card, it allows a borrowing power on the bank for which the customer/holder has to pay some charges or fees.

(2) There is no risk of overspending as the customer can spend what he has. In case of credit card, the holder tends to overspend because he spends money which he does not have at that moment.

(3) Debit card does not involve any interest payment or cost to the holder. Whereas the holder of credit card has to pay interest on the overdrawn amount.

(4) The holder of debit card need not carry any cash or even traveller's cheques. Debit card is as good as money in the accounts with his bank. Whereas credit card provides additional finance to the holder by allowing him to overdraw if necessary. Payments are made by the bank to the extent of purchases and if they exceed his limit, he pays interest on the excess amount.

Smart Cards

Smart card contains an integrated circuit with microprocessor chip embedded in it. It can perform calculations , maintain records and hence act as an electronic purse. The cards can either be exhaustible or rechargeable. They have built-in memory and processor along with an operating system performing the financial operations. The cards have built-in safeguard against fraudulent operations.

Banks can introduce smart/debit cards with the approval of their Boards subject to compliance of the guidelines issued by the Reserve Bank. The banks are prohibited from issuing smart/debit cards in tie-up with any other non-bank entities. The card issuing banks have to review the operations of smart/debit cards on a half-yearly basis.

Agricultural Credit Cards

In order to facilitate quicker and easier flow of credit to agricultural sector which is a priority sector, some top ranking agriculturists and cultivators were given credit cards by 21 public sector banks. These cards were given to them after they produced documentary evidence of land owned and cultivated by them, and their titles and other details. Agricultural credit cards are being encouraged by the RBI and the Government.

Before deciding the extent of credit to be given to the agriculturists, the banks obtains details as to :

(1) The holdings of the agriculturists.

(2) The annual output.

(3) Crop income and other sources of income.

(4) Ownership of land.

(5) Extent of ownership etc.

FACTORS AFFECTING USAGE OF THE CARD.

The following are certain factors that affect the usage of credit cards :

(1) Income of the holder's. Income group in which the cardholder falls affects to a great extent the usage of the card. Individuals with high income group are found to be making increased use of their cards.

(2) Education. Many credit card companies use education as an indicator for soliciting preferred customers. Because the more highly educated a person, the more likely he or she is to use credit cards.

(3) Age of family head. Families that are in an age range of 25-40 are likely to incurr more expenditure and consequently likely to use credit cards more than other group. Whereas an age old person is less likely to make use of credit card.

(4) Socio-economic standing. An individual with a relatively high social standing is more likely to be a user of a bank credit card than is a person of relatively lower social standing.

(5) Attitude. Attitude of the cardholder also to great extent affects the usage. An unfavourable attitude is due to (1) the fear that use of a card may make the cardholder rely heavily on credit, (2) the belief that cards should be used only in times of emergency needs.

But a favourable attitude of the cardholder who views credit card as an easy mechanism for making payments is likely to make all payments through card.

Thus credit card companies have to consider the above factors while formulating it's marketing strategies to target :

(1) merchants to install the credit card system.

(2) potential cardholders to get the credit card issued.

(3) The existing cardholders to encourage greater use of their cards.

Advertising and promotional strategy should stress more on convenience aspects to make non-active users an active user of cards.

FUTURE OF CREDIT CARDS

The number of credit card holders and the participating business establishments, hotels etc. have increased enormously over the years to run into some millions. Some Indians banks like Andhra Bank and Canara Bank have entered into agreements with some international banks and agencies to have internationally acceptable credit cards, which are particularly useful to businessmen, export traders and foreign trade agencies, visiting many countries.

But the schemes of credit cards are not very popular among middle and lower income groups. Income-tax difficulties and high rates of interest charged by banks are some rigorous terms and conditions as to the repayment of overdraft facility have led to less popularity of these credit cards in recent years. Continued market research is required on changing state of the market segments, for examples, on retailers, active and inactive cardholders and the changing influence of factors such as income, age and so on these market segments. Effective marketing policies should be formulated by card companies and potential customers be identified.

Existence of more sophisticated computers with large memory capacity has provided the momentum for the development of credit card. Credit cards are increasingly replacing cash and cheques. Credit cards have replaced some of the other and more routine functions of traditional banking. Customers can receive statements, cash and so on with the help of cash dispensers and credit cards and so on without even having to enter a bank.

NEW TECHNOLOGY IN BANKING

Banking environment has today become highly competitive. To be able to survive and grow in the changing market environment, banking enterprises are restructuring their processes to focus on their customers. In this scenario, information technology (IT) is being perceived as a tool that can respond more quickly to the fast changing market environment. It is also viewed as an instrument of cost reduction and effective communication with people and institutions associated with the banking business.

There is no denying the fact that computerisation in Indian banking industry has resulted in better customer service. Customers can now get their statement of accounts without any delay. The interest on depisits/advance are being calculated by the system in time and with almost zero error. Due to the advent of technology, customers are able to draw money through ATM on 24*7 basis. Customers can now enjoy anywhere banking facility, e-banking facility etc. All these things are made possible due to computerisation only.

Computerization in banking operations has become inevitable for :

(1) Improving services to the customers.

(2) Improving the efficiency in the working of the banks.

(3) Reducing the cost of transactions and hence improving the speed.

(4) Meeting the growing competition in the industry.

(5) Improving the quality of Management Information System (MIS).

Advantages of New Technology in Banking.

Banks have adopted and are pursuing effectively it's IT policy with the aim of achieving efficiency in operations and reducing costs. Banks have been able to meet its customers and market expectations with the help of information technology. Following are the specific advantages of various technology projects of the Bank.

1.FULL BRACH COMPUTERISATION (FCBs). Information technology has enabled improved customer service, efficiency in house keeping and improvement in base level customer service like prompt interest application, accurate book-keeping, computerized pass book printing, extended working hours, single window service, faster remittances etc.

2.ATM DEPLOYMENT. Banks have national network of their branches providing truly "any where banking". A part from the number of ATMs what is creditable is that they have taken this customer-centred technology all over the country from metros to small towns to remote corners.

ATM cards have since been upgraded to ATM-Cum-debit cards under Master Card's Mastro-Cirrus programms which enable their cardholders to transact their networked ATMs of other banks linked to Master Card and also at merchant establishments linked to Master Card. While one can spend without having any balance with a credit card, One can spend only up to the amount available in the account in case of a debit card .

State Bank of India has recently entered into a tie up for use of each other's ATMs with HDFC Bank and ICICI Bank. It earns a substantial fee-based income when other bank's customers use it's ATMs. It charges Rs 18/- for cash withdrawal and Rs7/- for enquiry service per transaction.

Various facilities offered through ATMs include

*Balance Enquiry

*Last five transaction enquiry

*Pin change option

*Withdrawl of money

*e-fee payment in case of IITs

*Sharing of ATM with other Banks

*Issue of Railway seasonal tickets

3.TELE BANKING. In tele-banking the customer is allowed access to the tele banking server at the branch to the telephone. The customer had to dail a specified number and on getting the line, he has to identify himself by dialing his Personal Identification Number (PIN). Access is permitted to the customer only to his pre-defined accounts. The following transactions are permitted through tele banking :

*Transfer of funds request

*Draft issue for pre-defined amounts, name and branch code

*Cheque book issue request

*Balance enquiry

*Account statement enquiry and through fax also

*Transaction enquiry

4.REMOTE LOGIN. Under Remot Login, the customer can access his account from his own office using a PC. The following services are available to a customer :

*Cheque book issue request

*Balance enquiry

*Transaction enquiry

*Transfer of funds request

*Downloading of account statement at client's end.

*Draft issue/Banker cheque

5.STEPS. STEPS has been launched by SBI to meet customer demand for faster remittances and speedier collection of outstation instruments. It stands for State Bank Electronic Payment System. STEPS handles payment message and reconciliation simultaneously. Under STEPS, the various products offered are :

(1) e-Realisation (eR) : E-Realisation is introduced to facilitate expeditions reconciliation of outstanding entries in cheques/dividend warrant purchased accounts at the branches. Under this project, DD purchase/Dividend Warrant payment advices are sent by the paying branch to the purchasing branch through STEPS network.

(2) e-Transfer in place of TT.

6.ELECTRONIC NOSTRO RECONCILIATION (ELENOR). The system provides connectivity with all FOREX Branches and handles all types of forex transactions, including exports, imports, inward and outward remittances, forward contracts, FCNB loans etc. ELENOR is an on-line real time reporting package which helps in reconciliation of forex transactions between all Forex intensive branches. This facility has made available the latest status of remittances/bill collection/payments on line.

7. ELECTRONIC RECONCILIATION (ELERCON). At the end of the day, all bank branches transmit information, through e-mail to its head office relating to Branch clearing, Drafts Account, Agency clearing and RTC schedules. Thus ELERCON helps in reconciliation of the information electronically.

8. SWIFT. The acronyms S. W. I. F. T. stands for society for world wide inter bank financial tele communication. SWIFT allows member financial institutions worldwide to electronically exchange information amongst each other. Services offered by SWIFT are cost-effective, reliable and secure. Messages are transmitted globally through high speed communication channels on standardized message formats for many international banking operations.

SWIFT is the only structure financial messaging method available to communicate with the foreign banks and branches. It enables branches to put through transactions with foreign banks expeditiously.

Security features incorporated in the SWIFT network ensures that no fradulent message can enter the system nor can any message be modified during processing. As an additional security measure all information travelling through this system is encrypted on their global network. The network is available 24 hours a day and seven days a week with all messages delivered within normal business hours irrespective of geographical destination. SWIFT ensures against loss or mutilation of messages during transmission.

Structured Financial System(SFMS)

A new software (SFMS) has been developed by RBI and installed at the bank branches after successful testing w. e. f. 1st March, 2003. It is expected to reduce the costs substantially and improve the flexibility and efficiency in transmission of the messages. The formats for financial messaging are structured in alignment with the SWIFT formats.

9. Bank's Website. Website provides, one click navigation, seamless integration of different products and services offered by the bank. It provides useful information like branch locator, documentation required for personal segment loans, downloadable application forms, equated monthly instalment (EMI) calculators, and maturity value calculators etc. The site offers detailed corporate profile, annual report, product-wise Frequently Asked Questions (FAQs) ,section for newsletters and tenders.

10. Video-Conferencing. It helps save time and cost when conferences / meetings have to be held among various functionaries located at different places. It is made functional using ISDN lines from basic telecom operators.

11. CORE BANKING. In order to have a single channel to support data, voice and video transmission, the banks felt the need to have an integrated network with centralised database (CORE BANKING) to implement core banking. After implementation of Core Banking, transactions of all net worked branches will be routed through the central server which means a customer would be able to operate his account from any of the connected branches. Further, the customer will no longer be a customer of one branch alone. He will become a customer of the bank and would be given a new customer number which would be unique across the bank.

VIRTUAL BANKING

Virtual banking refers to any banking service delivered to the customer by means of a computer controlled system without involving the usual bank's branch. In other words, in a virtual bank, customer's integration with the bank is replaced by an electronic machine which is new and innovative. Virtual banking has been the result of customer demand, commercial motivation and technology developments over the years, use of virtual banking has increased due to the following factors :

1. The introduction of automated teller machine (ATM) imparted flexibility to bank customers and gave further momentum to virtual banking.

2. The introduction of credit cards and debit cards helped both the consumers and retailers to be free from cash handling. They offered security as well saved time.

3. The use of computer by banks for accounting and as a tool to expand and improve customer service.

4. The routine banking transaction was becoming both costly and time consuming. Virtual banking is being used to cut cost and time overheads in handling routine transactions.

The stress in virtual banking is on four aspects namely, quality, cost, service and speed. It has the advantage of materialising transaction at lower cost through virtual resources as compared to classical mode of performing transaction through branch banking. It provides possibility of rendering diversified and quality services to the customers. Besides, these services are provided more rapidly and in more precised form at the convenience of customers.

Services under Virtual banking

ATMs including shared ATMs, electronic funds transfer using credit/debit cards, smart cards, internet banking are the different types of services under virtual banking.

Challenges Ahead

As regards the strategic challenge posed by the virtual banking, the banks have to ensure the following services standards.

1.The services rendered by banks must be accurate, useful and free from faults.

2. The bank shall have to appoint right type of people who have the ability to face the eneerging challenges in banking service.

3.The approach of the bank has to be customer oriented. The customer has to be the centre of attraction while developing products.

4. The emphasis of bank branches should be for selling more profitable products, such as loans and investment products rather than for routine transactions.

Present era can be regarded an era of innovation and technology. The major influencing factor for the survival of industrial business and commercial organisations is going to be technology. Banking being a service industry, a lot depends on efficient and prompt customer service. There is a stiff competition among private, public and coperative sector banks to evolve innovative banking products in order to attract new customers and retain the older ones. Thus Indians banks have become more market oriented, highly competitive, innovative and high-tech in the present scenario.