PLASTIC MONEY

INDEX
CHAPTE
R
NO.

TITLE

PAGE
NO.

MONEY-HISTORY & EVOLUTION OF MONEY

PLASTIC MONEY OVERVIEW

22

MAIN KINDS OF PLASTIC MONEY

43

PLASTIC MONEY: A KEY ELEMENT OF

ELETRONIC BANKING

50

GROWTH & IMPACT OF PLASTIC MONEY ON 58

BANKING IN INDIA

CONCLUSION

62

BIBLIOGRAPHY

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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
3

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.

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
4

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.

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
5

(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.

Standardized Coinage

Greek drachm of Aegina. Obverse: Land turtle / Reverse: (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
7

the Bibliothque 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).

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
8

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.

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.
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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.

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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.
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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

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

12

soundness was maintained. Thus, the goldsmiths of London became the forerunners of British banking
and prominent creators of new money based on credit.

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

13

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.

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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 (618907), 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
15

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.

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 government16

authorized currencies were forms of representative money, since they were partially backed by gold or
silver and were theoretically convertible into gold or silver.

EVOLUTION AND FUNCTION OF MONEY:

Evolution of money:
17

Barter system

Commodity money

Paper money

Demand deposits

E-money

EMO
NE
Y

PLASTIC
MONEY

PAPER CURRENCY

METALLIC
COINS

BARTER SYSTEM

18

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.

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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.

Paper Money:
20

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.

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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.

22

23

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 consumers 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
24

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.

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 typessingle purpose card,
closed-system or limited-purpose card and general-purpose or multi- purpose card. The singlepurpose 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 well25

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.

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
26

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 onethird 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 1930s, 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 peoples
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.

27

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
28

Clothings 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 Diners 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 Diners Club.

The Diners 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 Diners 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
29

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., Diners 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.

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
30

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 Britains 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 Diners club scheme was
introduced in USA, the Finders Service Club in London, during 1957 sought the permission of
Diners Club, to start up a similar scheme, in Britain. The Diners 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 Diners Club of Great Britain.
Then the Westminister Bank of England took a 49 per cent stake the following year.

31

In 1963, the American Express set up office in England and by 1967 it was being promoted by
Lloyds and Martins 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 Diners 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 Citibanks Diners 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 Limiteds 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
32

came with Visa Classic Card by 1989. Citibanks 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.

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
telecommunications

infrastructure

links

fact,

highly

complex

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
consumers 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 consumers 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
33

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. Englands 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.

A working version of the Docutel ATM was sold to New Yorks 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 todays. 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

34

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 Angelos 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 ATMs 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.

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
35

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 Mastercards 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 issuers name, was
printed on the surface, while personal data elements, such as the cardholders 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
customers 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
36

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 systems host computer for security reasons. However, this
generates considerable data transmission costs.

In order to reduce costs, solutions must be sought that allow card transactions to be executed off-line
without putting the systems 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
37

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.

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
38

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 cards 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.

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
39

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.
40

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 Diners 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 holders 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.
41

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 companys 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.

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

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
Diners 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
42

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.

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.
43

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 ones 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.

44

Switch Card
It is an electronic debit card which enables holder to make payments at retail outlets. The payments are
directly to the retailers 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.

ADVANTAGES OF PLASTIC MONEY

Purchasing Power: Credit or Debit cards made it easier to purchase things. Now we dont
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 dont 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 PLASTIC 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.
45

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.

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 todays 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
46

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.

The merchant provides his acquirer with the chargeslips for the days 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.
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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 cardholders 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
doesnt 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.

48

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

49

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
50

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.

51

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:

52

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.

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.
53

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.

54

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:

55

Merits:
o
o
o
o

Convenience
Allows a short term credit to customer
Provide more fraud protection than debit cards.
Many credit cards offer rewards and benefits packages

Demerits:
o High interest and bankruptcy
o Inflated pricing for all consumers
o Weakens Self-regulation.

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.
56

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.

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Types of Debit Card Systems

Online Debit System:Online debit cards require electronic authorization of every

transaction and the debits are reflected in the users 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 23
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

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 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 preauthorizations, and even attempted but refused transactions by the merchant

Lower levels of security protection than credit cards. More prone to frauds

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 companys products.
59

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 cardholders
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.

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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.

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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
62

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.

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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.

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Debit Cards
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
65

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.

66

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
67

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.

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,
68

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.
69

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.

70

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.

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.
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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.

72

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.

73

Chapter 5
GROWTH & IMPACT OF PLASTIC MONEY
ON 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:
74

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 dont

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.

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
75

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,
Bankers 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.

76

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, EFTs, 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
77

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:

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.
78

Bank Card Association: The associations

(VISA, Master Card, American Express)

Steps taken by the other countries towards cashless transactionAs 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.

79

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 consumers preferences. These changing preferences
have also modified their outlook and decision regarding the acceptance and nonacceptance 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 1990s has also sparked
80

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 dont 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.

81

Bibliography

Websites:
www.slideshare.net

www.freepatentsonline.com

www.ijmrbs.com

en.wikipedia.org

www.investopedia.com

82

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?

83

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 monDiscounts while shopping, No hassles of carrying cash, Security of money, Hassle free
EMIs, Easy to use, Personal Loan on Credit Card.

84