ASSIGNMENT ON

MANAGEMENT OF FINANCIAL SERVICES

FM: 3103

Topic:- PLASTIC MONEY

Department of Business Administration, Assam University, Silchar.

Submitted to:Asst. prof. A.K.Das

Submitted by:Amit Kumar Gupta (Roll no- 07) Anupama Chanda (Roll no-10)
Sec-A, 4th semester

CONTENTS
PARTICULARS PAGE NO.

1. Introduction

2. Plastic Money (meaning & types)

4-6

3. Parties involved

7-9

4. Advantages & Disadvantages

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5. Status in India

11-12

6. Improvements for enhancing the use of Plastic Money 13

7. Bibliography

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INTRODUCTION:
Starting from 'Diners Club', some 50 years ago, the card industry has been growing with a rapid pace world over and so has been the growth in the Indian card industry. With only two players in domestic card industry, HSBC and Citibank in the early 80s, the number swelled to over 25 in the year 2001. Credit cards in India, made their debut in 1981, and are on the verge of an unprecedented boom. Between 1987 and 2001, the market has virtually grown to over 4 million cards with over 25-30% of compounded annual growth in new cardholders base. Its not that only the card numbers have increased, but even the types of cards on offer have seen a surge. Today the domestic card industry is flooded with different types of cards ranging from gold, silver, global, co-branded credit cards, smart to secure, the list is endless. Foreign banks have shouldered the major responsibility of increasing the card base and adding value-added services to the card products in the past. This is also evident from the fact that the market share of these foreign banks is estimated to be well over 70%. But the scenario has changed dramatically in the last of couple of years with the entry of State Bank of India (SBI), a domestic major in the banking sector. More and more nationalised banks and private sector banks like ICICI and HDFC Bank are aggressively launching credit card with value added features.

WHAT IS 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. Plastic money represents currency and near currency. It is not the currency itself and cannot be converted into currency. It is the most convenient way to smoothen the exchange process of economic activity.

TYPES OF PLASTIC CARDS:

Debit card and credit card are basically two types of plastic cards which represent monetary transactions. However, there are various other type of cards which are discussed as follows: 1. Debit card- 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 per se, 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. A debit card combines the functions of an ATM card and a cheque. When a debit card is used at a merchant establishment, the merchant swipes card through an electronic point of sale (EPOs) terminal which is directly linked up with the debit card issuing bank and the card holders account immediately gets debited. There are two types- one is the personal identification number (PIN) based card and the other is the signature based card. In India, Master Card issues the PIN-based card in
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association with Citibank while Visa International issues the Signaturebased card in association with HDFC Bank. While the PIN-based card is thought more secure, the signature-based card is more widely accepted in India.

Advantages of Debit-Card:
Obtaining a debit card is easier. The debit card may be more readily accepted by merchants.

Disadvantages of Debit-Card:
Limited to the existing funds in the account to which it is linked. Banks charging over-limit fees or non-sufficient funds fees based upon pre-authorizations.

2. Credit card- The first card was issued in India by Visa in 1981. When we do a transaction using a credit card, we dont need to pay our hard money to merchant or to Credit Card Company instantly. That transaction amount will paid by credit card company to merchant and then we can pay it to credit card company in next month or during our billing period. Generally a limit is set to the amount of money a card holder can spend in a month. A credit card may be of different kinds like Standard card, Classic card, Gold card, Platinum card and Titanium card, different value-in services are added with different kinds of credit card.

Advantages:
Allows a short term credit to customer. Many credit cards offer rewards and benefits packages like hotel discounts, travel fare discount, etc.

Disadvantages:
High interest and bankruptcy. It is acceptable only at selected establishments.

3. In-store card- These types of cards are issued by retailers or companies and can be used at the issuers outlet for purchasing products of the issuer company. Payment can be on monthly or extended credit basis. For extended credit facility interest is charged.

4. Smart card- Its a card embedded with a chip in it. A customer can store the value of money in the form of e-purse. When a transaction is made using the card, the value is debited and the balance comes down automatically. Once the monetary value comes down to nil, the balance is to be restored all over again for the card to become operational.

5. Charge card- A convenient means of payment of goods purchased at member establishments. This facility gives a consolidated bill for a specified period, usually one month. No interest is charged.

PARTIES INVOLVED IN DEBIT CARD TRANSACTION PROCESS:

The card holder provides a debit card to the merchant at the point of sale. The merchant's bank (the acquirer) sends an electronic authorization request to the payment network (usually Visa or MasterCard). If the customer enters a personal identification number (PIN) during the transaction, the network contacts the customer's bank to be sure that there are sufficient funds to cover the purchase. If the customer chooses to sign for the transaction instead of entering a PIN, the network determines if the customer's total purchases over the previous two to three weeks exceeded the bank's pre-set limit. The network then either sends an approval or decline back to the merchant. Funds are immediately deducted from the customer's account for PIN transactions and the funds are deducted within two to three days for signature transactions.

PARTIES INVOLVED IN CREDIT CARD TRANSACTION PROCESS:

The five primary parties involved in processing a Visa or MasterCard credit card transaction are: The cardholder The card issuer The merchant, The acquirer, and; The card Association. Authorization: The credit card holder makes purchases and swipes the card for making the payment. The merchant submits the transaction to the acquirer (acquiring bank) and the acquirer, in turn, verifies the credit card number of the holder and the transaction type. This amount is reserved by the issuer through the acquirer in favour of the merchant. Authorization process generates an approval code which the merchant keeps secured as official record of the transaction.

Batching: Batching refers to storing of the entire days transactions together or in batches before they are sent to the acquirer. These batches are scheduled for submission typically once at the end of business day. Authorization of those transactions which do not become part of the batch stays valid only for a period of time. This time period is determined by the issuer. After the expiry of this time period the amount is returned to the credit card from where it was debited. Transactions that are submitted in the batch without prior
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authorizations can be those transactions that fall under the merchant's floor limit. Or alternatively, these are the ones where the authorization was unsuccessful but the merchant is still attempting to override the transaction through.

Clearing and Settlement: the clearing and settlement process begins with the merchant requesting to the acquirer for final transfer of transaction batch. This request is channelled through the credit card association which leads to the transfer of money from the customers account to the merchants account. The transaction charges are essentially levied to the account of the issuer.

Funding: After the money reaches the acquirer, the amount is transferred from the acquirer account to the merchants account. The merchant receives the amount from the acquirer after deduction of the transaction fee, popularly known as discount rate. This is the fees that the merchant pays to the acquirer for processing the transaction.

Charge backs: In case of a dispute arising out of a transaction, chargeback comes into play. A chargeback is an event in which a purchase payment in a merchant account is held back due to a dispute relating to the transaction. Charge backs are mainly initiated by the cardholder. The issuer, in the event of a chargeback, returns the transaction to the acquirer for resolving the dispute. The acquirer, in turn, sends the chargeback to the merchant. The merchant then has the freedom of either accepting the chargeback or advocate it.

Advantages of plastic money:

1. Eliminates the need of carrying huge cash 2. Risk of loss or theft minimized 3. Any time anywhere access 4. Credit facility 5. Online payment

Disadvantages of plastic money:

1. Non- acceptance at small retail outlets 2. Cannot be used for all daily needs 3. Loss and misuse 4. Service charges has to bear 5. Over Budget

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STATUS IN INDIA:
The Indian economy expanding rapidly at more than 7.5 per cent per annum and the middle-class budding, so, several financial firms believe and predict that the use of plastic money (or cashless transactions) in India will become very popular. How-ever, according to the recent estimates by the Reserve Bank of India (RBI), the use of cashless transactions through credit card usage among Indians is actually falling. According to RBI, altho-ugh the number of credit cards increased to a crore during three financial years from 2005 to 2008, the number of transactions th-rough credit cards fell in financial year 2009-10. A number of reasons for the current de-cline in use of cashless transactions in India are cited below: Credit cards offer free and risky credit and thus are an expensive payment mode. The product design and promotions in credit card sales are such that the pricing is kept hidden and the users are oblivious of the fact that the cost is ultimately borne by them. Debit card is another alternative to cash though this mode of payment offers no credit and carries little risk, yet it has been often priced at par with the credit card by the Indian banks again, a price that is borne by the cardholder. The end result causes a net decline in the use of plastic money. For both debit and credit cards, the cost of transactions is ultimately passed onto the merchants who agree to accept card payments. If the merchants cannot put a surcharge, then he will add the card transaction cost to the cost
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of the product, which in most cases will be unknown to the card user at the point of sales. However, in cases where the merchants can put a surcharge, there is a discount on offer for paying cash, which makes using the card an inefficient mode. Also, in India most merchants have small or medium-sized business and in this set up there is a disincentive for these merchants, who have less pricing power due to their low business volumes. It is believed that mobile devices like mobile phones and PDAs could soon be used as plastic money. According, to the Telecom Regulatory Authority of India (TRAI), mobile phone usage has been steadily increasing in India and according to a recent estimate India now has 851.9 million mobile phone users. If the government considers promoting the use of the mobile devices as plastic money, then that might just be the thing needed to spur the use and adoption of cashless transactions in India. The phone-as-card use might also spur a healthy growth and competition among mobile phone companies offering such services to its end users.

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SOME IMPROVEMENTS FOR ENHANCING THE USE OF PLASTIC MONEY IN RESPECT TO INDIAN ECONOMY:
Rationalising costs associated with the use of debit cards, making them more secure and conducting financial education programmes for increasing public awareness. Govt. must provide tax benefit to merchants for accepting card-based payments from card users.

Use of prepaid debit card must be promoted its a debit card that is not linked to a regular bank account, but where the consumer instead pays a bank or merchant some amount to recharge the same amount as plastic money. Banks should be encouraged to issue prepaid and reloadable debit cards to non-customers.

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BIBLIOGRAPHY Sources:

Book- Kothari Rajesh, (2010), published by SAGE India pvt.

Ltd, pg- 255-270

INTERNET http://wiki.answers.com/Q/Future_of_plastic_mon ey_in_India, retrieved on 13-04-13 at 7:40pm http://finance.indiamart.com/investment_in_india/ plastic_money.html, retrieved on 13-04-13 at 8:05pm

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