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2010

Growth of Plastic Money in Pakistan - A study of factors affecting use of Plastic Money
Introduction, Literature Review and Methodology

Arslan Tahir Mian Qasim Javeed Usman Khan BBA 7 SZABIST 11/26/2010

Introduction
Plastic money business has definitely been growing in Pakistan. Although credit card was introduced in Pakistan almost two decades ago when Habib Bank, the largest bank in Pakistan at that time, launched its gold card, but people hardly knew about this card because of its limited issuance. All leading banks are not only offering credit/debit cards but also they are offering different types of credit cards which come with different benefits and payment plans. These credit cards however are backed by three prominent companies namely Master Card, Visa and American Express. The importance of credit cards, both as a payment and short-term financing medium to today's consumers, is no longer debatable (Chakravorti and Emmons 2001; Hayhoe et al. 2000). The growth of plastic money can be divided into two main perspectives, one being the infrastructure perspective that involves banking infrastructure and the technological infrastructure and the other being the consumer perspective. We will study the infrastructure perspective first. The penetration of credit cards has been slow in Pakistan despite the fact that it has grown. The primary reason is that at first it was targeted only at the upper class of the society. Now however we see a different picture. According to the latest data available, there were 6.4 million cards in circulation of which 24% are credit cards while the rest or 76% are debit cards. Similarly, more than 3200 ATMs and 54000 Point of Sale (POS) terminals have been working seamlessly across Pakistan, thus providing 24/7/365 banking facility to plastic money holders in Pakistan. With increased liquidity of banks, there has been an overall increase in the supply of consumer finance that includes personal loan, house mortgage, credit cards and auto loans. Consumer financing forms more than 25% of the total private sector credit (Economic survey, 2006-2007) in Pakistan. Financial Institutions in Pakistan have seen a major reform in the shape of restructuring and privatization since 2000. Despite of increase in the interest rates over the last couple of years, banking sector witnessed a growth of 18.2% (Economic Survey, 2006-2007). In addition, State Bank of Pakistan (SBP) has laid out stringent requirements for banks to get formal approval of those given credit and the Credit Information Bureau needs to keep a check on non performing loans. However, SBP holds no strict regulation for the issuance of credit cards in the prudential regulations as compared to other consumer financing. The limit of credit cards can be extended to two million rupees in case of a privileged customer. The unsecured loans, in the form of credit cards, are increasing at a high rate. According to

the Economic Survey of Pakistan 2006-2007 the credit card holders are increasing at the rate of 50% annually. In December 2006, the total credit card amount outstanding was Rs. 39198 Million (a substantial increase from Rs. 19340 Million in June 2005. Yet the market remains unsaturated and a low number of cardholders exist as compared to other developing countries. Tough competition amongst the commercial banks has provoked different line of efforts by them. They now rely on quality and other non-price factors to market their products. These can then be used as a means of differentiation to achieve higher revenues and improve market share (Worington 2005). Though the plastic money industry might have experienced a small set back recently due to reduction in the overall users of credit card due to increasing interest rates, double digit inflation, poor online links and power outages/telephone links being down which reduces the efficiency/effectiveness of credit cards. As for the consumer perspective, consumers generally have different motives for holding cards. They also have different incentives to incur the time and psychological costs of searching for lower interest rate terms (Kim, F. Dunn, and E. Mumy 2005). However since Pakistani consumers are slowly grasping the concept of paperless transactions, there is a need to properly segmenting the market especially since there are different meanings of the use of credit card. On the other hand the gap between consumption and saving is widening due to financially insecure customers, who when unable to pay end up paying more with penalties. The highest default within the consumer portfolio has been increased from 1.4 percent in December, 2006 to 3.7 percent in March, 2007 (Ghani 2007). Nowadays all banks are competing for the same market of consumers of credit cards and the majority carries multiple types of credit cards. New trends are shaping up, especially in terms of customization (introduced by UBL to allow a customized picture on the credit card), Awami card (introduced by Askari Commercial Bank) and Co branding of cards (e.g. PIA Co-brand cards by Standard Chartered Bank), and so on. Yet there is a need to further improve the credit card strategies by understanding the perception and attitude of potential and existing customers. This study attempts to observe the general behavior and attitude of the Pakistani consumers in the credit card market. Also we will see how the policies of State Bank of Pakistan, economy of Pakistan and the overall infrastructure affect the growth of the plastic money in Pakistan. Banking reforms have made the credit card industry more attractive and competitive in Pakistan. There is a need to study the growth pattern of credit card industry in Pakistan and especially how not only

consumer perception and attitude but also the infrastructure available affects it. Credit card has not been a driving source for the Pakistani economy unlike other economies. The development of financial services marketing has been slow and for a long time the industry was primarily product led. Also there was lack of proper infrastructure to support large scale growth. The significance of our research is that we want to improve an already existing research on the consumer perspective of plastic money usage. The difference in our research is that we have also included the aspect of infrastructure perspective that affects plastic money usage. We are going to use this study to improve the market for plastic money in Pakistan and see the benefits it brings to the economy.

Literature Review
Credit cards, including store cards and bankcards, serve two distinct functions for consumers: a means of payment and a source of credit (Ausubel 1991; Chakravorti 1997, 2000; Chakravorti and Emmons 2001; Slocum and Matthews 1970; Stavins 2000). Based on the main use of credit cards and the benefits sought, credit card users can be segmented into two groups: convenience users and revolvers (Lee and Hogarth 1999). Convenience users tend to employ credit cards as an easy mode of payment; typically pay their balance in full upon receiving the statement. Revolvers, on the other hand, use the card principally as a mode of financing and chose to pay interest charges on the unpaid balance. According to the consumer behavior literature, consumer usage behavior and the benefits sought from a product or a service are one of the best predictors to explain consumer purchase behavior (Peter and Olson 1999). Credit cards also serve as an open-ended, easily available credit source (Lee and Kwon 2002). When consumers use credit cards as a mode of financing, credit cards compete with bank loans and other forms of financing (Brito and Hartley 1995). Credit cards allow consumers to borrow within their credit limit without transaction costs, which includes all the time and effort involved with obtaining a loan from a financial institution. This convenience attracts many consumers to pay high interest on outstanding credit card balances, rather than taking the time to apply for a loan with a lower interest rate. As a result, credit cards account for a substantial and growing share of consumers' debt (Canner and Luckett 1992). The popularity of credit cards as a payment medium has been attributed to the convenience of not carrying cash and checks, the limited liability of lost/ stolen cards, and additional enhancements, such as

dispute resolution services and perks (i.e., frequent-use awards programs) (Chakravorti 1997, 2000; Chakravorti and Emmons 2001; Whitesell 1992). They are frequently used for convenience, telephone and Internet transactions. The behavior and the attitude of the consumer towards the use and acceptability of credit cards differ for psychographic reasons (Yang, James and Lester 2005). Xiao, Noting and Anderson (1995) devised a 38-item scale to measure effectiveness, cognitive and behavioral attitudes towards credit cards. Affective attitudes involve emotional feelings (e.g. my credit card makes me feel happy); cognitive attitudes involve thoughts (e.g. Heavy use of credit cards results in heavy debt); while behavioral attitudes involve actions (e.g. I use my credit card frequently). Many consumers value uncollateralized credit lines for making purchases when they are illiquid (i.e. before their incomes arrive), even at relatively high interest rates. Because of limited alternatives to short-term uncollateralized credit, the demand for such credit may be fairly in-elastic with respect to price (Brito and Hartley 1995). Ausubel (1991) suggests that consumers may not even consider the interest rate when making purchases because they do not intend to borrow for an extended period when they make purchases. However, they may change their minds when the bill arrives. Stavins (1996) argues that consumers are somewhat sensitive not only to changes in the interest rate but also to the value of other credit-card enhancements such as frequent-use awards, expedited dispute resolution, extended warranties, and automobile rental insurance. However, she agrees with Ausubel (1991), Calem and Mester (1995) that lowering interest rates may attract less creditworthy consumers, therefore dissuading some credit-card issuers from lowering their interest rates. According to Jeans S. Bowers (1979) longitudinal study, low income users of credit cards tend to use the cards for the installment feature rather than for service features such as convenience, safety, or identification. It has been suggested that the installment feature of credit is needed by the low income consumer to permit purchases such as automobiles, furnishings, and other consumer durables. Demographics also seem to play a vital role in making a choice and the use of credit cards as a convenience user or revolver. Age, income level has been studied previously and suggest some indication for correlation between demographic and use of credit card. According to the study conducted by Jean Kinsey (1981) the probability of having credit cards and the number held was

correlated highly with age and occupation. However these two characteristics were less important than the place of residence, use of checking and savings accounts, and attitude towards credit. S. Sabir Ali Jaffery in Economic Review, March, 1995 observes that the question is, and it is indeed a crucial question, that how many Pakistanis are capable to avail of these facilities by making use of credit cards. A reply to this question alone shall determine whether or not we are adequately equipped to switch over to such sophisticated techniques of transfer of funds. While moving to cash-less society, an earlier step is the increasing use of cheque currency; the credit card stage arrives much later. Have we reached the stage where cheque is more desirable than currency notes? Obviously, not. On the contrary, majority of our population, which resides in villages, is still averse to banking system probably owing to chronic illiteracy and below-the-subsistence-level living conditions. Illiterate urban population, which outnumbers their literate counterpart, also does not behave differently. It is, therefore, a small segment of literate civil population which alone is left to court with cheques and other commercial papers. Lack of legal cover against cheques being dishonored is responsible for their low acceptability in commercial circles. The use of credit and debit cards in Pakistan has not gained wide spread popularity due to lack of awareness, poor online links, and fewer shops having card swipe facility, random interviews show. Another factor was that the most of time the banks links were down when the customers try to use debit or credit cards on the swap machines due to electricity failure or telephone line problem, so the customer preferred to make cash payments. Credit card users claim that the hidden charges of banks were the main hurdle in popularity of plastic money.1

1

Lack of awareness, poor online links hinder plastic money use in Pakistan. (http://www.maverickpakistanis.com/?p=2248)

Methodology
According to Raj Singh and Everett (1996), banks focus on geographical, socio-economical and psychological characters to segment the market for financial services, although this is not the right predictor of the buying behavior. One of the approaches is to focus on the customer's attitudes and behaviors and segment them by benefit segmentation. Knowing consumers' level of interest in alternative benefits is important in shaping, and perhaps changing a company's product portfolio. The other approach is to see how current infrastructure affects the use of credit cards.

This study on one hand takes into consideration those individuals who do not carry credit cards currently to cater for potential customers need as well as those who are currently using credit cards as medium of transaction. On the other hand it focuses on merchants who do and do not keep credit card facility and what they think whether credit cards are popular or not. The research questions that this paper attempts to inquire are: Consumer Side:

RQ1: What is the general perception about credit card usage among the non-card holder?

RQ2: What factors contribute towards the choice of a credit card out of a pool of factors?

RQ3: What are the different motives behind carrying multiple or single credit cards?

RQ4: Does the level of income and the average amount of transaction per month exhibit a relationship?

RQ5: What is the general perception about the usage of credit cards among nonusers? Infrastructure Side: RQ1: What is the general perception about credit card facility among cash only merchants? RQ2: What are the motives behind carrying single or multiple credit card facility among a pool of factors?

RQ3: Does the level of annual profit and transactions per month exhibit a relationship? RQ4: What is the general perception about popularity of credit cards as mode of payment? RQ5: What factors if any scare away potential credit cardholding customers? There are estimated 2,000,000 credit cardholders in Pakistan (Figures taken from an overview of industry done by Standard Chartered for the first Quarter of 2007). This study attempts to drive results based on the data collected from the existing users of credit cards as well as the potential customers (those who do not use credit cards) and merchants who do or do not keep credit card facility. Nonprobability sampling will be adopted for the study and approach of data collection would be survey questionnaire. The questionnaire will be tested through a pilot study on 25 consumers and 10 merchants this we believe will help in the refinement of final questionnaire. Our aim is to gather 150 valid responses from consumer side and 100 valid responses from merchant side. Descriptive statistics will be used for analysis. The data collected will be tested mainly through the use of frequency, cross tabulation and Pearson correlation. This study attempts to explore the responsiveness of potential and existing customers towards the use of credit cards and responsiveness of merchants who do or do not carry credit card facility. The analysis has been divided into three parts and examines two groups of individuals and one group of merchants.

Survey Questionnaire A Individuals who do not carry credit card Instructions: Please tick the best applicable choice unless specified otherwise. Gender: Male Age: 15-25 Years 26-35 36-45 46 and above Profession: Banker Engineer Doctor Lawyer Educationist Management Artist Other (Please Specify): ______________________________________________ Income: Rs.5000-20000 Rs.21000-35000 Rs.36000-50000 Rs.51000-65000 Rs.65000 & above Do you intend to buy a credit card? Yes No Female

What are the potential perceived problems in the use of credit card for you? (Tick all applicable) Lack of trust while snaking transaction Unacceptability, at retail outlet High interest rate Terms and condition of banks Technology linkage issues

What are the perceived uses of carrying credit card in your opinion? (Tick all applicable) Additional credit line Fashion statement Secure as compare to other payments mode Ease while shopping Convenience Yes Do you think advertising can convince you to buy a credit card? Would a bank name affect your decision to buy a credit card? Do you think use of plastic money in the future is very promising? No

Survey Questionnaire B Individuals who carry credit card Instructions: Please tick the best applicable choice unless specified otherwise. Gender: Male Age: 15-25 Years 26-35 36-45 46 and above Profession: Banker Engineer Doctor Lawyer Educationist Management Artist Other (Please Specify): ______________________________________________ Income: Rs.5000-20000 Rs.21000-35000 Rs.36000-50000 Rs.51000-65000 Rs.65000 & above Please specify your average transaction amount per month: Rs. _________________ Do you own more than one credit card? Yes No Female

Do you own a supplementary credit card? Yes No

Do you pay your credit card bill mostly on time? Yes No

Why do you carry multiple cards? (Tick all applicable) Better acceptability To avail different offers More credit line options Fashion statement I do not carry multiple cards What factors determine your choice of credit cards? (Tick all applicable) Looks of the card Co branding offer Power by (Visa/Amex/Master) Credit limit Marketing campaign Image of issuer Bank

Survey Questionnaire C Merchants

Business Name: _________________________________________________________________ Nature/Type of Business: __________________________________________________________ Business Annual Income/Revenue:
Rs.20000-350000 Rs.36000-50000 Rs.51000-65000 Rs.66000-80000 Rs.81000-95000 Rs.95000 & above Do you provide credit card facility? Yes No

If YES: What is the average percentage of consumers who pay via credit card?
Less 25 ± 50 ± 75 ± than 25% 50% 75% 100%

What problems do you face when you make a transaction on clients behalf?
(Tick all applicable) Telephone links being down Electricity crisis Poor Network by credit card companies Poor services by the credit card companies

Other (Please Specify):_____________________________________________________________ _____________________________________________________________ If NO:
What are the potential perceived problems because of which you do not provide credit card facility? (Tick all applicable) Bank Service Charges Terms and condition of banks Technology linkage issues You do not have enough clientele that uses credit card

Payment reimbursement schedule of banks is not feasible

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