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Credit Cards — benefits and risks for banks and consumers

Published on 22nd June, Edition 25, 2015


Credit cards promote the concept of plastic money whereby a user can purchase any product or service without having to carry cash. Credit cards allow secure method of payment online. Large payments e.g. fridge, television, furniture, airline tickets, expenses on international travel are done through credit cards. Through the usage is quite prevalent in Western markets where credit cards have replaced currency altogether, in Pakistan credit cards are seen mostly as a back-up or a medium used in case of acute need. People in general do not use credit cards as prime mode through which payments are to be made. Credit cards in Pakistan therefore are used more as security and kept safe unless required to be used.

In order to encourage people from using card cards, bank offers reward systems where users can obtain discounts. Since Pakistan is a food-oriented economy, card promotions are mostly geared towards restaurants. In addition, some banks have a scheme whereby large purchases can be converted into installments. Monthly credit card statements include flyers and promotion material by various companies. Banks also waive annual fee against usage. Banks who offer the best incentive or promotion schemes along with merchant discounts include HBL, Faysal Bank and Silk Bank.

Most merchants in Pakistan accept Visa card, however, Master card is also acceptance. Credit cards can also be used for cash withdrawal against certain mark-up.

Process of having a facility

Since credit card is clean lending without collateral, banks decision to issue a credit card is based on a number of factors, primarily credit history (checked through eCIB) , current salary, debt burden, occupation, residence, experience, background etc, hence requirement is stringent. It is estimated that industry wide acceptance rate is less than 10 percent, which means of every 100 applications, less than 10 will be issued credit cards. The requirement for banks discourage those who may default and do not have the financial means to pay monthly billing. Even if a decision is made to issue a credit card, the limit is restricted to its bare minimum to discourage large purchases. In general the process involves calling the call centre with a request to issue credit card. A bank official will call for details and will send one of the sales staff to obtain copy of CNIC, filled form, salary slip and bank statement. These details are shared with banks approving authority. A confirmation call normally done to cross check details. In addition, reference check is conduced. A sales representative will also visit the residence to ensure that the stated address is same as filled in the form. Once approval is obtained, the credit card is issued with two weeks. The entire process from initiation to obtaining the credit card is completed within 2-3 weeks.

The process of applying for a credit card is far behind Western markets. Most banks in the US offer a facility whereby application to either obtain a credit card or apply for enhancement in limit can be done online. Not only can a customer apply for a card, the customer can also request for a limit as per his need. Unlike Pakistan where delivery of a new card takes weeks, the turnaround time for banks in the US is 2-3 working days at most. The customer can also track the progress of the application online. Whereas Pakistan offers 3-4 categories of cards, banks in the US offer multiple categories to suite every lifestyle. Needless to say that the service level far exceeds any bank in Pakistan.


Unsafe business, maintenance

With respect to risk, credit card is a risky business for a bank since lending is clean without any underline collateral. This means if a customer defaults, the bank cannot sell any tangible security linked to the card. Advances against credit cards have increased from PKR 21.22 billion in March 2014 to PKR 22.44 billion in March 2015, with infection ratio remaining same at 10.8 percent, which in turn translates into default of PKR 2.4 billion in March 2015. Since there are multiple customers with small amounts, recovery is a challenge and keeps the recovery teams busy throughout the year is also a big task. The infection ratio ideally should not exceed 2 per cent for any bank, for the reason that the cost of taking risk on issuing credit cards should not exceed 2 per cent of the portfolio. The global default rate as on March 2015 was 2.6 percent; therefore Pakistani market with default of 10.8 per cent is 5 times as risky as compared to global markets for cards.

Considering dishonestly, ownership and sense of fraud in the Pakistani environment, it is not likely that one would find banks pushing for every customer. Once again, the default rate in Pakistan needs to be reduced and lending only to those who on paper seem not to default. Ironically banks earn with transaction volume, so sales efforts are critical to keep inducting new customers for its cards portfolio.

The challenge for banks is to keep customers excited with various flyers, standees to show case discounts. Constant drive to interact with merchants look for opportunities to offer various promotions is a key since banks earn on usage. Banks in general seem to be very heavy on restaurants since this is probably the only entertainment for people in Pakistan. Some retailers charge extra for usage of cards or incorporate the cost in the selling price. The risk for the customer is theft resulting in usage of card for transactions not authorized. Considering street crime in Pakistan, particularly Karachi, this risk is paramount for any card holder. To mitigate this risk, it is advisable that two wallets are carried with separate wallet having cards and identification. Even if anyone does not intend to use a credit card, a card must be held to meet any unforeseen circumstances when cash is not readily available. Again, usage should depend on how much debt a person is willing to bear and can return on a monthly basis. Credits offer both a win-win situation for both customers and banks, as long as both parties understand the risks.


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