Arshad Shaikh studies the rise of credit card usage in India. The latest RBI data shows a surge in payments for purchases using credit cards. While it is being touted as a sign of economic recovery after the pandemic, the flip side to such overzealous spending usually leads to a debt trap with the cardholder ending up paying enormous sums in interest payment to the card company. Credit card usage encourages personal debt and reduces savings. Many get addicted to spending beyond their means and buying things they do not need. They become easy prey for banks and credit card firms – the new loan sharks in the market.
Credit card payments are on the rise in India. The Reserve Bank of India (RBI) data shows that payments done through credit cards increased from `6.3 lakh crores (in FY 2020-21) to `10.4 lakh crores in the first three quarters of FY 2022-23. In the same period, debit card payments decreased from `6.61 lakh crores to `5.6 lakh crores.
If we look at the period between December 2019 to December 2022 (around 3 years), we see a huge surge in the payments (around 92%) done through credit cards. They increased from `65K crores to `1.25 lakh crores. In sharp contrast, debit card payments fell 30% from `83K crores to `58K crores.
RBI data also shows the number of cards in use in the payments system. In one year, from December 2021 to December 2022, the number of credit cards rose to 8.12 crore from 6.89 crore. These numbers were 6.04 crore and 5.53 crore in 2020 and 2019 respectively. The number of debit cards remained almost constant at around 93K crores between December 2021-22.
In India, credit cards have around 7% of the market share while debit cards have the remaining 93%. Private banks issue around 67% of all credit cards in the market while public sector banks account for 24%. Of the total credit card transactions in 2021 worth `8.9 lakh crores, `3.7 lakh crore were made through Point of Sale (POS) machines and `5.2 lakh crore was done online through e-commerce portals like Amazon, Flipkart, etc. The average value of the credit card transaction (ticket size) in 2021 was `4122/- (a near 13% increase over 2020).
THE SHIFT TO CREDIT FROM DEBIT
For ATM withdrawals, people still use debit cards. Cash withdrawals using credit cards are minimal. However, there is a perceptible and steady shift to the usage of credit cards over debit cards. Some analysts conclude that the increase in credit card usage increased after India’s economy bounced back after the pandemic. Data shows that at the end of March 2022, the household gross financial savings were 10.8% of GDP compared to 16% of GDP over the previous year.
This fall in saving is indicative of increased spending due to inflation, a spurt in economic activity post-pandemic and changing spending patterns of the younger generation. With a lower balance in the bank account, customers are opting for payments through credit cards that offer zero interest over a credit period of 30 to 40 days.
Another important development is the RBI’s permission to allow the linking of credit cards with Unified Payment Interface (UPI). Since UPI or mobile payments have become the preferred mode of payment for consumers, many are opting to buy for their daily needs on credit using the UPI app that is linked to their credit card (account). This facility is giving them the luxury of a cashless transaction and that too on credit terms. This shift in card usage holds huge significance for the economy. It should be analysed correctly to assess its impact on spending and saving patterns in the country.
HISTORY OF CREDIT CARDS
A credit card is a financial system that allows a consumer to utilise a “buy now pay later” scheme run by banks and credit card companies. The use of credit cards started in the 1920s in the United States when oil companies and hotel chains issued them for purchases made at their outlets. The first popular credit card was the Diners Club. Another major card that came out in the 1950s was the American Express Company. Soon banks jumped into the bandwagon. They started issuing credit cards. They allowed customers to accumulate purchase payments and pay them at a deferred date (usually every month – allowing them a 30-40 day credit period). The payment could be made to the bank in total (without any carrying charge if paid before the due date) or in monthly instalments (for which the banks charge hefty interest).
The term “Visa” associated with credit cards traces its roots to the BankAmericard launched by the Bank of America in 1958. The card was renamed Visa in 1976 which turned into a global corporation in 2007. The system of credit card payment became globally popular, as card-usage was not restricted by geography and the number of participating merchants (who agreed to accept payments by depositing their bills of sale with the bank/card company issuing the credit card) kept increasing to the point of near universal acceptance.
Credit card companies spend hundreds of millions of dollars every year to advertise their products. They entice customers to spend as if there is no tomorrow and their advertisements show that they are helping the consumer financially. It is statistically proven that consumers using credit cards spend approximately 83% more than they would spend without a credit card.
Consumer behaviour experts point out that the pain felt by spending cash is absent in a credit transaction. Hence, the customer indulges in binge spending. According to a survey, one in three Americans feels that he will “max out” his credit card if he makes a big purchase. Moreover, many naïve youngsters are beguiled into falling in the trap of excessive spending and opting for the minimum 5% payment of the purchase.
In this way, their next payment (previous amount along with interest payment plus current monthly purchases) gets more difficult and this spending habit leads them into a mountain of debt. No wonder, critics have termed these credit card vendors as the “new loan sharks”.
THE GOLDEN MEAN
There is a verse in the Qur’ān, which teaches us to follow the golden mean when it comes to spending and saving. It says – “Make not thy hand tied (like a niggard’s) to thy neck, nor stretch it forth to its utmost reach so that thou become blameworthy and destitute” (The Qur’ān – 17/29).
Allah commands us to avoid being overzealous savers and refrain from squandering our wealth. It may lead to what modern economics calls the “paradox of thrift”. At the same time, the Qur’ān says – it is imprudent to indulge in squandering one’s wealth on wasteful expenditure.
People are not only being made addicted to purchasing things that they do not need but they are also made to purchase them even if they cannot afford them. Consumers are piling on an enormous amount of debt to be paid back on interest. This is how most households are being managed and ruined.
This “golden mean” principle applies not only to individuals but also to societies and nation-states (microeconomics /macroeconomics). The result of profligate spending is insolvency and destitution. The problem is exacerbated further by taking on bigger loans with higher rates of interest to service the previous loan. As American financial advisor, David Ramsey put it – “The credit card is the cigarette of money. Everyone knows it’s bad and will kill you, yet people still use it.”