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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. Non-
probability 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 Female

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

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 No

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?
Survey Questionnaire B

Individuals who carry credit card

Instructions: Please tick the best applicable choice unless specified


otherwise.

Gender:

Male Female

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

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 than 25%


25 – 50%
50 – 75%
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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