A credit card is a thin, rectangular piece of plastic or metal issued by financial institutions that allows you to spend money from a pre-approved limit to pay for your transactions at online and offline merchants. . The card issuing institution determines the limit based on your profile, income, and credit history.
Eurêka moment: In 1949, businessman Frank McNamara was having dinner with his clients in a New York restaurant when he realized he had forgotten his wallet. Frank and his associates discussed the idea of a multipurpose charge card as a way to avoid similar embarrassments, which led to the formation of the “Diners Club”.
The rest, as they say, is history: the birth of a fiercely competitive and ever-changing industry with a pervasive global presence, at the local level. The credit card galaxy transmogrifier at regular intervals and brand new credit card constellations are constantly appearing and gaining luminescence.
How does a credit card work?
The most important link in the credit card chain is the consumer – you. As a result, it is so essential to be fully informed about all facets surrounding the selection and use of cards, and we will discuss these aspects later. However, it is just as important to be somewhat familiar with “what lies beneath”.
Besides the cardholder, there are four main players in the value chain.
1. Issuing banks: Almost all banks (and recently a few neobanks) issue credit cards. From a banking perspective, this is the start of the customer’s life cycle.
2. Payment processing networks: Connect banks / merchants / customers and enable transparent settlement of transactions eg Visa, Mastercard, Diners, RuPay. Their core competency lies in the maintenance and efficient operation of an enabling technical capacity 24/7, on a global scale.
3. Merchants: Hotels, airlines, malls, online shopping, gas pumps and any point where you would use the card. The acquiring bank installs an electronic data entry (EDC) machine in these points of sale. When you make a purchase, the merchant slides in your plastic and receives real-time authorization to complete the transaction.
4. Acquiring banks: Place their EDC machines in points of sale, that is to say at traders. You may be using an HDFC card (issuer) at a point of sale that has an EDC Axis Bank machine (acquirer). Switching is facilitated by a network, say Visa. This is true for national or international transactions. The acquiring bank is the entity that ensures that the merchant collects his contribution according to a pre-established schedule.
Elaboration via a purely hypothetical example: you buy a book at Shoppers Stop for 100 INR via a YES (Visa) bank card, where Shoppers used an Axis Bank EDC machine. YES The bank will charge you INR 100 and pay INR 98.50 (minus the exchange) to Axis; and Axis will pay Shoppers 98 INR (transaction value minus the merchant’s discount rate – MDR); in addition, the switching network (Visa) will receive a commission of 25 paisa from YES Bank.
The above is only a basic level intersection map. In reality, multiple custom models (details remain highly confidential) are in continuous operation. For example, it is quite possible for Visa to recover the change fee from YES Bank and Axis Bank.
Innovations by neobanks
Over the past seven decades, business models and value chains have undergone continuous and fundamental changes. In recent times, neobanks have added a whole new dimension to the financial services landscape and created alternative avenues for customer service. Globally, these technology banks offer a wide range of cutting-edge products and services. India is also witnessing the rise of neobanks, which have now started providing credit cards and digital loans through BNPL (Buy Now Pay Later). These fintech start-ups frequently partner with traditional banks to issue credit cards, and their variants.
Some banks are aggressively exploring partnerships with fintech players to acquire a new set of clients for their platforms. Banks provide open application programming interfaces (APIs) to fintechs and leverage their ecosystem to onboard credit card customers. In addition to traditional credit scoring procedures, card issuers are exploring other models of credit risk, thereby enabling the issuance of credit cards to customers without an existing credit score. As a result, there has been a slight increase in the number of new credit card customers. However, this is only the beginning and the jury is still out on the success of the new initiatives.
As Frank McNamara would have triumphantly put it, a credit card is the proverbial “win-win” for all constituents: banks, networks, merchants, consumers.
Banks earn from spending on credit card as well as cross-selling loans and other services to an ever-growing base of credit card holders. Networks charge fees to enable an efficient multi-constituent settlement process. Merchants, both physical and online, enjoy a much higher level of sales. However, it is society as a whole, as well as millions of consumers who have witnessed recurring and enduring benefits on a large scale.
Traditionally, India has had a conservative mindset towards borrowing, and much of the population would view ‘spend before you earn’ with some unease. Over time, credit cards have gradually driven a dramatic shift in consumer behavior, with plastic now seen as a friend and not an enemy.
In 1980, the Central Bank launched the first credit card in India. In 2013, there were 18.7 million cards in force (CIF), and currently that figure stands at 66 million. Given India’s demographic dividend, the comparative figure for 2025 is expected to exceed 150 million.
The widespread issuance and use of credit cards is proof of how cards have become an integral part of our lives and an essential part of individual wallets. In addition, the credit card ecosystem is a real pillar of the successful digitization of the economy and is an effective tool to integrate consumer spending and all associated positive spillovers i.e. transactions are recorded, thus allowing a solid tax collection.
In addition, huge credit card spending (crossed 1 lakh crore in October 2021) brought much needed positivity to boost demand, especially for an economy hit by Covid.
Access to organized financial services is a significant step towards comprehensive “financial inclusion”. A credit card is an entry level product and publicizes other credit facilities eg home loans, personal loans.
Plus, most cards come with a built-in insurance feature, and as such, out-of-the-box protection is on the table for the consumer. The availability of formal credit is even more widely appreciated in semi-urban and rural India. Farmers benefit from the ease of Kisan credit cards to manage their finances.
Benefits of a credit card for consumers
A credit card offers its holder up to 50 days of interest-free credit, if the entire balance is paid before the due date. The main difference between a credit card and a debit card is that the former is a Buy Now Pay Later (BNPL) instrument; whereas in a debit card, the money is deducted immediately from the customer’s bank account.
Banks also accept a minimum amount due, i.e. 5-7% of the bill, and carry the balance over to the following month. However, this home comes with a prohibitive interest rate of 1.5% to 4.0% per month. So it is always advisable to pay credit card bills on time and keep a good credit history.
In an emergency, you can use the card to withdraw money from ATMs, for a stipulated fee.
Frequently, parents use low limit credit cards as an educational tool, to familiarize their wards with the use of plastic, and to instill a sense of responsibility.
Characteristics of a credit card
- Credit limit: The credit limit on your card is the upper limit for transactions. Cardholders with a good repayment history are granted an enhanced credit limit by the bank.
- Annual and membership fees: While there are a few no-membership fee credit cards on the market, most credit cards have membership fees and annual fees. Fees can range from Rs 500 per month for a basic card to tens of thousands for premium offers. In some cases, there is a fee waiver, subject to a predefined minimum expenditure.
- Card billing cycle: On a predetermined date, each month, your credit card statement is generated. The invoice payment deadline is 15 to 20 days after the invoice date. This gives you up to 50 days to pay your credit card bills.
- Interest rate: Whenever you delay your credit card payment beyond the free credit period, a stipulated interest charge is levied. Interest is billed monthly and “interest on interest” accrues until the outstanding balance is paid. Always pay off your credit card bills on time. Disciplined financial behavior is a great tool for building your credit score.
- Minimum payment due: You can delay your credit card payments by paying the minimum amount owed. The balance amount is carried over at an exorbitant interest rate.
- Foreign margin: Overseas travelers should check the surcharge fee in foreign currency, they can range from 2% to 4%.
- Rewards and Benefits: Each card comes with certain types of benefits, aimed at a distinct category of users. To maximize the benefits, select a card that best matches your spending model.
- Several cards: To take full advantage of the benefits, select two to three different card categories eg travel, fuel, lifestyle, online shopping. In addition, make sure that the cards do not have the same settlement date i.e. 15e or 30e of the month. Thus allowing longer periods of free credit.
- Card security: As long as your credit card is loaded with a CVV and magnetic chip / stripe, it is always advisable to monitor safety hygiene. Always transact from reliable stores and websites. When transacting at a point of sale, verify the details before energizing the spindle. Never share the card’s PIN and CVV with anyone. A simple hack such as registering the card issuer’s hotline number in the mobile can allow rapid action.
The credit card industry provides jobs for millions of people, increases consumer demand, accelerates digitization, acts as a catalyst for innovation, strengthens financial inclusion and will always remain relevant in our lives – in some form. or another.