Feature Review: Payment Protection Insurance

Most Credit Card Issuing Banks offer an Insurance feature on their Credit Cards which may be Life Insurance, General Insurance or in some cases may be a specialized form of Life Insurance which is called as “Payment Protection Insurance”

What is Payment Protection Insurance also known as Credit Shield Plus Insurance?

This insurance ensures that if you die while holding your Credit Card, then the entire Credit Card outstanding whatever it might be at that time will be paid by your Insurance Company and will not have to be borne by your family / dependants / legal heirs.

In 99% of the cases I do not recommend this product as it is useless and I have observed that most banks (at lease the credit card issuers I have worked for) do not follow up with the family of the deceased card holder and just write off the out-standing. The fact that if you die, the bank will chase your family is untrue, at least to my knowledge. While they are legally empowered to do it, they do not do it as far as I am aware.

In addition to this, it may happen that at the time of your death that you do not have any Credit Card outstanding at all and hence the entire premium that you have paid has got wasted. I would recommend this card only if you are a perpetual revolver and your Credit Card outstanding at any given point of time is more than your monthly take home salary, then you can think of going in for this product.

The premium amount is usually less than 0.1% of your Monthly Outstanding and gets billed in your Credit Card statement every month. If you have an outstanding of Rs.30000 every month you will have to pay a Premium of approx Rs.30 every month. While this may look like a small amount, this is an expense you can avoid and donate this money to “needy children” which would be putting it to better use.

If you do apply for this product, you will open yourself to complaints such as incorrect premium billed, changes in the premium rates, non receipt of policy documents and in most cases your family will not even be aware that you have this insurance policy.

You need to keep it in mind that the bank will keep calling you and keep saying that “after taking this insurance you can live in peace knowing that your family is secure etc.” but that is all crap. Remember from the Rs.30 that you pay every month, the bank will get Rs.10 from the Insurance company and hence you give your Bank Rs.100 per year. If they manage to sell this product to 100,000 customers, they will get Rs.1,00,00,000 which is waster money going to the bank coffers.

This is a totally useless feature of most Credit Cards, so please stay away from it.

If you have any queries or suggestions, you can write to me at Ask.Pranav@Gmail.Com and I will write back to you as soon as possible. Thanks.

Market Outlook: Future of Credit Cards in India

In the current scenario, almost all banks which issue Credit Cards are bleeding financially and are not able to sustain themselves. A simple generic model of the Profit & Loss Account of the

Credit Cards Business is given below.

For every Rs.100 lent to customers by the Bank the following are the income and expenses

Revenue Streams

(1) Rs.20 is the Interest Income earned by the Bank on an annual basis (average across portfolio)
(2) Rs.2 is the other income earned through transaction & merchandising revenue

Costs

(1) Rs.9 is the Cost of Funds
(2) Rs.5 is the Acquisition Cost of sourcing the Card
(3) Rs.3 is the Operational Cost
(4) Rs.3 is the Bad Debts (Customers not paying back money and going delinquent)

So if you calculate for every Rs.100 lent out you have revenue of Rs.22 and a cost of Rs.20, which gives you marginal profit of Rs.2 for every Rs.100 lent out. However this was the case about 3 years back when the Bad Debts were restricted to 3%.

Last year the bad debts have soared to as much as 12% which is Rs.12 for every Rs.100 which have been spent and hence the costs go to Rs.29 which the revenue still remains at Rs.22, so as a result the banks make a loss of Rs.7 for every rs.100 lent out. This loss cannot be sustained and as a result the banks have taken the following steps

(1) Cards issued to customers who have a flawless Credit History and who will definitely pay back on time and hence reduce the percentage bad debts and make the business more profitable
(2) Tighten Credit Policy to issue Cards to reduce Bad Debts. Not to issue cards to customers who do not have a proven Credit Record

The way I see it, the Credit Cards Business in India will be profitable in India only under the following scenarios. If these scenarios are not met then I do not see the sense in banks issuing Credit Cards at all – a view which is echoed by many in the Financial Services space and is disputed by an equal number of people as well

(1) The Acquisition Cost has to come down from Rs.5 to Rs.2. This will happen when the banks move away from the current model of DSA Agent Based sourcing and move to Internet Sourcing with no face to face visit with the customers. However there are Technical and Regulatory hurdles preventing this from happening right now
(2) The Bad Debts should not exceed 2% to 3%. This needs to be managed through effective Credit Policy which ensures only those customers get Cards who have an ability to pay back. This restricts the number of Cards issued by the bank as most customers who can afford to pay back have already got a Credit Card. New entrants will get all the sub-prime customers where if you issue cards, the losses will also rise
(3) Banks need to increase revenue by cross sell effectively on the Credit Cards base. This means that they will need to start doing merchandising activity on the Credit Cards Base and use the Credit Cards Base to sell Loan products, Bank Accounts, Investments and Insurance to beef up the Non Interest Income and increase the same from rs.2 to Rs.5

Until the banks develop a strategy on the above mentioned lines, it will be very difficult for the Credit Cards Business to be profitable at all. The financial model used above as an example is indicative and does not represent any specific bank profit and loss account.

If you have any queries or suggestions, you can write to me at Ask.Pranav@Gmail.Com and I will try to write back to you as soon as possible.

Customer Awareness: Most Important Terms and Conditions for Credit Cards (MITC)

Whenever you apply for a Credit Card, you are subscribing to the Most Important Terms & Conditions of the Credit Card Company at the time of applying for the Credit Card itself. These most important Terms & Conditions are mostly the same across Credit Card Issuers and usually state the following major points.

(1) Tariff Schedule is covered as the last part of the MITC. This gives your Rate of Interest (also known as APR in Credit Card circles) Late Payment Charges, Cash Advance Charges, Fuel Surcharge and all the other charges. It is recommended that you go through this list of charges to avoid nasty shocks at a later date
(2) It is to be noted that if there is any change in the MITC, then the bank has to inform customers at least 30 days before effecting the change. The bank will communicate to you as a part of the Statement Message on top of the statement or through a separate letter sent to your mailing address. If the bank does not do this, and changes your charges in an ad hoc manner then you can write to them for a Charge Reversal and escalate your Complaint to the Banking Ombudsman as well
(3) Other, than the schedule of charges, the MITC also contains a declaration that you authorize the bank to contact you for any offers that they may deem suitable for you. Some application forms like Deutsche Bank and SBI Card have a section which allows you to opt out of any calls and messages. You may choose to check the same. However, I recommend that you should opt for promotional messages as sometimes during festival times, the banks come out with good offers which you would not like to miss
(4) On a lighter note, the bank does not verify the number entered by you. You can change your Mobile Number later and change it to someone you really want to harass and the bank will start directing calls to the new mobile number updated by you. Believe me, the banks do not have a check to prevent this
(5) The MITC also states that they will provide your data to the Credit Bureau (CIBIL) from time to time which gives your spend data, late payment data and non payment data. This is an important point as you can ruin your future life because of this. Please note that now in India we have a CIBIL Score and hence any late payment / non-payment made by you will reflect across all banks and they will refuse to lend to you if you have a bad score. What this means is that you will need to take extra care that you make your payments on time, else you will have your record ruined. It does not matter if you are arguing with a bank for the reversal of charges etc. once they report you (which happens automatically end of month) you are finished. I would sincerely recommend that instead of fighting with the bank over a few hundred bucks it is better to pay up and keep your Credit Score in tact
(6) The MITC also gives other information such as the Payment Modes for making Payments to the Banks and other good to know features on your Credit Card

Please make sure you read the MITC of the Credit Card at the time of applying for one. Do not bother asking the Sales Representative, as they usually do not have a clue (they are usually paid per application and hence they are keen on picking up the application however complete, incomplete it may be.

Mark my word, if you do not read the MITC and are not an aware customer, your ignorance is going to come and bite you at a later date. Credit Cards are very useful and I strongly recommend them as a Financial product, however only informed users should use them.

If you have any queries or sugestions, you can write to me at Ask.Pranav@Gmail.Com and I will try to revert back to you as soon as possible.

Product Review: Deutsche Bank Gold Credit Card

The one thing that stands out about Deutsche Bank is a customer focused approach across all their products. I rate them at the top on Customer Service. Their Contact Centre is best in class with executives who have good communication skills and know what they are talking about, and hence managing your Credit Card relationship is a pleasure. I would recommend this card primarily for the ease of Banking with them.

The positive aspects of this card are as follows

(1) Outstanding Phone Banking and Internet Banking Platform with well trained staff making information access very easy. If you compare this to some poor quality contact centre’s such as Barclays & ICICI, you will understand what I am talking about and the difference it makes to the Customers life
(2) Awesome festive offers, they have gives Rs.10,000 Cash back on Rs.1,00,000 of spend in the festive months of Oct to Dec for the first 100 customers or so and the lucky draw of a Maruti Swift as well. Their regular round the year offers are nothing to write home about, but these festive offers definitely make take the card worthwhile
(3) The charges and interest rates are better than the others in the market and my personal view is that this is the bank which is least likely to take the customers for a ride with unfair charges being levied to customers
(4) Their Operational processes are sound, the statements reach you on time and payments get credited on time. They have launched payments through Quick Pay and NEFT Payments for Credit Cards which enables you to make Payments through different banks on the Internet
(5) They do not have a massive Outbound Calling Team for stupid offers such as Loans and the Customer is left in peace to use his Card. This is a major irritant in banks such as Citibank, Barclays and ICICI where you will get at least 3 calls a week if you have not registered for the “Do Not Call Registry”

The negative aspects of this card are as follows

(1) The Card Plastic Is not unique and is not designed very well at all. They let you change images on the Credit Card at a small fee, however none of them are unique like the Times Barclaycard which you would like to show off to your friends
(2) Regular offers are not as good as the festive offers that are offered on this card

All in all, I recommend this card, however their Card Issuing Policy is very tight and for the past year they have been issuing cards only to a select group of customers. Feel lucky, if they have actually issued you a card.

Feel free to write to me at Ask.Pranav@Gmail.Com for any clarifications that you may have and I will try to respond to you as soon as possible.

Clarification on Payment Due Date for Credit Cards

Just a few days back I read an article in the Times of India pertaining to the confusion on Credit Cards Payment Due Dates. Having worked in the Credit Card industry, I thought it would help if we threw some light on the subject.

All Credit Card Issuing banks have 2 payment dates.
(1) Print Due Date: This is the Payment Due Date which is communicated on the customer statement. This is the date communicated to the customers, by which the payment needs to be made
(2) Actual Due Date: This is usually between 2 to 5 days after the Print Due Date. This includes 2 to 5 days of grace period which the bank gives for the cheques which have been dropped on the Payment Due Date to Clear and for the clear funds to reach the credit card issuing bank

In most cases customers drop cheques on the Payment Due Date as communicated on the statement. If the cheque is dropped in the drop box as communicated by the bank on the payment due date, it gets picked up the next day and sent for clearing. The payment gets credited to the Credit Card only after 2 or 3 working days depending on the clearing period and if it is an outstation cheque or not.

If the Banks start levying the fat late payment fee of Rs.500+ if the payment does not reach them by Print Due Date, 80% of the customers would get charged and the call centre would get calls that we have dropped the cheques on time – how dare you charge us etc. This is the reason why the due date configured on the bank statement is different.

However, if you use Internet Banking, NEFT to make Credit Card Payments, they reflect instantaneously as they do not need to go through the cheque clearing process and hence the customer will not get charged even if he makes a payment a bit late after the print due date and before the actual due date.

Late Payment Charges are a major source of revenue for credit card issuers, and this revenue line is monitored at the highest level. There is a monthly target for Late Payment Fees and strict guidelines for Late Payment Fee Reversals as well. Most banks will reverse out the Late Payment Fees the first time … however will be very strict after that. However if you spend more than Rs.20000 on your Credit Card every month and have been paying back regularly, then your bank will not want to lose you as their customer and you can get them to reverse the fee sighting some reason or the other.

However, I suggest that you make your Credit Card Payment in time, however if you have forgotten, the first time you will be excused, but after that you jolly well start paying the fees. You need to be responsible – if you take your bank for a ride, be rest assured, they will take you on a ride as well.

For comments, suggestions and queries, you can write in to Ask.Pranav@Gmail.Com and I will write back to you as soon as possible.

This is the season for Hidden Charges on your Credit Card

Over the last few months Indian Credit Card Issuers are going through a tough time on the inability of the customers to pay back the money that they have spent on the Credit Card. The whole model of the Credit Card industry has been turned up-side down. This has happened due to the following reasons.

(1) Tremendous Sales pressure within the banks has forced them to give Credit Cards to sub- prime Customers, customers who do not have a proven ability to pay
(2) Some banks have even given Credit Cards to customers who do not know what a Credit Card is, and hence do not know they need to pay back (sounds funny isn’t it!)
(3) About 3 years back, the banks on an average would lose Rs.3 for every Rs.100 lent out as bad debt, not that number is Rs.15 for every Rs.100 lent out
(4) This is a 12% reduction in the profit margin, which was anyways between 3% to 4%, and now the companies are heavily in loss

As a result banks are issuing fewer credit cards and to make the business more profitable have increased the fees and charges, hoping to make more fee revenue. Therefore it is very important to pay attention to the revised fees and charges communication that you would receive from the banks. It would also do you good to check the revised fees and charges communication on your Bank website.

Just a few pointers to what has happened in the market over the last year

(1) Barclays has raised the Late Payment Fee from Rs.300 to Rs.500 to Rs.600 to I think Rs.1000 for some tier of customers (I agree they have been very transparent which was their launch tagline ….. and I have received 4 badly printed inland letters communicating the changes)
(2) HSBC has done away with the fuel surcharge of 2.5% which was waived for the customer and if you want a fuel surcharge waiver they have introduced a fee of Rs.349 or so which will make sense only if you have fuel purchase in excess of Rs.12000 per year
(3) HSBC has introduced a transaction charge on making Credit Card Payments through HSBC Branches and Drop Boxes (how funny is this …….. the customer is actually paying back, when many customers are not paying back)
(4) Deutsche Bank has reduced the value of a Reward Point from Re.1 to 75 Paise
(5) ICICI Bank has started charging for Credit Card Payments through NEFT

So dear customers, the point I am trying to make is that BEWARE ……. All Credit Card issuers are trying to get more fee revenue and will try to extract those fees from you. Some do it openly and some do it slyly. So please check your Credit Card Statements carefully and if you see any hidden charges, please login a complaint with the bank and if they do not reverse it, with the Banking Ombudsman. Anyways do let me know … I would like to know the ways in which Credit Card issuers are trying to make their money.

You can write to me on Ask.Pranav@Gmail.Com and I will revert back to you as soon as possble.

Regards.

Pranav.

Which Credit Card can a businessman use for Working Capital Management?

Customer Says:

I am a business man and basically need money daily usually 10000-50000> on daily basis.So,I thought that a credit card might help me.Are these> really helpful.Pls tell me which card to apply for.

Ask Pranav says:

Credit Cards are to be used for convinience, so that you do not need to carry Cash everywhere you go. They are not to be used as Tools for Working capital management, as you are sure to get stuck in a Debt Trap. Please do not make this mistake.

However, if you need to get a Credit Card under any circumstances and you will be using it extensively, I suggest you avoid Barclaycard, ABN Amro and the other smaller companies. It would be better to go with ICICI or Citibank as they have a better product offereing and they have a robust Internet platform which will help you manage your account Online.

The Citibusiness Credit Card from Citibank would be a good option to go with.

Do write into ask.pranav@gmail.com for any further clarifications that you might have. Also do visit http://www.simplybank.blogspot.com/ for interesting articles in the financial services space, which may be of use to you.

Regards.
Pranav

Case Study (HSBC Bank) - Payment for HSBC Credit Card which was never received!

Customer Says:

Hi, I applied for HSBC credit card one year before and after some weeks I got call and letter from bank that they are not issuing any credit card and in case i got any credit card, dispatch it. No credit card and document i received.

After 6 month i got a call from HSBC recovery dept. to pay my due of 5000 otherwise they list my name in defaulter and blah blah. After that i called customer care who says my account is closed. After that i start ignoring them,but they continuously calling me .

Then they started bargaining with me to settle down.At the end i offered them, to pay 1000 rupees .Then they told me that their man will come at my place next day and pay him cash.As i heard from net that after that also they don't stop. Then i asked him to give me the letter of settlement i will pay that amount in the bank.And :D they refused. so the game continues...I would like to hear if there is any solution to get rid of it without paying any due to recovery dept and HSBC.

Ask Pranav Says

Yes, there is a way out. I am assuming that whatever you have stated is the truth.
If you have not even received a Credit Card from HSCB, there is no reason why you need to do any settlement with them. You just need to tell them to give you proof of delivery of the Credit Card and the Transactions that were done in your card, and wait for your response. There would mostly be some form of fraud on your Credit Card and you had never received it, there is no need to pay for the same.

You can collect all your communication with HSBC and share the same with the Head Customer Care at HSBC, the E-Mail will be updated on the website. If you do not get any response, then write to the Banking Ombudsman, the E-mail ID of which is updated on the HSBC Website, also keep a record of all the communication.

As you have not paid back the money (at least as far as their records are concerned) they would have reported your name to the Credit Bureau, once the case has been resolved you need to tell the HSBC guys to remove your name from the Credit Bureau, they can do it internally. Please do not leave them before they do this, else your changes of getting a loan subsequently may be affected.

If you have any further queries, do write into Ask.Pranav@gmail.com and I would be happy to answer any questions that you may have.

Also do check http://www.simplybank.blogspot.com/ for articles on financial education that may be useful to you.