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Lovely Professional University

A Synopsis of research based on

A STUDY ON CONSUMER SPENDING VIA CREADIT CARDS.

Submitted by: NAME: ABHILASH BALI SEC: M39B1 ROLLNO: A50 REGD NO: 10901229 Program - 162: B.Tech-MBA (Dual degree) ME

Submitted to: RICHA BHATIA

CONTENTS

Introduction of the study. Review of literature. Objective of the study. Scope of the study. Challenges for Credit Card issuers. Improving profitability of existing customer base Balancing risk with rewards Research design/ methodology. Executive Summary References.

INTRODUCTION OF STUDY

Debit and credit cards are an important part of our economic lives. These days, it is almost a surprise to go to a store and see someone pay with cash or a check. There are many advantages of debit and credit cards, of course. They are easy to carry. You are not limited by the specific amount of money in your pocket. There is protection for cards that are lost or stolen, while money that is lost is just gone. Obviously, credit cards have their dangers. The most obvious of these dangers is that they typically carry high interest rates. Once a consumer goes into credit card debt, it can be hard to dig out from beneath the payments. There is also a lot of evidence that consumers spend more money when paying with credit cards than when they are spending cash. There are many possible explanations for the observation that people pay more when using credit cards than when using cash. People may pay less attention to prices when they are paying by credit card than when they are paying by cash. Credit cards have this character as well. To stay within a budget using a credit card, you have to remember the prices for each of the items and then keep track of how those prices relate to your overall budget. If you have cash, then you can also limit the amount of cash that you carry as a way of limiting the amount you spend without having to remember all of the purchases you have made. As you can see, many factors come together to make it difficult to maintain a budget when spending with credit cards

Literature Review

This study is primarily a review of current newspaper and magazine articles. But several studies have been incorporated into the study. First, Faig and Jerez (2007) explores the idea that precautionary balances or savings accounts no longer have to maintain high balances because the use of information technology h as allowed for uncertain expenditures to be paid for b y credit cards or internet banking. Their study concludes that due to the lower precautionary Stauffer (2003) describes the effect of credit card usage on the money supply and the upward pressure on interest rates and the Federal Reserve monetary policies. The study emphasizes that consumers should consolidate their credit card balances and thereby reduces the demand for money. An analysis of how the credit supply affects the financial institutions ability to supply credit is the main point of the study. Soman and Cheema (2002) analyzes the consumer in an attempt to understand how consumer utilizes lines of credit. The study analyzes how a consumer views the larger line of credit available as a signal that their future incomes will also grow. The study analyzes the marketing behavior of the consumer and tested the theories in five areas of study. Soman and Cheema analyzed the Modigliani and Brumberg 1954 life-cycle hypothesis that consumers attempt to maintain their lifestyle and consumption basket over their lifetime even though their income and wealth may fluctuate over time. Von Hagen and Ho (2007) find that a slowdown of real GDP, lower real interest rates extremely high inflation, large fiscal deficits, and over-valued exchange rates tend to precede banking crises. The world economy is bracing itself for Americas credit card meltdown. The worlds consumers use credit cards for the smallest of purchases today. The interaction of the marketing o f credit cards and the technological change in the timing of monetary transactions has changed rapidly in the last decade fueling the fear of a credit card meltdown. Weistart (1972) reviews the beginnings of the credit card as an oil credit card through the 1950s Diners Card and American Express card to present day bank issued credit cards. Mr. Weistarts study concerns the legislative attention of credit cards which resulted in the federal Truth-in-Lending Act in 1970. Parts of this Act have been revamped with the 2010 CARD Act. The study also analyzes the loss ratios of banks due to fraud and credit loss. Claus (2007) refers to the bank lending channel and the balance sheet channel when describing the economic impact of credit market conditions on monetary policy. All of these studies emphasis the roller coaster ride of credit card usages by the worlds population and the impact on the worlds economy of these over usages. The credit card companies have been quick to capitalize on the over usage by applying additional fees and thereby profiting on the worlds over use of credit cards.

OBJECTIVE
Despite the spread in usage and ownership of credit cards, few studies have examined its effect on consumer debt in developing nations. The main purpose of this paper is to understand consumers' attitude and spending behavior using credit cards.

SCOPE OF STUDY
The findings are likely to be important to banks and financial institutions issuing credit cards, as they help managers to have a better understanding of cardholders in Jalandher and their attitude and behavior toward usage of credit cards.

Challenges for Credit Card issuers

As of 2010, there are predicted to be 181M credit card holders in the U.S. The economic downturn which began in late-2008 and continued through 2009 has imposed significant pressures on many of these card-holders. A significant proportion of this population has had to deal with falling net-worth, temporary or extended unemployment and an overall erosion in income levels. These factors have led to higher default rates and delinquency among credit card customers which has, in turn, impacted credit card issuers .Most of the leading card issuers have faced eroding profit margins and higher delinquency rates on their credit card portfolios. Fitchs Prime Credit Card Charge-off Index was at 6.17 percent in April 2008, rose to 8.89 percent in April 2009 and stood at a whopping 11.27 percent in February 2010. In addition, the Credit Card Act has imposed limitations on how card issuers can charge customers creating further pressures. To successfully address the challenges created by these developments, credit card issuers are focused on two key questions: 1. How to improve profitability of the existing customer base? 2. How to effectively target the right segments among new customers? This whitepaper captures key findings from Competes recent assessment of the credit card market which provide important insights along both of the above questions.

Competes survey, which captured responses from over 1,300 credit card holders, indicates that the average credit card customer holds 4.4 credit cards. However, what is interesting is that of these only 1.9 cards are regularly used. Customers never used or rarely used 2.6 credit cards (exhibit 1). Further, nearly half of the customer base (47%) used their credit cards fewer than 3 times a month. From a card issuers standpoint, this is a clear challenge. Cards which are not used or rarely used are unlikely to create revolving balances, which are an important revenue stream for issuers. Increasing share of wallet and frequency of usage is an important driver of improving revenues. Further, identifying high-value and low-risk customer segments is important to ensure that the overall portfolio remains balanced. The following sub-sections describe Competes insights along three key areas: Credit card usage relative to substitute products such as debit cards and cash Key factors influencing the choice of which credit card customers prefer to use Customer segmentation based on value and relative risk.

Balancing risk with rewards


Credit card issuers make money from card holders who do not always pay the entire bill, but eventually pay the amount with an interest added to it. At the same time, credit card issuers want to manage their risk with attracting enough card holders who can be expected to regularly pay their entire bill. Not surprisingly, low interest rate is much more appealing to the segment that pays only the minimum balance due. While cash back, reward points, and miles on every purchase as well as bonus on specific purchases are more appealing to the segment that pays their bill in full every month. Marketing and promotional messages (rewards versus low interest rate) should therefore be based on the segment a marketer wants to target or attract.

Research Methodology

The Research and Methodology adopted for the present study has been systematic and was done in accordance to the objectives set which has been detailed as below.

Research design
Considering this work as a basic research, this study has followed descriptive research design. An attempt is made in this study to understand customer satisfaction and attributes towards spending via credit cards.

Data collection

Primary Data - A questionnaire will be designed to collect the primary data. Secondary Data - As well as secondary data is collected from the articles
and journals related to consumer spending via credit card and other consumer preferences related to consumer spending behaviors.

Sampling method
The method of simple random sampling is used to collect primary data from the students and faculties of the LOVELY PROFESSIONAL UNIVERSITY by randomly selecting the students and faculties.

Questionnaire
Sample Size: Total sample size is 110.

Questionnaire Development
Questionnaire is the most common instrument in collecting primary data. In order to gather primary data from viewers. The present questionnaire consists closed ended type of questions and all type of scale.

Hypothesis

1) H0 Consumer does not prefer spending via credit cards. H1 Consumer does prefer buying spending via credit cards. 2) H2Consumer does not prefer Challenges for Credit Card issuers. H3Consumer does prefer Challenges for Credit Card issuers

3) H4 Consumer does not want balancing risk with rewards. H5 Consumer does wants balancing risk with rewards.

LIMITATIONS

1) The survey was conducted in the jalandher. 2) Target customers and respondents were too busy persons, so it was difficult to get their time and view for specific questions.

Executive Summary
Ever wondered about peoples attitudes towards credit cards? Why they own the cards they own?, Why they choose to use the cards they use? or as a credit card issuer have you wondered How can you attract the right segment to apply for your credit card? or How can you increase the usage of the cards you issued? This paper provides some interesting answers to these questions. The paper is focused primarily on attitudes of current credit card holders e.g., features they find most appealing in the cards they own, and how these changes based on different factors such as amount spent using credit cards. Towards the end of the paper, the key drivers of purchase behavior for those shopping for a new credit card are also examined. Most credit card holders own multiple credit cards in addition to substitute payment products like debit cards. These along with cash create a fascinating competition for share of wallet i.e. what share of expenditure is made using a certain credit card. Due to this competition there are only a few credit cards that people use frequently with some credit cards never being used. This is clearly important for credit card issuers, as it is not enough to have consumers simply own your card, but it is also important to drive card usage. It is also important for credit card issuers to understand what the drivers are to choose a card to use over others in order to incite card holders to use their cards more often. There are two primary segments of credit card owners based on how they choose which credit card to use for a specific purchase1. People who own a primary credit card.

2. People who pick a card to use based on the specific rewards they would get for the purchase they are making. These two groups of people seek different features in credit cards, with the former preferring no annual fee and low interest rates and the latter obviously focused on the rewards they get. Preferences of features differ by customer segment such as frequency of use as well as amount spent using credit cards. Understanding preferences of these segments will help credit card issuers better target the right customer segments. For example, high spenders and high frequency credit card users tend to value airline miles more than other card features. Feature preferences also vary based on whether customers are more likely to pay the entire credit card bill or only the minimum balance in a given month. Customers who have owned their primary card for a long time tends to find the no annual fee feature most appealing. This feature is also most popular with credit card shoppers, while low interest rates are not as appealing. These shoppers tend to use online resources for their research. While shoppers used search engines and third party reviews, the most popular online resource is the Website of Credit Card Company. Even for application purposes, shoppers mostly used either the credit card company website or an affiliated company website. Thus to gain higher share of wallet, credit card issuers can reach the right customers by promoting features that are most appealing to the specific customer segments.

References
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7) Article: Ausubel, Lawrence. 1999. "Adverse Selection in the Credit Card Market." Working Paper. 8) Article: Bertaut, Carol C., Michael Haliassos, and Michael Reiter. (2008). Credit Card Debt Puzzles and Debt Revolvers for Self Control. Fortcoming, Review of Finance. 9) Article: Calem, Paul S., Michael B. Gordy, and Loretta J. Mester. 2006. "Switching Costs and Adverse Selection in the Market for Credit Cards: New Evidence." Journal of Banking and Finance, 30: 1653-1685. 10) Article: DellaVigna, Stefano, Ulrike Malmendier. 2004. "Contract Design and Self Control: Theory and Evidence." Quarterly Journal of Economics, 119(2): 353-402. 11) Article: Feinberg, Richard A. 1986. "Credit Cards as Spending Facilitating Stimuli: A Conditioning Interpretation." Journal of Consumer Research, 12: 248-356. 12) Article: Fusaro, Marc A. 2008. "Debit vs. Credit: A Model of Self-Control with Evidence from Checking Accounts." Working Paper. 13) Article: Debt to Tax Rebates: Evidence from the Consumer Credit Data, Journal of Political Economy. 14) Article: Bertaut, Carol C. and Michael Haliassos. Chapter 6. The Economics of Consumer Credit. EdBertola etc. 15) Article:Ching, Andrew and Hayashi, Fumiko, 2008. Payment Card Rewards Programs and Consumer. 16) Article: Fusaro, Marc, 2007, Debit Cards: The New, Old Way to Pay in Household Credit Usage: 17) Article: Personal Debt and Mortgages, ed. Summit Agawam and Brent Ambrose, Palgrave-McMillan. 18) Article: Humphrey, David B, Kim, Moshe and Vale, Bent, 2001. "Realizing the Gains from Electronic. 19) Article: Payments: Costs, Pricing, and Payment Choice," Journal of Money, Credit and Banking.

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