Financial Times

Using your credit card wisely

By Suren Gnanaraj

You take your friends out to dinner, and the waiter brings you the bill. Just like 321,000 people in Sri Lanka, you pull out your Master or Visa credit card, a simple but sophisticated piece of plastic, and place it along with the bill. Then you patiently wait until the waiter returns with your credit card, which he has taken to the cashier in a separate room. But did you see your credit card being swiped?

Members of the Sunday Times Business Club listen to a speaker at its monthly meeting last week. Pic. by J. Weerasekera.

Zeyan Hameed, Manager of the Card Centre at Hatton National Bank (HNB), says that any customer using a credit card must be observant as to where his or her card is being taken. "It may be embarrassing to pursue a waiter to see whether your card is being swiped, but seeing that the swiping is done in front of you is one of the many ways in which you can eliminate the risk of your card being used for fraudulent purposes," he said. He explained that unless there is an error in the swiping machine, the card must not be swiped twice.

At the reverse of every credit card is a magnetic stripe (mag stripe), which contains classified information about the cardholder. This mag stripe technology which was initially regarded as foolproof, can now be tampered with by what is known as a "skimming device" which reads all data on the mag stripe through a single swipe, and copies it to another mag stripe on a counterfeit card, under a different name and signature. Skimming is regarded as the most popular mode of counterfeiting credit cards. "Both Master and Visa are to introduce a chip-based credit card by the year 2008, to replace the defective mag stripe, to curb the increasing credit card frauds," Hameed said.

Hameed also stressed the importance of preserving credit card receipts. "Sometimes people just throw away their receipts which contain their credit card numbers, and they are picked up by fraudsters who use it to buy goods over the Internet." Cardholders must also be cautious in paying for goods over the Internet. "Authorised sites require card holders to enter an additional three digit number, which is printed below the mag stripe. This is a feature of a lawful site." He explained that sites that are certified by Visa are known as CVV2 sites and those approved by Master are known as CVC2 sites.

Credit card frauds and issues such as "are we living beyond our means (and getting into debt)", were taken up for discussion at the monthly Sunday Times FT Business Club meeting, held last week at the Trans Asia Hotel. Jonathan Thambar, advisor to the Federation of Consumer Associations of Sri Lanka, said that prior to the origin of credit cards, there was a lengthy process of obtaining credit, and a more comprehensive screening process was carried out by the banks about the individual's total assets.

However, with the sudden influx of credit cards, obtaining credit can be done at the snap of a finger, which has induced people to spend lavishly, losing their self-control and getting in to severe debt. "After all, Sri Lankans are known to lead a champagne life with a toddy income, and credit cards just enhance this craving," he said. According to Central Bank statistics, there are 321,000 credit card holders in the island, collectively amounting to Rs. 6.2 billion of debt last year. He said that banks must introduce a system of regulation, through which card holders receive credit to the extent of which they could repay. He also noted that the alarming rate of credit card frauds was also an issue which required urgent attention to make this convenient device user friendly.

Ravi Amarasekara, Manager, Relationships and Marketing of the card centre at HNB, said that the credit card could be used from meeting operational needs such as food expenses to recreational needs such as gambling, but the onus was on the customer to be cautious in spending. He said that obtaining a credit card was not security-based unlike a loan, so interest rates were naturally higher than other advances owing to the high administration costs involved, placing a great responsibility on the part of the cardholder to make payments on time. "After all, the bank is taking a high risk when it gives out credit without any security," he said. He explained that the credit limits offered to each customer varied according to various factors such as age, marital status and nature of employment.

Highlighting some of the key benefits of a credit card, Amarasekara said that large amounts of money need not be carried by hand, and payments can be made both locally and abroad. "If you lose your money, you lose it forever, whereas if you lose your credit card, we will re-issue you a new card in 24 hours." More importantly it gives you peace of mind, when you know that in the event of any emergency you will always have money, he said.

Hameed, addressing the issue of credit card frauds, said that the basic method of identifying a counterfeit was to check whether the first four digits of a credit card number matched the four-digit number printed below in small print. The hologram, which can only be manufactured by Visa and Master approved organizations, is another method in which a counterfeit can be identified, which is required to be free of any defects.

Hameed explained that if there were any unusual spending by a cardholder, the bank usually would contact the cardholder to inquire as to whether he had actually made such transactions. If he denies making any of the transactions, the card is immediately cancelled.

P. Sridharan, Assistant General Manager of the card centre at HNB, said that there have been several reported instances in which people have made a few transactions in countries such as Malaysia and Bangkok, and on their return, found their entire credit limit had been used. "Credit card frauds are extremely high in such countries and it is advised to be extremely careful when using one's card abroad."

He said that the Malaysian police had raided a counterfeit credit card outlet, which had circulated over 185,000 counterfeit cards in to the market, with 160,000 to be circulated. "According to Visa and Master Card statistics, had those cards been circulated, the estimated loss on financial institutions would have amassed to a staggering $980 million." Sridharan pointed out that when a cardholder's credit limit has been exhausted by someone else, it is the bank that must absorb the losses.

"This is an additional risk that we take in addition to providing credit which we are never certain we could recover. There is no insurance cover for credit card losses to financial institutions."

Responding to the concerns raised as to whether Sri Lankans can afford to live beyond their means, Sridharan said that each cardholder should maintain an operational limit in terms of his daily requirement, and an emergency limit. If your credit limit is Rs. 50,000, then your operational limit would ideally not be more than Rs. 10,000 and your emergency limit would be Rs. 40,000. "This is how you need to control your spending. Unfortunately, most customers want gold cards with high credit limits, just for prestige." He said that the bank usually advised its customers in terms of deciding on their credit limit, depending on their income.

He said that an individual drawing a gross salary of Rs. 25,000 and a net salary of Rs. 10,000 after taxes, transport costs and family expenses, would be wise to settle for a credit limit of Rs. 50,000 rather than Rs. 100,000. "HNB requires a card holder to make a minimum payment of 10 percent of the credit limit. Therefore, if he obtains a credit limit of Rs. 100,000, he could be spending his entire salary, with no savings." He also observed that, in instances where supplementary cards had been issued, wives often spend much more than their husbands.

Replying to a query raised by a member as to why credit worthy customers with proven track records were not offered a lower interest rate as opposed to defaulters, with the intention of encouraging them to spend more, Sridharan pointed out that at the moment, credit cards were only a fraction of the local business, and that with the high tariff rates levied by the international bodies Visa and Master, together with the high risk lending involved, it was impossible to offer a lower interest rate. However, with increased competition in the market, interest rates would begin to drop with even "buy back" offers being introduced, where a bank would offer to buy a card belonging to another bank and offer that customer one of its own cards for a lower interest rate. He said if interest rates were to reduce, the issue of credit card frauds needed to be dealt with immediately. "Hopefully with the introduction of the chip-based system, we would be able to keep abreast of the fraudsters in terms of technology."

Leel Gunasekera, president of the Federation of Consumer Associations of Sri Lanka also spoke on the need to raise the profile of consumer groups and create awareness on many issues including credit cards. Representatives of the Housewives' Association were also present.

HSBC and Standard Chartered Bank, two of the biggest credit card suppliers, turned down invitations - for unexplained reasons - to make presentations at the meeting which saw some serious issues being discussed on credit cards - both from a suppliers and consumers' point of view.

The Trans Asia hotel was the main sponsor of the event with Lion Brewery, makers of Carlsberg, being the co-sponsors.


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