Credit Card Basic

8/4/2019 Credit Card Basic

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Table of contents

1. Executive summary

2. Introduction

2.1 Overview of America banking industry

2.2 Overview of China banking industry

2.3 Objectives of the assignment

3. Performance OfCredit Cardissued By ICBC And Bank of America

3.1 Overview of the credit card development in America and China

3.1.1 The overview of credit card current situation in America

3.1.2 The overview of credit card current situation in China

3.2 Performance of credit card in ICBC and Bank of America

3.2.1 Peony Dual Currency Credit Card

3.2.2Blue Cash Everyday from American Express

3.2.3The comparison of Peony Dual Currency Credit Card and Blue

Cash Everyday from American Express

4. Literature Review of SERVQUAL Model

5.Critical Analysis of Previous Studies

6.Conclusion


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1. Executive summary

Nowadays, people are more and moreenjoyingdeficit spending, this change in

consuming model making credit card become essential necessity in peoples

daily life.Cardholders are available to have a line of credit that can be used in

emergencies to cover unplanned expenses and the telephone bill, the internet or

in self-service situation, such as petrol stations. It benefits a lot in different facets.

This essay focuses on the credit card service quality measurement research to

make the bank get acknowledged what is the perception of how the bank serve

the customer, what aspect the customer mostly emphasize and what aspect the

bank disappoints them.

In the first part, this essay introduces briefly banking industry in America and

China respectively.In the second part, thendescribe the credit card development

in two countries and specifically single out Peony Dual Currency Credit Card and

Blue Cash Everyday from American Express to present the services

offered.And in the third part, conduct a literature review of the SERVQUAL model.

Last but not the least, in part fourth, this essay carries on a critical analysis of

previous studies to get a comprehensive understanding of aspects concerning

credit card.


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2. Introduction

2.1 Overview of America banking industry

The U.S. banking system had total assets of $13.3 trillion at the end of 2010.

These assets were even more concentrated than China, with the four largest U.S.

banks controlling $7.6 trillion or 56% of these assets:

Bank of America (NYSE:BAC) - $2.3 trillion

JP Morgan (NYSE:JPM) $2.1 trillion

Citigroup (NYSE:C) - $1.9 trillion

Wells Fargo (NYSE:WFC) - $1.3 trillion

There are two major types of banks in America:

(I). Regional (and Thrift) Banks - These are the smaller financial institutions,which primarily focus on one geographical area within a country. In the U.S.,

there are six regions: Southeast, Northeast, Central, etc. Providing depository

and lending services is the primary line of business for regional banks.

(II). Major (Mega) Banks - While these banks might maintain local branches, their

main scope is in financial centers like New York, where they get involved with

international transactions and underwriting.

Though the U.S. banking sector was in recovery mode in 2010, it still managed to

reach some highs and lows. There were 157 bank failures in the country last year,

the most since 1992, according to the Federal Deposit Insurance Corporation


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(FDIC). And the number of new bank charters was at an historic low compared

with 181 three years earlier.

With so many banks leaving the sector and so few entering it, a long-anticipated

consolidation process is now under way. The U.S. is expected to end up with noless than 6,529 commercial banks and 1,128 savings institutions by the end of

this year. That is a 4.4% decline from the previous year, and it leaves the country

with nearly half as many institutions as it had 20 years ago, according to the

FDIC. Many experts expect consolidation to continue, and predict that the trend

will leave the banking system better off in the long run (Government statistic

online, 2011).

2.2 Overview of China banking industry

The banking system in China used to be monolithic, with the People's Bank of

China (PBC), which is the central bank, as the main entity authorized to conduct

operations in that country. In the early 1980s, the government started opening up

the banking system and allowed four state owned specialized banks to accept

deposits and conduct banking business. These four specialized banks are the

Industrial & Commercial Bank of China (ICBC), China Bank of China (BOC),

Agricultural Bank of China (ABC) and China Construction Bank (CCB) (China

Banking Regulatory Commission,2010).

In 1994, the Chinese government established three more banks, each of which is

dedicated to a specific lending purpose. These policymaking banks include the

Agricultural Development Bank of China (ADBC), the China Development Bank

(CDB) and the Export-Import Bank of China. The four specialized banks have all

conducted initial public offerings and have varying degrees of ownership by the

public. Despite these IPOs, the banks are all still majority owned by the Chinese

government.

China has also allowed a dozen joint stock commercial banking institutions and

more than a hundred city commercial banks to operate in the country. There are


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also banks in China dedicated to rural areas of the country. Foreign banks were

also allowed to establish branches in China, and to make strategic minority

investments in many of the state owned commercial banks.

Figure 1 Assets and Liabilities of Chinese City Commercial Banks, 2006-2010

Source: China Banking Regulatory Commission

From 2006 to 2010, the total assets and liabilities of Chinese city commercial

banks increased from RMB2693.8 billion and RMB2472.3 billion in 2006 to

RMB7852.6 billion and RMB7370.3 billion in 2010 respectively, with the

compound annual growth rate of 24.8% and 24.4% separately. The share of city

commercial banks in the total assets and liabilities of Chinese banking institutions

increased from 5.9% in 2006 to 8.3% in 2010.

2.3Objectives of the assignment

This article is going to get a general understanding and image of what are the

traits of credit cards issued in China and America by the description of that


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offered by Industrial & Commercial Bank of China (ICBC) and Bank of America

(BOA).

3. Performance Of Credit Card issued By ICBC And BOA

3.1 Overview of the credit card development in America and China

There issome common credit cards used popularly all around the world which are

firstly invented by the English bank consisting of a market with different

segments.To be specific, they are cash back credit card, travel &airline credit

card, business credit card, student credit card, and 0% ARP credit card(Credit

card online, 2011).

3.1.1 The overview of credit card current situation in America

The present-day credit card industry in theUnited States originated in the

nineteenth century.In the early 1800s, merchants and financialintermediaries

provided credit for agricultural anddurable goods, and by the early 1900s, major

U.S.hotels and department stores issued paper identificationcards to their most

valued customers.

In the late 1950s, Bank of America, located on theWest Coast, began the first

general purpose creditcard (as opposed to charge card) program. In 1966, in the

wake of Bank of Americas success,a competing network of banks issuing a rival

cardwas established. This effort evolved over time intowhat is now the

MasterCard network. And the American ExpressCompany (American Express)

introduced itscharge card system in 1958, and Sears, Roebuckand Co. (Sears)

established the Discover Cardcredit card in 1986.

Currently the U.S. credit card industry is a maturemarket. The general-purpose

card marketis dominated by Visa and MasterCard, two bank controlledcard

associations. Figure 2 shows theU.S. market share of the top four card


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networks,with Visa and MasterCard together holding about70 percent of the

market share.

Figure 2 credit card market share distribution in America

Source by: The Nilson Repot, 2004.

3.1.2 The overview of credit card current situation in China

Duringthelateseventies,creditcardsasmainmeansofpaymententeredintoChinarapi

dly. The most common transaction processors in China is Visa international,

MasterCard, American Express, Diners Card, Japan Credit Bureau Card, and

China Unionpay. Until Dec. 12th, 2009, Visa international, MasterCard and

Unionpay remain the majority 97 percentage of the credit card transaction

processor market (Matthew Tingchi Liu, 2010).

As the following figure3 shows, Unionpay covers 62% market share in China until

2009, Visa and MasterCard possess 18.21% and 17.31% respectively. JCB and

American Express have 2% and 1% market share respectively.


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Figure 3 Chinese Credit Card Transaction Processor Structure, until 2009 Dec

Source: Matthew Tingchi Liu, 2010

3.2 Performance of credit card in ICBC and American Express

3.2.1 Peony Dual Currency Credit Card

There are six types of credit card issued by ICBC including Peony EMV Standard

Credit Card, Peony RMB Credit Card, Peony Dual Currency Credit Card, ICBC

Corporate American Express Card, Peony Quasi Credit Card and Easy Time

Credit Card. The former three are personal cards, the rest are merchant cards.


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Figure 4 Peony Dual Currency Credit Card

Source:Peony international card, 2011

Take the Peony Dual Currency Credit Cardshown above for example to illustrate

the main features of services ICBC offer for credit card. Here are the services it

provides(Peony international card, 2011):

1. The highest authorized credit limit for a personal card is 50,000 Yuan.

2. As for consumption by overdrawing within credit limit, a card holder can enjoy

interest-free repayment period of 25 days to 56 days only if the card holder

makes all the repayment before the repayment date specified on the

statement of account.

3. Peony Dual Currency Credit Card can be used in ICBC business offices,

ICBC special emporiums, special emporiums and ATMs with "China


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UnionPay" logo and business offices with VISA and "MasterCard" Logo at

overseas. Settlement can be made in RMB or a specified foreign currency.

4. The card has functions of overdrawing consumption, account transfer

settlement and deposit and disbursement of cash, etc.

5. From June 2003, foreign currency due arising from overseas consumption or

disbursement of foreign currency with Peony Dual Currency Credit Card can

be repaid by foreign currency purchased with RMB, except trade prohibited

by state laws.

3.2.2 Blue Cash Everyday from American Express

The credit cards issued by American Express are generally divided of Personal

Cards, Small Business Cards, Corporate Cards, Prepaid Cards and gift cards

(American Express online, 2011).Here this article focuses on the cash back

personal card.

Blue Cash Everydayfrom American Express

Figure 5 Service offered by Blue Cash Everyday from American Express

Terms Services offered by Blue Cash Everyday

Welcome Bonus $100 cash back

Cash Back

Earn 6% cash back at supermarkets. Earn 3% cash back at gas stations and departmentstores. Earn 1% cash back on all other eligible purchases.

Annual Fee$75 If you spend just $25 per week at supermarkets,

you can receive over $75 in cash back by the end of the

year.Payment Options Flexibility to pay charges over time

APR on Purchases0% intro APR for up to 6 or 12 months. After that, your

APR will be a variable rate, currently 17.24%, 19.24% or21.24%


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Referral Bonus

Recommend the Blue Cash Preferred Card to as manyfriends as you want and get a $75 bonus for each friendapproved for the Card.

Blue SavingsProgram

Offers a wide range of discounts and extras at hotels,

restaurants, retailers, and more

Source:American Express online, 2011

3.3 The comparison of Peony Dual Currency Credit Card and American

Express

Products

American Express offers many kinds of credit cards targeting in differentsegments, and each category is further fractionized based on different

consuming aim, whether to pay annual fee, ways of repayment and get rewards

for hotel or airline. It establishes a self-service process to tailor a credit card for

the customer. On the contrary, ICBC issues fewer credit cards and targets the

market only in general way.

Income structure

The sources of revenue generated by credit card come from the interest derived

from those who use revolving credit, overdraft on credit cards, annual fee,

commission from merchants, interchange commissions, overdue fines, and

advance cash fees. In mature bankcard markets like American Express,

overdraft interest is the main source of income. Because credit card is a new

product in China and conflicts against first saving, then spending in Chinese

mindset, ICBC generates the income basically on annual fee. Here is the pie

chart below demonstrating the disparity:


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Figure 6 Comparison of Income structure between Chinese card and Americancard

Source: Xingcaijing online, 2006

4. Literature Review of SERVQUAL Model

55%

22%

16%

7%

Income structure of Chinese card

annual fee

overdraft interest

commission from

merchants

others

20%

67%

10%

3%

Income structure of American card

annual fee

overdraft interest

commission from

merchants

others


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4.1 Development of SERVQUAL model

In the mid-1980s, Parasuraman, Zeithaml, and Berry began investigating service

quality and itsmeasurement using data collected from consumer focus groups.

Through these focus groups,Parasuraman et al. (1985) determined that

consumers often experience a gap between theirexpected level of service and

their perception of service actually received. In essence, the gaprepresents the

consumers assessment of service quality. If the expectations exceed

theperceptions, then the service quality is negative. If the perceptions exceed the

expectations, thenthe service quality is positive as below:

Figure 7 SERVQUAL model


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Source: Parasuraman, A., Zeithaml, V. A. & Berry, L. L. (1985).

4.2 Elements of SERVQUAL model

This model investigates five dimensions including Tangibles,

Reliability,Responsiveness, Assurance, and Empathy. The process for

administering SERVQUAL is straightforward. First, the respondents are askedto

answer the 22 items of the expectation survey. Next, the respondents are given

the 22 itemperception survey to complete. Finally, perceived service quality

isdetermined by subtractingthe expectation rating for an item from the perception

rating for the same item. This calculationproduces the gap score. These gap


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scores can then be used individually or averaged bydimension for diagnostic

purposes. They can also be averaged across the 22 items to obtain anoverall

service quality score.(Bill Hardgrave et al., 2006)

5.Critical Analysis of Previous Studies

The report named Fees and Rates Drive Decline in Overall Credit Card

Customer Satisfaction finds that proactive and clear communication is the key to

improve satisfaction among credit card customers. For example, when an

interest rate change occurs, satisfaction scores are 97 index points higher when

customers say they were notified ahead of time by the credit card issuer,

compared with when customers say they were not notified in advance. Another

differentiator of high performers is the importance of customer interaction.

Discover Card, for example, performs particularly well in customer interaction

through its Web site, automated phone service and customer service

representatives. Discover Card also has a low percentage of Web site

inaccessibility (13%) and an average wait time of only 3.3 minutes to speak with

a customer service representative(Businesscenter online, 2011).

Cox and Jappelli (1993) found that the demand for credit to be positively related

to permanentearnings and net worth and negatively related to income and age.

Duca and Rosenthal (1993) foundthat the credit demand of young households is

positively related to wealth, income and household size.

Ausubel (1997) and Domowitz and Sartain (1999) have found a positive

relationship betweencredit card debts and personal bankruptcy. Ausubel (1991)

indicated that there is a contribution fromirrational card holders attitudes for the

rise of credit card debts in USA. Lee, J. and K.N. Kwon. (2002)investigated the

situation of the peoples inability about paying their credit card debts and found

thatcard holders with high unpaid debts have higher probability of default. In their

study, Black andMorgan (1998) stated that there are important effects of the

social and demographic factors about therise of not paying the credit card debts.


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Dunn and Kim (1999) found that the variables, the total minimum required

payment to incomeratio, the percentage of total credit line which the consumer

has used and the number of credit cards onwhich the consumer has charged to

the credit limit have statistically significant positive effects on theprobability of

credit card default. They found that the total credit card debt to income ratio has

noexplanatory power on the default probability.

Slocum and Mathews (1970) testes whether social class and income can be

considered asindicators of consumer credit behavior by using data obtained from

2,032 commercial bank credit cardholders in the USA. They found out that while

members of different income segments exhibitsdifferent credit card use patterns,

social class is not the most useful market segmentation variable forthe credit

card behavior of consumers and concluded that income level is better indicator of

consumercredit card behavior than social class.

6. Conclusion

Based on the analysis is shown above, it can be concluded that American

Express gains the customer satisfaction by tailoring the service with different

demands of customers (e.g. ways of repayment ) and constructing an online

platform where the customers have access to check its account at any moment.

And ICBC is only providing credit card with some basic services, credit card still

is not the mainstream consumption pattern in China.

7. References

American Express online, 2011,American Express bank limited,

http://home.americanexpress.com/home/axpi/?inav=NavLogo

Ausubel, L,M. ,1991, The failure of competition in the credit card market,AmericanEconomic Review, Vol. 81, pp.50-81.


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B. Raja Shekhar, M. Devi Prasad, 2010, Development of Railqual:A Service Quality Scale for Measuring Indian Railway PassengerServices Management Science and EngineeringVol. 4, No. 3, 2010, pp. 87-94

Bill Hardgrave, Sam M., Robert E. Miller, Thomas W. Jones, Sam M.,2006, The

Impact of Presentation Order On SERVQUAL dimensionality Journal ofUniversity of Arkansas

Businesscenter online,

2011,http://businesscenter.jdpower.com/news/pressrelease.aspx?ID=2009

162

China Banking Regulatory Commission, 2010,Chinese City Commercial Banks

Current Situation Analysis, China Banking Vision Vol.12

Cox, D. and Jappelli, T. 1993, The effect of borrowing constraints on consumer

liabilities,Journal ofMoney, Credit and Banking, Vol.25, pp. 197- 213.

Creditcards online, 2011,http://www.creditcards.com/credit-card-news/credit-

card-industry-facts-personal-debt-statistics-1276.php

Domowitz, I. and Sartarin, R. 1999, Determinant of the costumer bankruptcydecision,Journal of Finance, Vol. 54, No.1, pp. 403-420.

Duca, J. V. and Rosenthal, S. S. 1993, Borrowing constraints, household debt,and racialdiscrimination in loan markets, Journal of Financial Intermediation,

Vol.3, pp. 77-103.

Dunn, L.F. and Kim, T.H. 1999, An empirical investigation of credit card default,WorkingPaper, Ohio State University.

Ehow online , July,2011, http://www.ehow.com/about_7513521_definition-

prepaid-credit-card.html

Government statistic online, 2011,http://www.sec.gov/Archives/edgar/data.htm

Lee, J. and K.N. Kwon. ,2002, Consumers use of credit cards: store credit

cards usage as analternative payment and financing medium The Journal ofConsumer Affairs, Vol. 36, No.2,pp. 239-262.

Matthew Tingchi Liu, 2010.Credit Card Business Report in 2010, EconomyView, Vol. 5


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Parasuraman, A., Valerie Zeithaml, and Leonard Berry. ,1985, A ConceptualModel of Service Quality and Its Implicationsfor Future Research, Journal ofMarketing(49.3) pp.41-50.

Peony international card online, 2011, ICBC limited,

http://www.icbc.com.cn/icbc/bank%20card/introduction/creditcard/peonyinternationalcard/

Slocum, J.W. and H.L. Mathews (1970), Social class and income as indicatorsof consumercredit behavior Journal ofMarketing, Vol. 34, No.2, pp. 69-73.

The Nilson Repot, 2004. Overview of Recent Developmentsin the Credit CardIndustry, issues 825 and 826, HSNConsultants, p23

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Credit Card Basic