Visa executive says credit bureau crucial component of promoting alternatives to cash
CAIRO: Every so often one bank announces that its number of credit cards has reached a record high while another bank launches a new line of specialist cards.
This flurry of activity to promote plastic money is a sign of the potential gain for financial intermediaries in an economy dominated largely by cash.
Despite the growth in the number of credit cards issued, cash remains a popular method of payment and the use of credit cards and other forms of electronic payment is limited.
The penetration of electronic payment is around 2.5 percent of total personal consumer expenditure, says Tarek Elhousseiny, vice president and general manager of Visa in Egypt and Libya. If you take a market like Turkey, for example, the penetration is way above 5.5 percent.
A number of issues – technological, cultural and economic – have inhibited the growth and adoption of credit cards.
The culture of cash and the distrust of electronic systems is arguably the biggest impediment to alternative methods of payment, deterring consumers from using credit cards.
Many of the people who we talked to cited concerns that using their credit cards online is unsafe and that their credit card number may be stolen and used illegally, says Ramy Habeeb, managing director of KotobArabia.com, an online electronic book merchant.
In order to address customer concerns, KotobArabia.com began selling prepaid scratch cards, which could be redeemed on the company s website, at various retail outlets.
One of the reasons we released the scratch cards was because people would call us and ask if there was any other way to purchase our books, says Habeeb.
While consumers are concerned of the security of credit cards, this reluctance, in turn, dissuades merchants from installing point of sales systems in their shops.
Consumer patterns are pretty much a chicken-and-egg [situation], says Elhosseiny. If they perceive that a piece of plastic is not widely accepted, then we need to change that perception. And the only way to do that is to increase the number of shops that accept the cards.
However, the cost of dealing with cash may be particularly significant for large merchants.
Although implementing systems to handle plastic money requires an upfront investment by merchants and there is a transaction cost for accepting credit cards, this may be offset by savings in the monitoring, reconciling and storing of monetary notes and coins.
For large merchants, it is very costly and risky to manage the tons of cash that goes in everyday, to do the reconciliation, to take the money to the bank [and] to take the money out of the bank, says Elhousseiny.
Certain card schemes may encourage loyalty and increase customer expenditure with smaller merchants.
The competition with small merchants is probably more fierce than it is with large merchants, says Elhousseiny. Large merchants tend to create consumer loyalty … Plastic money and credit cards in particular create that loyalty from customers through discounts at particular merchants.
Elhousseiny adds that, based on Visa s research, credit card holders in Egypt tend to spend 150 percent more than other consumers because of the line of credit afforded to them.
But the impact of electronic payment extends beyond individual merchants. Funds that are exchanged electronically remain in the financial system, increasing its liquidity and promoting the efficient allocation of capital.
The more you keep money in the banking system, the better the chances for banks to invest this money, says Elhousseiny. In this market … money goes into a bank account and comes out of the bank account very quickly because consumers tend to rely on cash in their pockets, in their safes [and] in their drawers at home.
A study of 50 countries by Visa and research company Global Insight in 2003 found that electronic payments can generate cost savings of at least 1 percent of gross domestic product on a national level. The study also concluded that, on average, a 10 percent increase in the utilization of credit cards resulted in a 0.5 percent increase in consumer spending.
The supervision and enforcement of credit is also a key concern of banks, and the historical absence of a functional credit bureau has suppressed the development of the retail lending market.
In order to address this issue, a number of local banks jointly created Estealam, a credit bureau that will consolidate and disseminate the borrowing and payment history of consumers.
I think the most important component at the moment is the credit bureau; it s an enabler to grow credit in general, says Elhousseiny.
Estealam is currently in the process of being set up with the support of the Social Fund for Development, the International Finance Corporation and the United States Agency for International Development.
The credit bureau will enable creditors to reduce turnaround time for credit decisions and provide higher level of credit to deserving borrowers at more advantageous rates, Estealam Managing Director Mohamed Refaat said in a statement.
The development of alternative forms of payment presents both an opportunity and a challenge for financial institutions, but the benefits may not be restricted to card issuers. Merchants can gain from the encouragement of spending by the growth in consumer credit.
Consumers and merchants can also enjoy the convenience of plastic money, but the attitude of the public towards alternatives to cash remains the most substantial impediment to credit card growth and usage.
The industry will not achieve its full potential until this attitude changes. In the mean time, investment in the technological infrastructure to support electronic payments by banks and merchants is perhaps the most effective way to encourage consumers to stray away from cash.