Tag: Credit Cards | Vivek Kaul

8 March, 2017

Are Indians Going Back to Cash?

One of the so-called aims of demonetisation is to reduce the total amount of cash in the financial system. As of now, the financial system continues to have a lesser amount of cash than it had before demonetisation.

Take a look at Figure 1. It plots the currency with public between September 2016 and middle of February 2017. Currency with public forms a major part of the currency in circulation. The remaining being cash with banks. Before demonetisation, the cash with banks used to be around 4 per cent of the currency in circulation.

Figure 1

Figure 1 clearly tells us that the currency with public has been going up post December 2016. Nevertheless, it is still some way away from the pre-demonetisation level. Whether that level is achieved remains to be seen. It depends on whether the government decides to replace the entire currency withdrawn through demonetisation or not.

Now take a look at Figure 2. This basically plots the rate of weekly increase in currency in circulation. I have taken currency in circulation and not currency with public because there are more data points that are available. The currency in circulation is declared by the Reserve Bank of India(RBI) every week, whereas the currency with public is declared once in two weeks. Also, I look at this data from January 13, 2017, onwards. This is because December 30, 2016, was the last date to submit the demonetised notes to banks.

Figure 2

The rate of weekly increase in currency in circulation has had a downward trend since January. Nevertheless, we will probably need a month’s data more to say something with certainty. If the downward trend continues then the conclusion that can be drawn is that the government does not want to replace the entire currency that was demonetised. What will be the impact of that remains to be seen.

Let’s look at some more data. Figure 3 shows the number of ATM transactions using debit cards since November 2015.

Figure 3

As far as ATM transactions using debit cards go, they have bounced back post demonetisation. In fact, the total number of transactions in January 2017 was more than that in January 2016. Having said that the total number of transactions in January 2017 was still lower than the pre-demonetisation level. If we ignore the jump in total number of transactions in October 2016 due to the festival season, the difference between the total number of transactions in January 2017 wasn’t much in comparison to September 2016.

Having said that, we also need to look at the total value of ATM transactions using debit cards, which we do in Figure 4.

Figure 4

Figure 4 tells us that ATM withdrawals in rupee terms month on month tend to be very stable. There is some jump in October 2016, perhaps due to the festival season. After that ATM withdrawals in rupee terms crashed between November and December 2016, in the aftermath of demonetisation.

ATM withdrawals in rupee terms went up by around 79 per cent between December 2016 and January 2017. If ever there was a data point that showed that Indians preferred cash to carry out economic transcations, this is it.

Having said that, the total ATM withdrawals in rupee terms still remain below the level they were before demonetisation. This, despite the fact that the total number of ATM transactions using debit cards are more or less at the same level as they were before demonetisation (as we can see from Figure 3, ignoring the October 2016 data, which I think is a blip due to the festival season).

One explanation for this lies in the fact that the currency in circulation in January was still a long way off from the total currency in circulation before demonetisation. Hence, there was only so much currency going around which the public could withdraw. So, while the government might say that there was never a currency shortage in the aftermath of demonetisation, that is clearly not the case. Over and above this, there were withdrawal limits.

The data from the coming months will tell us if Indians continue to use cash or move towards digital transactions, as the government wants them to.

One data point that we can look at is the point of sale data using debit cards as well as credit cards. Point of sale is essentially any point where a consumer uses a credit card or a debit card to pay for goods or a service, with the card getting swiped in a point of sale machine.

Now let’s take a look at Figure 5.

Figure 5

Figure 5 clearly tells us that the usage of credit cards and debit cards spiked up in the aftermath of demonetisation. But the value of goods bought using credit and debit cards through the point of sale route, fell by 8.4 per cent between December 2016 and January 2017, as more currency became available in the market. If we look at just debit cards, the fall is around 16 per cent. Of course, we need more data to see if this trend has continued in February as well.

To conclude, while there is not enough data to say that Indians have totally gone back to cash, but the data that is available does suggest that they are moving towards it.

(The column was orignally published on Equitymaster on March 8, 2017).

28 October, 2015

Why everybody loves credit cards

Recently I went looking for a new Wi-Fi data card. I quickly decided on what I wanted, and put up the necessary papers required. When I was ready to pay using a debit card, I was told that there would be a 2% charge if I decided to pay using either a credit or a debit card.

This came as a surprise. The merchant clearly was still living in the 1990s.

The merchants used to charge extra on a card payment when credit and debit cards were just getting started in India in the late nineties. This continued in the early noughties as well. This was because banks charged the merchants every time a card holder used a credit or a debit card to make a payment. And merchants did not want to pay that money out of their own pockets.

Over a period of time as cards became popular this changed and no extra payments needed to be made if one decided to pay using a credit or a debit card. What brought about this change? Other than the fact that cards became ubiquitous, with people not wanting to carry cash around everywhere, merchants also realised something else.

And what was that? People end up spending more when they use cards.

This is primarily because cards take out the pain one feels while spending paper money, totally out of the equation. As Nobel Prize winning economists George Akerlof and Robert Shiller write in their book Phishing for Phools—The Economics of Manipulation and Deception: “One of the bases of credit card’s magic is that most of us think that we buy only what we need(or want).” Nevertheless “there is circumstantial evidence that people with credit cards spend more.”

In fact, psychologist Richard Feinberg carried out a series of very interesting experiments to show that just the presence of a credit card as a cue, leads to people spending more. In one of these experiments, people were shown various items on a screen, one at a time, and were asked how much would they pay for each one of them.

As Akerlof and Shiller write about the experiment: “In the presence of a credit card in the corner on the screen…subjects were willing to spend more.” For a toaster, they were willing to pay $67.33, in the presence of a credit card cue. When there was no credit card in the corner of the screen, they were willing to pay only $21.50. The numbers for a tent were $28.42 in the presence of a credit card and $7.58 in the absence of one.

In fact, this discrepancy was seen in case for all the items that were flashed on the screen. Further, in the presence of a credit card, the decision to buy at a higher price was made much faster.

Given these reasons, it is hardly surprising that merchants have taken to cards, like a fish takes to water. And they are happy to accept cards these days, even if that means paying a fee to the bank, every time they accept a card payment. They have realised that people spend more when they use cards, and this benefits them.

This brings me to another question. Why don’t merchants offer discounts to those paying cash, given that there are no extra costs that they need to pay? As Akerlof and Shiller write: “If people are unknowingly spending more because they are paying by credit card, it would be ill-advised for…the local supermarket to remind their customers that they might, well, get a discount for paying by cash.” What is true for a local supermarket is true for other merchants as well.

This explains why everyone loves credit cards. The customer can spend more money than he has. The merchants can sell more, which is something that the merchant I mention at the beginning of this column, needs to realise. And the bank can collect exorbitant interest on the money that is spent.

The column originally appeared in the Bangalore Mirror on October 28, 2015

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

17 June, 2015

Money lessons from Uber

When it comes to technology I am a slow adopter. I got an email account only after most of my friends already had one. I started using Facebook and Twitter after these two social media websites had already taken off big time. Further, its been less than a year since I got a smart phone and given that I have only recently started using the app-based Uber taxi service.

For those who have used Uber will know that the company primarily offers three levels of taxi service. Its most basic service is uberGO. This is followed by uberX in the mid-range and UberBLACK in the top-range.

Further, the company does not take cash payments. In order to use Uber, you first need to create a wallet account with Paytm, transfer money into it from a bank account and then link it to the Uber app on your smart phone. The cost of the travel is deducted against the money in the Paytm account.

After using the Uber service, you don’t pay paper money or cash to the company. As mentioned earlier, the payment is deducted directly from the Paytm account. Hence, in that sense the situation is similar to when you buy something using a credit card or debit card.

And this is where things get interesting. Research shows that when people use their credit/debit cards they are likely to end up spending more in comparison to when they use cash, simply because there is no pain of purchase, as is the case when using cash.

Gary Belsky and Thomas Gilovich explain this phenomenon beautifully in Why Smart People Make Big Money Mistakes and How to Correct Them: “Credit card dollars are cheapened because there is seemingly no loss at the moment at the purchase, at least on a visceral level. Think of it this way: If you have $100 cash in your pocket and you pay $50 for a toaster, you experience the purchase as cutting your pocket money in half. If you charge that toaster though, you don’t experience the same loss of buying power that your wallet of $50 brings.”

The same stands true about using a debit card as well or for that matter a wallet account like Paytm, to purchase things. “In fact, the money we charge on plastic is devalued because it seems as if we’re not actually spending anything when we use cards. Sort of like Monopoly money,” the authors add.

Hence, as people don’t feel the pain of spending money, they are likely to spend more. “You may be surprised to learn that…you not only increase your chances of spending to begin with, you also increase the likelihood that you will pay more when you spend than you would if you were paying cash,”Belky and Gilovich write.

So how is all this linked to Uber? The area that I live in central Mumbai, uberGo, which works out cheaper than even a kaali-peeli taxi and is air-conditioned, is not so easy to get. On days I don’t find an uberGo I end up using an uberX which is more expensive than a kaali-peeli. And on a couple of occasions I have also ended up using UberBLACK, which is significantly more expensive than a kaali-peeli taxi.

The reason for this is straight forward. Since I don’t have to pay Uber in cash, I don’t feel the pain of paying and end up using a service which is more expensive than a kaali-peeli. In fact, since I am paying using a smartphone the pain of payment is even lower than when using a credit or a debit card, given that payment through a smart phone using a wallet is one more step removed from cash than a credit or a debit card.

This also explains why almost every e-commerce site wants you to shop using an app and not from their website. Since you may pay using a smartphone through a mobile wallet account, there is chance that you will end up spending more money.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared in the Bangalore Mirror on June 17, 2015

12 November, 2012

Gambler’s fallacy: The lesson I learnt last Diwali

Kyon daren zindagi main kya hoga, kuch na hoga to tajurba hoga’ – Javed Akhtar (tajubra = experience)
Experience is a great teacher, but the trouble is it only comes with time, and by then the mistakes have already been made.
Last Diwali I played teen patti for the first time with friends and family. I started cautiously with a hundred rupees bet. But with the beginners luck at work I easily won the next few rounds and half an hour later I had won Rs 5,000 and was now worth Rs 5,100 in total, which included the Rs 100 I had started with as well.
Then egged on by sister I bet the entire Rs 5,100 blind, on the tenth round that we were playing. And against the luck of the draw, I lost.
I turned around wanting to look at my sister, but before I could say anything i.e. call her names she said “Don’t worry bhaiyya you just lost a hundred rupees.”
Now did I? Was that really the case? Or was something else at work?
Following the time tested method of when in doubt then Google, I came to realise that I had just become a victim of what behavioural economists (a section of economists who link human psychology to economics) call “mental accounting”.
Richard Thaler, a pioneer in the field of Behavioural Economics and who coined the term mental accounting, defines it as “the inclination to categorise and treat money differently depending on where it comes from, where it is kept and how it is spent.”
This leads to what is referred to as the gambler’s fallacy, the tendency of gamblers who lose their winnings, feeling that they haven’t lost anything at all. Precisely, like what my sister said.
Thaler along with Cass Sunstein explains this in his book Nudge — Improving Decisions About Health, Wealth and Happiness. “You can also see mental accounting in action at the casino. Watch a gambler who is lucky enough to win some money early in the evening. You might see him take the money he has won and put it into one pocket and put the money he brought with him to gamble that evening (yet another mental account) into a different pocket,” write the authors.
The gamblers call their winnings ‘house money’. As the authors write “The money that has recently been won is called ‘house money’ because in the gambling parlance the casino is referred to as the house. Betting some of the money that you have just won is referred to as ‘gambling with the house’s money’; as if it was, somehow, different from some other kind of money. Experimental evidence reveals that people are more willing gamble with money that they consider house money.”
The house money effect is even seen at work when stock markets are on an upside. Thaler and Sunstein, give the example of the late 1990s when the world was seeing the dotcom bubble. “Mental accounting contributed to the large increase in stock prices in the 1990s, as many people took on more and more risk with the justification that they were playing only with their gains from the last few years,” they write.
It isn’t only while gambling and investing in stock markets that human beings categorise money in different ways. As John Allen Paulos writes in A Mathematician Plays the Stock Market “People who lose a $100 ticket on the way to a concert, for example, are less likely to buy a new one than are people who lose $100 in cash on their way to buy the ticket. Even though amounts are the same in the two scenarios, people in the former one tend to think $200 is too large an expenditure from their entertainment account and so don’t buy a new ticket, while people in the latter tend of assign $100 to their entertainment account and $100 to their “unfortunate loss” account and buy the ticket.”
Or sample this situation. Let’s say you are at an electronics shop looking to buy a laptop. You finally decide to buy a model which costs around Rs 36,300. Just as you are paying for it a friend calls and tells you about a better deal on a website which is offering the same model for Rs 36,000? Will stop the purchase and go back home and order the laptop from the website? The chances are no.
But consider another situation where you are out looking to buy a DVD player. You finally zero down on a model that costs Rs 3000. At that point of time a friend calls and tells you that the same thing is available on a website for Rs 2700. Will you stop the purchase and go back home and order the DVD player from the website? The answer is yes.
The funny thing is that in both the cases you would have saved Rs 300. But in one case you decided to go ahead with the transaction and in another case you did not? Why does this happen? At a fundamental level the Rs 300 we save is being categorised into different mental accounts because we are thinking in terms of percentages. Rs 300 expressed as a percentage of Rs 36,300 is very small whereas Rs 300 expressed as a percentage of Rs 3000 is significantly larger.
This tendency to categorise money into different mental accounts leads to several other interesting situations. Money that comes in rather unexpectedly, like a tax refund, a salary arrear, a higher than expected bonus at the end of the year, or a generous cash gift from a visiting relative for that matter, gets spent faster.
As Gary Belsky and Thomas Gilovich point out in their book Why Smart People Make Big Money Mistakes and How to Correct Them “Consider tax refunds, for example. Many people categorise such payments from the government as found money – and spend it accordingly – even though a refund is nothing more than a deferred payment of salary. Forced savings, if you will. If, on the other hand, those same people had taken that money out of their paycheck during the course of the previous year …they would most likely think long and hard before spending it on a new suit or Jacuzzi.”
This also leads to a situation where people have personal loans or huge credit card balances outstanding even though they have money lying in the bank earning nterest in the savings account or in the form of a fixed deposit. This despite the fact that the interest earned on a fixed deposit is much lower than the interest being paid on a personal loan or credit card balance outstanding.
In fact research has been carried out to show precisely this. “David Gross and Nick Souleles (2002) found that the typical household in the sample of Americans had more than $5,000 in liquid assets (typically in savings accounts earning less than 5% per year) and nearly $3,000 in credit card balances, carrying a typical interest rate of 18% or more,” write Thaler and Sunstein. Now wouldn’t it have been much simpler to pay off the credit card debt instead of paying such a high rate of interest on it?
But mental accounting is at work. People put the loan outstanding into the loan mental account whereas money in the bank gets categorised as a savings mental account. And the two do not meet. As the Thaler and Sunstein write, “Many of these households have borrowed up to the limits that their credit cards set. They may realise that if they paid off the credit card debt from the savings account, they would soon run up the cards to their limits once again. (And credit card companies, fully aware of this, are often more than willing to extend more credit to those who reached the limit, as long as they aren’t yet falling behind on interest payments.”
Hence it is important to remember that money is fungible. So there is no point in having money lying in a fixed deposit while you are still paying off your credit card balance or a personal loan for that matter. The interest you earn on your fixed deposit will be always lower than the interest you pay on your credit card debt or on a personal loan. Given this it makes more sense to first and foremost pay off your debts instead of saving money while categorising it into a “mental account”.
If all this wasn’t enough, have you ever wondered why shops and malls actually accept payments made through credit and debit cards, even though they do not get the full price on those transactions? Well the answer again comes back to mental accounting.
As Belsky and Gilovich point out, “In fact, credit cards…are almost by definition mental accounts, and dangerous ones at that. Credit card dollars are cheapened because there is seemingly no loss at the moment at the purchase, at least on a visceral level. Think of it this way: If you have $100 cash in your pocket and you pay $50 for a toaster, you experience the purchase as cutting your pocket money in half. If you charge that toaster though, you don’t experience the same loss of buying power that your wallet of $50 brings.”
Given this, while shopping most individuals end up paying more when they use their credit cards. And that explains why shops accept credit cards happily even though they get paid only around 98% of the price of what is purchased. But they benefit because the size of the purchase goes up.
If you still haven’t understood what mental accounting is all about here is a brilliant example that Thaler and Sunstein talk about. “The concept is beautifully illustrated by an exchange between Gene Hackman and Dustin Hoffman. Hackman and Hoffman were friends back in their starving artist days, and Hackman tells the story of visiting Hoffman’s apartment and having his host ask him for a loan. Hackman agreed to the loan, but then they went into Hoffman’s kitchen, where several mason jars were lined up on the counter each containing money. One jar was labelled ‘rent,’ another ‘utilities,’ and so forth. Hackman asked why, if Hoffman had so much money in jars, he could possibly need a loan, whereupon Hoffman pointed to the food jar, which was empty.”
The article originally appeared on www.firstpost.com on November 12, 2012.
Vivek Kaul is a writer. He can be reached at [email protected]