Future of Credit Cards

Remember Aamir Khan in Ghajini giving credit card to the chaat-wala? Well, the credit cards have almost become ubiquitous at-least in the urban India and I think it wont be long before it would engulf the far-reaching rural areas including the chaat-walas. Although I do hate credit card, but there is no doubt that this is going to be the default mode of payment in future.

The credit card companies make a load-full of money sometimes not by ethical means but they are also spending a lot of money in the future technology of credit card which may be more secure and more useful for the end consumer. So what’s the future of credit card? Here are some glimpses:

1) Multi Account Credit Card

The Multi Account Credit Card has two buttons on its face each with an indicator light. So you can essentially have two accounts in the same card. You can also have a credit and a debit card rolled into one. The card contains a lithium-polymer battery inside can last four years under high usage. They're also fully waterproof,

 

2) The Hidden Credit Card

This card does not display all the digits of your account number and some digits are hidden. This credit card has a keypad and black-and-white display for six of the digits in the card's unique number. Once the correct PIN is entered on the card's four buttons, the missing digits are filled in and the card's magnetic strip is populated with data. Both the digits and the strip become blank again after a short time. If the card is lost, no-one can use it.

3) Contact Less Credit Card

These are essentially chip-cards that works on the RFID mechanism. The idea is that you do not need to swipe and you can just wave the card in front of a special RFID scanner who can charge your card quickly. The RFID chip can transmit a lot more information without having to dial in to a network. American Express says its ExpressPay transactions are 63 percent faster than using cash. I guess, if this technology works out, then the chip may be implanted in other devices like watches or cell phones (already available e.g. Nokia 6131 NFC) and who knows may be in the human body itself.

4) Citibank’s 2G Cards

The Citibank 2G cards are special cards that allow users press the request-rewards button before swiping the card for paying with their card points. The action of pressing the buttons changes the data imprinted on the magnetic stripe.

Check out the video for the demo of some of these cards

There are definitely lot of issues with the new technology that should be sorted before these become the de-facto credit cards. The key point for getting these technologically advanced cards relies in the adoption strategy by the millions of vendors who have already spent money for the infrastructure of today’s simple credit card. So they definitely would need some incentive to switch to advanced technology. Also the security is going to be utmost significance especially for contact less credit cards. I hope we see these soon in India, since I expect that these advance cards will bring more security to the end consumer.

Satyam Crisis – What is there to learn?

One of the significant quote from Benjaman Graham’s Intelligent Investor is that “Every stock has a company behind it!!”. The biggest proponent of value investing, Graham intends to change the way investors look at stocks. The primary aspect of Graham philosophy is to invest only in companies that you know.

This implies that “Assessing Management” is one of the primary aspect of study before investing in the company. An investor need to  evaluate the credibility of the management. While it is important to establish the credibility of management based on what they have delivered in past, but most of the time an investor gets influenced by the image created by the media of its CEOs or promoters. So while “Reliance” is good and the image of Ambani Brothers may be excellent, it is important to look at, what the management delivered for each of the Reliance companies.

This fact is highlighted by the recent Satyam fiasco. Satyam planned to buy two real estate firms Maytas Infra and Mytas properties with 1.6 billion $. The chairman of Satyam, B. Ramalinga Raju justfied the buy saying

Stating that it is part of its plan to de-risk the core IT business in times of recession, Mr B. Ramalinga Raju, Chairman of Satyam, said the combined entity would help face the challenging environment and uncertainty in the market.

This raised suspicion among investors not only in terms of buyout giving significant benefits to the promoter family but also in terms of valuation of Maytas, causing Satyam to drop the acquisition plans.

Byrraju Ramaling Raju has been a well-known and renowned name in the field of Information Technology, receiving lot of awards. Just seaching for B. Ramalinga Raju gives you enough information about the person and the media report will cause you to believe that the person have impeccable credibility. In fact Satyam received “ Golden Peacock Global Award for Excellence in Corporate Governance” 

The honor is especially relevant given that corporate governance best practices are considered key benchmarks by stakeholders who evaluate corporations. In fact, their importance is magnified in difficult economic environments.

If we just look at the stock price of Mytas Infra and Satyam on 16th Dec,

16th December	226.55 (Satyam)	481.00 (Mytas Infra)
19th December	162.00 (Satyam)	246.00 (Mytas Infra)

The dates are important since 16th Dec evening, the news was officially announced of a Satyam buyout of Mytas. This can be significant if we see that stock prices of most of the infrastructure and software companies are going down. This essentially gives a feeling of insider trading!!

The biggest learning for a value investor is that

Do not just bank on the big names in the industry, but to assess the management, go into the details of how much the management has delivered in the past years.

Some interesting reads on this:

• Financial Express 1 
• Financial Express 2
• Mint Editorial
• Motely Fool
• Hindu Business Line

Best time for car buying is, now !!

I recently went for a car upgrade and realized that “now” is the best time to buy or upgrade your car. If you have been thinking about buying a new car or even upgrading your existing car or even buying a second hand car, Dec – 08 probably is a bonanza month for getting a handsome deal.

Here are some of the reasons why December this year is better:

Dealer Discounts: December is the month, when car sales usually drop. A typical consumer wants to buy a car in Jan since that changes the model year of the vehicle in expectations of higher re-sale value. This year due to the economic downturn, the car sales have already hit badly, hence dealers are trying to push sales aggressively to reduce the inventory. So you can expect huge discounts on all ranges of cars.

Government Fiscal Stimulus Package : To provide some boost to the automobile sector which is hit by falling sales this year, government has announced a 4% excise duty cut. As per reports :

Maruti Suzuki India (MSI), the country’s largest car maker, announced it was cutting prices effective from midnight. “We are looking at passing on the entire benefit to the customers. We shall be cutting down prices in the range of 3.5-4% from midnight and most of our vehicles will be cheaper by that percentage,” MSI chairman R C Bhargava said.

This again brings huge benefit to the ultimate consumers.

Ease of Auto-Loan : With government trying to bring the repo rate down to ease liquidity crunch with the banks, it becomes easier for banks to provide auto-loans.

Whenever the banks have any shortage of funds they can borrow it from RBI. Repo rate is the rate at which our banks borrow rupees from RBI. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive.

This can bring the auto-loan rate by 1-2% and makes the loan easier on the consumer pockets.

When I walked into the Sagar Automobiles (Maruti showroom on B.G. Road), I realized that almost all vehicle prices are down by a huge amount. For example, a typical WagonR Lxi which was priced at around 4.1 lakhs on road, now coming at 3.6 lakhs on road. If you already own a maruti vehicle and want to upgrade you can bargain for more discounts. Also the loans are coming cheaper with SBI giving a loan at 11.75-12%, while private banks at around 13% (which might be reducing further). BTW another reason to cheer while buying a car is the reduction in petrol prices. Also there is talk of privatizing the petroleum products (Petrol and Diesel), and if that happens, the prices are about to fall further. Consumer is the king for now!!

LIC Credit CardsI

I was rather amused by this news when I saw it on CNBC. A search on Rediff tells the entire story. This in a business jargon is called diversification, when an organization intends to move away from its core business domain. I am not very happy with the news. Looking at the history of LIC, you will notice that

Starting as Indian enterprise with highly patriotic motives, insurance companies came into existence to carry the message of insurance and social security through insurance to various sectors of society. The Parliament of India passed the Life Insurance Corporation Act on the 19th of June 1956, and the Life Insurance Corporation of India was created on 1st September, 1956, with the objective of spreading life insurance much more widely and in particular to the rural areas with a view to reach all insurable persons in the country, providing them adequate financial cover at a reasonable cost.

So the basic idea behind LIC is more benign in nature. And somehow I have personally been very wary of credit card companies (Why I hate credit cards or How credit card companies make money) , because their sole aim is to earn money with little care for the customers. So I see this as an evil move for a benign company taking towards becoming a money minded business. This might look like a philosophical and biased logic, but I guess it indicates the threat seen by LIC from the private players. With a 77% share of market, it is till numero uno, but it is facing stiff competition from private players.

I see the credit card move as a step to fight back the competition. Undoubtedly LIC has a strong distribution network, but that is because the name provides a "TRUST" to any customer. The biggest reason is the sovereign guarantee by the government. So a customer wont care much about from whom the policy is being taken and just the LIC name is enough to bring that trust. That is the reason it is still the numero uno insurance provider even amongst the youth. And fortunately it has kept pace with the changing times by being up-to-date with its customer services. The only way I would love LIC credit card if I can gain the same TRUST as LIC Insurance provider. I already have sufferred a lot with the private credit card players and dont want to add the agony with another one, unless LIC can keep its original objectives intact with the credit card business

Conduct business with utmost economy and with the full realization that the moneys belong to the policyholders

Real Estate Prices Dipping

I was reading an article on businessworld about the dipping rates of real estate. I do not think that this is the usual demand-supply cycle and the real estate market is going through a dip. Everyone is still willing to buy a house, and with increasing number of young people joning rising industries, the earning power is increasing day by day and real estate is the most secure and profitable investment. Considering just the IT industry, nearly 1,20,000 IT graduates join the workforce per year, imagine the amount of young people earning good. Within two years of joining the industry on an average everyone wants to invest in buying a house. So the demand has not ebbed a bit.

The real reason for the slip in the real-estate prices is that with RBI soaking the liquidity in market causing increase in interest rates, the affordability of purchasing a house through bank loans has reduced significantly. With the early boom in the real-estate market, the prices have already touched an all time high and they just going north. A simple two bedroom flat in prime location of Bangalore might cost you not less than 30-40 lakh in a decent locality. This is simply outrageous. But with easy loans from banks, it was still affordable. Now EMI getting more than to Rs 1000 per lakh of loan, it simply has become impossible for a service class person to go for it. Compare that to the cost of renting, a similar house can cost me around Rs 11,000 per month on rent with all the facilities(fully-furnished including pool, gym etc). So everyone who wanted to buy a house is postponing the plans and following the wait n watch policy. Here are Bangalore prices from the businessworld article (prices from 2004 to 2007):

Mixing Sarsawati with Laxmi

I recently read an interesting piece of news. Mumbai University might be listed on BSE and a retail investor can trade stocks of university. Sounds unusal, yes it is indeed unusal. There has been a hot debate going on on the campus about the positives and negatives of it, but I think, discussing about it, dreaming about it is totally different than actually implementing it. First, implementing it will be a mammoth task given the government control over it and then there is a question of advantages of such a move. The proponents claim that they can garner huge amount of corpus by public listing and can use it to push the university to higher levels. I have strong doubts, though the idea is interseting. A university can never be modelled on the lines of profit making business. A company can grow fast and move fast, benefitting its shareholders, but not a unversity. The biggest fallout could be commercialization of the courses. The authorities, bounded by vision of increasing shareholder's profit, would be bound to keep the courses only which has higher demand. There are lot of other negatives I can see when the prime motive for the univesity is to increase the profits. The article truly sums up by saying "Why mix Saraswati with Lakshmi?" Why, indeed.

ICICI hikes service charges

It is a bad news. With everyone seems to be eating up your income, this is another setback to the banking customers. Private banks like ICICI & UTI have decided to increase the charges for services like ATM cash withdrawl & if customers fail to maintain the quarterly balance (Rs 5000). This will be applicable from July 1. ICICI has also increased charges for PIN regeneration and ATM usage of non-partner banks. ICICI Bank customers, who fail to maintain QAB, will now be able to avail of only five free ATM transactions as against the earlier six and thereafter they would be charged Rs 50 per transaction instead of Rs 25 per transaction earlier. According to banks the move is made to penalise customers who do not maintain the necessary balance or issues unnecessary cheques (penalty increased for cheque bounce). Currently there is no fixed guidelines set by RBI for "how much banks can levy such charges?" and usually this is fixed by the competition in the market. With the increase in education cess (3%) and the service tax of 12%, the effective income tax any way has shot up. With small things like ATM transactions now attracting huge fees, customers now have to rethink befire using banking services everytime.

Home Loans Squeezed

In another news, the FM has directed state-run banks to go slow on personal and home loans higher than 20 lakhs. With the rising interest on home loans, it anyway has become extremely difficult for individuals to dream of owning a decent house. So this is definitely a big blow to everyone who wants to own a house. Considering that the home rates are skyrocketing in metro cities like Banglore, Hyderabad and Delhi, dreaming about your own few hundred square feet has become more difficult.

Although the step is taken to curb inflation and ease out industries which are overheating, but I think the limit of 20 lakhs is just a bit low to even filter out average buyer. So the only choice for an aspiring owner is to visit the nearest private bank, which now can muscle around with difficult terms and conditions (which anyway are too convoluted). It looks like bad news all around.

MCX ties up with IIMA

This is a piece of new I read in ET today, I still wonder, are the commodities market so much booming? At least the retail investor is very very far away from it. Here is the news

THE booming commodities market has now caught the fancy of the premier B-school Indian Institute of Management, Ahmedabad. The institute plans to set up a commodities chair in association with the Multi Commodity Exchange of India (MCX). With this, the institute will now increasingly conduct focused research on different commodities, including the demand supply, production and trading patterns.
“We want to encourage good market research on commodities, so we have tied up with IIMA to set up a research chair at the institute,” said Joseph Massey, deputy managing director, MCX.
It is also talking to a few other IIMs for possible collaborations. The commodities market is already catching the fancy of the management schools. The IIMA, which recently held an agri festival ‘Amaethon’, also held commodity trading games as a part of the event this year. Many students from the PGP-ABM (post graduate programme in agri business management) are increasingly opting for careers in the commodities market.
Booming economy, good returns and fast expanding network of commodity exchanges have given momentum to commodities trading market.
The total commodity futures trading volumes in the last financial year have increased to Rs 37 lakh crore from previous year’s Rs 21.55 lakh crore.

Buying First House, Cheers!

THE government is planning to seek long-term loans from multilateral finance institutions like ADB and World Bank to provide credit to Indian housing finance companies at competitive rates. This would enable housing finance companies to provide home loans to customers at a much lower rate. This facility is being considered to provide cheap loans to first time home buyers.

“We are considering a proposal to provide housing finance companies direct access to cheaper credit contracted by the Centre from multilateral institutions for building infrastructure. Though the proposal is at initial stages of discussion, the issue is being pursued seriously to provide relief to home loan segment,” an official of housing ministry told ET.

A proposal from the housing ministry to offer cheaper loans to first-time home buyers is under consideration of the finance ministry. Once approved, the Centre would work out details of loan agreements with multilateral institutions for this specific use, the official said.

The new mechanism is being considered to cool down the cost of finance for the housing sector. If it materialises, the step would come as a major relief to consumers who have seen a spurt in interest rates due to high inflation.

Home loan rates have moved up between 200 percentage points and 300 percentage points since the last one year. The current cost of fixed rate home loans varies between 12% and 14%. The rates under floating option is slightly lower than this. Under the new system, housing finance companies could access funds at a much lower rates of about 5-8%. This would enable them offer home loans at less than market rates even if a premium is charged on funds secured from multilateral agencies.

While the housing ministry is taking forward the proposal, a Planning Commission working group had earlier suggested the same to give a boost to the housing sector.

Via [TOI]

SIP only in month end

I was reading an article in ET about how it is beneficial to go for choosing dates in SIP at the fag end of the month. The idea is that historical data reveals that NAV is always lower during the month end. So if your SIP is timed such that you buy units at the end of the month, you will get the units at lower NAVs compared to other days. The suggestion is to time the buying of units between 23rd to 2nd of next month. This has been corroborated by the following data and the saving can be as high as 3.5%.

I find this advice a bit counter-intutive. If you closely look the % saving is continuously reducing from year 2000 and there is as such no clearcut pattern. Also a retail investor chooses SIP primarily to enforce a disciplined saving. The risk-takers usually don't go SIP route and also those who have lump-sum amount to invest. SIP is particularly popular amongst the salaried people. Now if someone choose the SIP investment date at the fag end, it would most likely be a time when the salaries have been splurged away with all the purchases and expenses. This might lead to another problem of cheque bounce or direct-debt insufficient cash situation. The best time is to make it as soon as your salaries come, this way the money is already gone into saving.

MIN is meaningless

It seems that government agencies work mindlessly. Check out this news about introduction of MIN (Mutual Fund Identification Number).

Investors putting in 50,000 rupees or more in a mutual fund from Jan. 1, 2007 will have to provide a mutual fund identification number (MIN) or apply for one, the Association of Mutual Funds in India (AMFI) said on Wednesday.

The idea of MIN is that "investors dont have to fill forms everytime they invest in various MF schemes and just quoting MIN is enough". On the first appearance it seems like a good step by AMFI to reduce paperwork and ease the investment process. Currently the MFs have to follow the Know Your Customer (KYC) norms which mandates them to ask for photographs, address proof and identification proof like passport or PAN. So the once a MIN is established, any investment in MF in any scheme can be done by just quoting MIN.

But I feel that it will just add more headache in allocating and maintaining the MINs. All investors usually provide a PAN number which is fast becoming synonymous with the social security number of developed countries (at least in terms of financial transactions). The PAN is obtained after proper identification of an individual after submission of photographs, residence proof and other such details. So I fail to understand what extra is achieved by introducing MIN. All major banking transactions need PAN number, any income tax details need PAN number, so I think all transactions can be cross-verified and checked using PAN alone. I feel that quoting a PAN number should be good enough to identify a person.

Evil is the root of all money

I was reading this fantastic paper by Nobuhiro Kiyotaki ,London School of Economics and John Moore Edinburgh University and London School of Economics. Their theory tries to answer the question "Why we do have money?". The essence of the argument is that we need money simply because we do not trust each other. In an ideal world, I would say get the service of someone (e.g doctor) and promise him to pay back by something I do when he needs it. But the doctor does not trust me, so I pay him with rupee notes. A money note is essentially a promise by the central bank. So if I pay the doctor 100 Rs, the doctor essentially has got a promise that when he needs something he can trade this 100Rs to get the service/commodity. A central bank is more credible entity for a doctor than me. This argument applies to everyone. A pretty interesting read !!