1.1. Introduction

This research seeks to analyse the risk of credit card and possible frauds and actions against them in the Sri Lankan context in order to create a better awareness of it among exchange parties and stakeholders. This research basically focussed on global usage of credit card as the alternative to the standard 'money' and also risks, frauds and actions.  The widely recognised role of credit card, technological aspects and credit card frauds are mostly relevant in the context of Sri Lanka. Finding of this research will facilitate the development of better risk awareness programs and  formulating more appropriate  legal and security  polices and framework for usage of credit card.  


Today a large number of financial transactions are being done through the use of ‘plastic money’ as the alternative to the standard 'money such as cash and notes. The term "plastic money" can refer to plastic credit cards, debit cards and EFTPOS cards which have been replaced the currency notes in day to day activities in numerous trade transactions (Ronald, 2006; Akers, 2005).  This mode of payment became popular among the exchange parties in view of number of reasons (Swartz, 2004).  It is more convenient to carry around and today’s context people find it difficult to carry money due to security issues. It is believed that carrying a credit card is prima facie without much risk.  Moreover, the customer can affect trade transactions not only the money being physically carrying but also when the required funds are not available in his/her bank account.  It is of somewhat spending prior to earn. As a result, nowadays even developing countries like Sri Lanka are encouraging the use of the plastic money more than cash.


It is a well known fact that with the new evolvement of plastic money the stake holders such as customers, banks, issuing agencies, merchants, low enforcement officers, judicial officers, regulators and the governments have being facing  with numerous issues due to various reasons (Richard  1997; Carlton  and Alan,  1995; Hunt, Robert, 2003).  The perpetrators take the advantage of the newly emerged issues, as a result not only the stake holders but the entire society has been threatened.  This is a global phenomenon which is also common to Sri Lanka as well.

1.2. Significance of the research

The history of the usage of money runs up to the agricultural era from the history of the mankind from its origin.  In the said era the excess produce of agricultural products were exchanged according to the needs of the people with the others. In such non-monetary traditional society, all exchange had to take the form of barter, exchanging goods (Brian, 1996). As the time passes, the non-monitory society twisted to a monitory based society and the methods of exchanging goods were obsolete and the use of coins, with specific values replaced the existed system.  The evolvement of the paper currency followed next and remains among all the societies for a long period of time.  The introduction of cheques and bills of exchange was subsequently occurred as the trading goes on from strength to strength.  The most significant mode of payment and trading among the mankind was introduced just within two decades that is plastic money or plastic card (Garcia,   Hahn, and Layne-Farrar 2004; Ronald, 2006).  The latest into the fold is the electronic money or digital money (Chaum, Fiat, and Naor, 1990).  Money has become intangible with the mode of electronic money and no more physically carried item, other than a plastic or a micro chip with a password or pin number. 


In the technologically advanced modern societies   still utilize the coins, paper money, plastic money and digital money as values for their trading, however,   the plastic card specially credit card are becoming more popular among the societies, starting from the developed western countries.    Transactions with credit cards become more and more fashionable with the introduction of online shopping and banking due to the efficiency of advanced technology and the effectiveness of the dynamic global financial environment. All these evident that today, the role of money has been changed completely contrasting to the early stages of the human life.


Dramatic change of the mode of money and the medium of transactions has been taken place as a result of industrialization which followed by the modernization and finally the globalization.  The international and the intra-national trade has developed and grown expeditiously with large volumes and magnitudes due to the mass productions and changing requirements of the human being.  Modernization gave the initiative for the change and globalization completed the change of existing systems among the nation.  The concept of globalization all the global village evolved as the result of the advent of the Information Technology (IT). With this dramatic change the role of the money as per today, also changed accordingly.   It has now been changed from carrying in a big bundle but transfer the value of larger magnitude within couple of seconds crossing borders of several countries.  Apart from the quickness the exchange of money has been globalized through various networks backed-up by IT.  Therefore, the burden of carrying money has been limited to a card made out of plastic. Hence, today the plastic card, especially credit cards are performing the most tedious task of circulating physical money and the most complex transactions are done in specific manner due to technology.


Technology, change the society a paradigm shift and cater the need of money of the people with different values.  The credibility of the transactions made more strengthen as the IT. Facilitates the trag-back formula.  The efficiency that is the correct transaction in a correct manner was remarkably high and accuracy was nearly 100%.  Although with the expansion of trade and commerce it turn to a complex mode and the use of IT facilitated to over-come almost all the existing issues.  However, it should be borne in mind that the plastic card was the vehicle used by the IT carry out all of them, mainly the credit cards.  As mentioned earlier the IT has been changed the global phenomena and therefore, in Sri Lanka most financial institutions are encouraging the use of these plastic card system more than cash  in financial transactions and in the process exchange to be aligned with global changes of mode of transaction. Even development of  IT helps to this sophisticated mode  of transaction , it has been recognized that the number of credit card frauds has increased with the introduction of newer technology (Carlton and Alan   1995; Richard  1997; Kalinga    2005). Therefore, studying about the plastic money and its usage and consequence within the context of Sri Lanka is a contemporary and appropriate issue for the social wellbeing.

1.3    Background and research problem

In Sri Lankan context plastic card system has been encouraged by financial institution such as commercial banks, investment banks and credit unions.

The commercial banks known as business banking in Sri Lanka also has been encouraged, introduced and issued the credit cards to the Sri Lankan society accustom with the global trend and the fashion.  As at today nearly one million credit cards are in circulation in Sri Lanka issued by the local commercial banks 

Although the IT has provided numerous facilities for the development of the mankind it has still failed to be of foolproof due to the various mistakes, human errors and the acts of the perpetrators (Hunt, 2003).  However, it is unlikely all manmade thing are not foolproof, therefore, IT is no exception (Kalinga, 2005).   This development exposes the IT based credit cards to the great deal of danger in committing transactions. Increasing number of credit card frauds with the technological development could be identified from embossers to encoders to decoders.  With the very latest technological development, credit card counterfeiters are able to read, change, and implant magnetic information on counterfeit credit cards (Carlton,   and Alan   1995.  Transactions of the cards could be intersected hacked or varied by the others and mis-directed due to human errors. In view of these gaps the element of risks in transactions executed is being accumulated in the modern society. 

The risk element has to be treated as important as the performance if not it would become similar to inflate a balloon with the holes in the back of it.  The risk factor causes enormous damages not only to the parties involved in the transaction but also to the banks, organizations, individuals and especially to the national economy.  Since the IT based system process the element of risk, there is no way that it could be totally eliminated and the requirement is to manage the risk at a certain level. 


The management of risk is imperative in terms of prolongation and the expense involved.  It is revealed that most of the risk element is centered on the usage of credit cards in Sri Lanka at present.  Thus it is necessary to assess the situation and identify the magnitude of the risk to make remedies to curtail the upward trend.  The expansion of the credit cards and the related risk cannot be prevented due to the existing global trend and the fast changing societies.  Therefore, it has become a challenge to the entire society not only to the individuals’ stakeholders or the government.


The risk has been mainly contributed and originated by the technology itself.  The gaps created by the technology and promoted and contributed to the risk. Apart from the technology the nature of the existing laws has imposed more risk to the credit card industry.  In the case of Sri Lanka the credit card has introduced in the absence of specified laws to cater the fraud risk or the level of criminality.  Thus open a void in the Sri Lankan legal system and the perpetrators escaped Scott free increasing the impending level of the risk.  The other identified feature in respect of Sri Lanka is the social factor.  The society was unaware of the changes caused with the advent of the technology based credit cards.  This gap has given the perpetrators and open passport to proceed with the fraudulent activities without being noticed by the people.  It is proved that any system without the knowledge of the people is subjected to a great deal of risk threatening the safety.  However, it is not really threatening Sri Lanka but fact remains the level is risk is on the rise. 


In this context a new dimension has evolved in Sri Lanka which should be catered early and objectively.  Basically and critical challenge has evolved in Sri Lanka.  However, there is no search or research has being conducted to-date in the country and thus it is imperative to research on this area and  studying  the issues and challenges of the risk involved with a special reference to the credit cards system in Sri Lanka  is identified as a research problem .

1.4. Research objectives

Most of the credit card fraud and challenges  are seems to be more common to   all Sri Lankan context  and based on that  the following Four research objectives are formed rationally.   


While the plastic card has been the standard for a half century, recent developments show alternative forms of payment rising to prominence, from online services such as credit card. Therefore, Objective one is:


1.            To explain the role and the risk of the credit card in the modern economy and the society.


This objective seeks to explain that prominent role and risk of credit card in the modern economy and the society.


The use of credit card is becoming more popular in Sri Lanka. Sri Lanka had 891,163 active credit cards up to March 2008 of which 57,075 were local that were accepted only in the island. The rest were global cards with a worldwide reach. The total outstanding balance on active cards was 29,954 million rupees with 697 million rupees from local cards. Hence, the second objective is formed:


2.            To ascertain the credit card related issues and challenges including the credit cards related fraudulent acts and the investigations.


This objective focuses on:

·         Frauds and offences related to the Credit Card Industry

·         The credit cards related fraudulent acts and laws in different contexts.


All above objectives help to get wider understanding about   the credit card related issues and risk on challenge which are appropriate to the context of Sri Lanka. However, legal context may divers from context to context therefore fourth objective is defined specifically to examine the presence of legal and regulatory system in Sri Lanka. Therefore, third objective is:


3.           To explore the use of an expansion of credit cards in Sri Lanka.


The second objective will explore the use of expansion of credit card in the Sri Lankan context.


The credit card industry is facing serious challenges from credit card fraud, identity theft, and the need to secure confidential information. Thus, the fourth   objective is:


4.            To critically analyze the criminal justice system in Sri Lanka in respect of credit cards.


Hence the final objective will   analyze the criminal justice system in Sri Lanka in respect of credit cards.

1.5.   Research method and approach

The credit card related issues and risk on challenge involve complex human and legal interactions and embraces a range of artefacts and objective certainty. This suggests a need for a research framework and process to better understand credit card usage and its consequences in Sri Lanka. The purpose of this chapter is to outline a research framework and process to analyse the issues and challenges of the risk involved with credit card a special reference to the Sri Lankan context. The aims of this chapter are therefore: (a) to establish an appropriate research approach and research methods, and (b) to select an appropriate research design.  

Research problem will be addressed by employing quantitative and qualitative data approach of data collections where necessary. Qualitative research method helped to get objective data on credit card usage, frauds, act and law, in dept understanding and analysis are based on qualitative interview data which covered more details on the level of influence of product quality, innovation, advertising and promotional strategy factors on the success of credit card and frauds.

However, secondary and primary data collection methods are used as it is required to get information from published data and from other documentary evidences to the issue.  In-depth discussions based on interview will be utilized to arrive at objective.   


Overall Research Methodology is illustrated   in the Figure 1.1. This involves both Secondary (Desk Research) and Primary data collection which driven through both qualitative and quantitative approaches.