A year before economic reforms kicked off in 1991, Citibank stole a march ahead of its competitors and became the first bank to launch a credit card in India. Fifteen years later, the pioneer has been upstaged by a homegrown bank, ICICI Bank, which has raced to the top position in less than four years with more than 3 million cards. That’s a frenetic market for you.

The New York based major has been beaten but not disgraced. With about 2.5 million card holders, Citibank is at second place. Standard Chartered Bank, at third spot, has issued about 1.78 million cards, and plans to extend its reach to 25 cities by the end of 2005.

Close on its heels is domestic behemoth State Bank of India (SBI) which has crossed 1.5 million cards within two years of launching the card. HDFC Bank is at fifth place with a million cards on its books. HSBC is fighting hard to be in the reckoning with over 900,000 cards.

Economy driving spends

A thriving economy, substantial increase in disposable incomes and consequent rise in consumer expenditure, growing affluence levels and consumer sophistication have all led to a robust growth in credit cards, and each of the players mentioned above have posted an enviable annual growth rate of more than 100% over the last two years.

There is no doubt that more and more middle class Indians are letting plastic rule their day to day lives. Five years ago, there were 4.3 million credit cards being used in the country. That zoomed to 6.5 million in 2002. A year later that shot up once again to around 9 million credit cards. Today, even if debit cards are overtaking credit cards in popularity, the scorching pace of growth continues unabated.

Venture Infotek, a consumer payment processing company, estimates that the total spends in the credit card payment industry in 2003-04 was close to US $ 5 billion at merchant establishments. This reflected a growth of 28% over the previous year.Projections for 2005 range from 10-14 million cards according to Electronic Payments International. According to another forecast put out by the Lafferty Group, India’s credit card spending is estimated to grow at 34 per cent in 2005.

Standout features

An explosive growth in volumes has not dented quality nor profitability, and the Indian card market is at par with the best in the world. Here are some indicators.

Profitable usage: Credit cards can be used online with a separate
security number to prevent misuse. This has increased profitability. An
estimate by Business Standard in early 2004 reckoned that Citibank's
profits on the card business were over US $ 34 million and StanChart's
was around US $ 23-34 million. Among the Indian banks, SBI Cards was estimated to be the most profitable with over US $ 11.6 million as operating profit.

Growing reach: Indian Raiways which runs one of the largest travel
booking sites in Asia and offers door-delivery of train tickets if booked online using credit or debit cards. Credit cards are now increasingly being used to pay for even school fees and hospitalization expenses.

Safe and sound: Safety standards followed by players to prevent misuse match the best in the world. For example, any transaction above a
particular sum is automatically referred to the issuing bank which calls up the cardholder in a matter of seconds on the mobile phone to confirm the purchase.

Feature-driven: Product features too match the best anywhere in the
world. Almost all credit cards come with standard frills such as free
accident insurance, medical insurance at a heavy discount and much more. The cardholder is offered the option of converting a big purchase made on credit card into a loan at a lower rate of interest spread over a long period.
Banks now offer details of expenses incurred on credit cards under
different heads – such as food, clothes and jewellery – to enable easier tracking by the customer. E-mail alerts and mobile alerts on credit card details are commonplace.

Aggressive marketing

Banks have not only raised the bar in quality and services but they have also devised aggressive growth strategies to notch up higher spends on cards. ICICI Bank, for example, launched three no-holds-barred campaigns simultaneously during the high festival season in the last three months of 2004 – a 5% cash back on all purchases over Rs 2,000 (US $ 46)a lucky draw for a couple to the seven wonders of the world; and a chance to win a Mercedes E 240. Result: the bank saw spends shoot up by 36% during the last three months of 2004.

Over the last four years, the bank has also built up the most extensive
network of sales, service infrastructure and collection mechanism for credit cards across 107 cities including smaller towns like Vapi, Valsad and Bhuj in Gujarat and Siliguri in West Bengal.

Not that competition has been staying quiet. As soon as ICICI Bank came out with the cash back scheme, Citibank decided to introduce a new cash back card on the lines of its popular Citibank dividend card in the US. Other players too have already announced their plans to take on the top two.

Growing beyond metros

The growth in spending has so far been spearheaded by the burgeoning
middle class in major cities, where consumer spending is concentrated on
lifestyle and luxury goods.Spending in rural areas has been mainly in
cash.

This has begun to change. By issuing credit cards at 107 cities, ICICI Bank has established the largest reach. SBI, the largest bank in the country with over 9,000 branches, has fanned out its credit card business in 45 cities. Citibank, which operates in 40 cities, is planning to scale it up to the 94 cities in which group company Citifinancial operates.

When the plastic revolution spreads, many farmers could be using credit cards to buy seeds and fertilisers. That would, in fact, put an end to the reign of unscrupulous money lenders in rural hinterland.

Huge market remains untapped

The most heartening part of the growth is that so much still remains to be covered. Consider this: only 2.4% of the working population in India owned a credit card in 2004. McKinsey predicts that 35 million credit cards will be issued by 2010 with an outstanding balance of over $7 billion.

Compared to other Asian markets, Indian credit card market is still at a nascent stage. Credit cards per bankable population in India is 0.03 per person against 3 in South Korea, 2.66 in Taiwan, 2 in Hong Kong, 1.1 in Singapore and 0.4 in Malaysia. According to Mr. V Vaidyanathan, senior general manager and head – retail products, ICICI Bank, an average Indian credit cardholder spends less than $500 on his card annually, compared to around $800 in Sri Lanka and over $3,000 in Hong Kong and Singapore.

Outstanding dues on credit card (which are the money spinner for any
card issuing bank), are the lowest in the region. The outstanding balance in India is at $1.5 billion, compared to $90 billion in Korea, $10 billion in Hong Kong and US $2.5 billion in Malaysia.

In other words, the credit card market in India could continue to register the current blistering growth in the medium to long term. That should be music to the ears of banks looking for a slice of an increasingly affluent Indian consumer.

Taken with permission from India Brand Equity Foundation