Banks step up credit card play ahead of festive season

As the pandemic ebbs, banks are pushing the pedal on credit card issuances, betting that an economic revival will lift consumer spending and lead to lower delinquencies.

Lenders are coming up with innovative products, entering co-branded partnerships and luring customers with attractive cashbacks as they look to tap the upcoming festive demand.

Top bankers Moneycontrol spoke to, said this trend is likely to continue, thanks to a largely underpenetrated credit card market in India. Banks are also better placed to underwrite these customers, reducing the risk of default on this portfolio, they said.

“Rising wages, sustained growth, an upwardly mobile population and increase in affluence have led to a significant increase in consumption patterns where customers are spending more across categories,” said Parag Rao, Group Head - Payments, Consumer Finance, Digital Banking and Information Technology at HDFC Bank. “This gives banks both a challenge as well as an opportunity to expand their customer base and also get a higher share of their spends on credit cards.”

Rao added that banks are now looking beyond the conventional means to acquire customers. They are entering into partnerships and onboarding new customers from the partners' ecosystem.

The momentum will continue as long as the partnerships are scalable and the banks are able to consistently offer superior, modern and digital customer experience and access to innovative and relevant financial products, he said.

Also read: Do you travel frequently? Here are five best credit cards with complimentary airport lounge access

Credit card frenzy

Credit cards are one of the easiest ways to obtain surplus funds for managing short-term financial obligations. Customers can use the pre-approved credit limit to pay for almost all expenses, including food, travel and shopping on e-commerce websites among others. Banks are capitalising on this trend of availing credit for consumption purposes.

Between January and June this year, outstanding credit cards in force increased from 7.03 crore to 7.87 crore, according to the Reserve Bank of India data. In September last, the total outstanding credit cards were at 6.50 crore.

In June itself, the total number of credit cards rose more than 25 percent year on year. Total credit card spends have stayed above the Rs 1 lakh crore mark for four consecutive months through June, according to the data.

The trend of higher credit card spends, according to bankers, is likely to gain further momentum as the festive season approaches. The major festive season in India commences during October and November when consumers line up big-ticket purchases like smartphones, electronics, fashion and beauty-related products, among others.

“The credit card spends always peak during the festive season, and we hope to see the same this year,” said Ambuj Chandna, President of Consumer Assets at Kotak Mahindra Bank.

Banking on co-branding

In India, banks have partnered with particular brands to step up usage of credit cards. These cards, also known as co-branded credit cards, offer exclusive discounts, cashback offers and reward points for brand purchases. HDFC Bank, Axis Bank, IndusInd Bank and Kotak Mahindra Bank have also announced multiple co-branded partnerships over the last few months.

“The success stories of a few recent e-commerce, airline, telecom, payment aggregator partnerships have demonstrated the massive potential market that a co-brand credit card can unlock,” said Sanjeev Moghe, President and Head - Cards and Payments, Axis Bank.

For example, Axis Bank, in May, partnered SpiceJet to launch a co-branded credit card, which comes in two variants – SpiceJet Axis Bank Voyage and Voyage Black - and is aimed to enhance consumer’s travel experience and incentivising credit card purchases.

“Partnering with merchants helps credit card issuing banks to tap a new customer base, while helping the merchant partners drive higher engagement from customers,” added Moghe. “This is a win-win situation for all, including the end-customer, who derives higher value from the co-branded card.”

Many other banks have joined the co-branded space. Kotak Mahindra Bank, for instance, announced a co-branded partnership with Indian Oil in March. Prior to that, the bank had announced similar partnerships with IndiGo and PVR.

“There are a couple of other partnerships in the pipeline which we will roll out soon,” said Kotak Mahindra Bank’s Chandna.

Tapping innovations

Banks have traditionally sourced credit card customers or any lending product customers from savings accounts, cross-selling and proprietary marketing. Banks’ partnerships with fintechs are primarily a way of acquiring new credit card customers.

With a strong customer engagement and analytics model, the credit card segment becomes an “obvious segment” for banks to partner with companies with a strong value proposition, said Soumitra Sen, head -- consumer banking and marketing at IndusInd Bank. This gives the customer the added advantage to get credit period and rewards from banks while the partner is able to drive loyalty, added Sen. The momentum is likely to continue as new consumer use cases emerge, he said.

According to Shailendra Singh, managing director of Bank of Baroda Financial Services, going forward, a multi-party model of issuer, merchant and fintechs may emerge, to get the best of all three for the customer.

Singh was referring to the emergence of CCAAS, or Credit Card As A Service, start-ups, that bring value to customer lifecycle management with or without being a party to the arrangement between the issuer and the co-brand partner. “We will see more such interesting developments going forward,” Singh said.

Asset quality risks minimal

Private banks prefer to disburse unsecured loans, like credit cards, as these have better profit margins. Many private banks like Kotak Mahindra Bank, Axis Bank and ICICI Bank have shown a rise in the disbursement of unsecured loans last quarter, as per their latest quarterly results. Kotak Mahindra Bank, for example, saw an 81 percent year-on-year increase in unsecured loans in the April-June quarter. Credit card lending grew 17.4 percent quarter-on-quarter for IndusInd Bank.

Also read: More private banks are offering unsecured loans. Here's why

This trend is reminiscent of the early 2000s when banks' push for unsecured loans ended up being a disaster for banks as loan defaults rose. However, this time, history may not repeat itself, said bankers, especially as banks have tightened their underwriting practices.

“Customers applying for the co-branded credit card are known to the merchant,” said Axis Bank’s Moghe. “Issuing banks are better placed to underwrite these customers as they show association with the merchant and thus, co-branded credit cards come at lower risk as compared to completely open market customers.”

Kotak Mahindra Bank’s Chandna concurred.

“The default risk in the credit card portfolio is pretty much within what is factored by us,” said Chandna. “For Kotak, it will be within the expected range and we don't see any discomfort there.”