Credit Cards, the most profitable product for banks, are again gaining steam.
Commercial banks are aggressively launching new credit cards, taking the organic route, the co-branding model, or partnering with fintechs as the pandemic has accelerated the shift to digital transactions and e-commerce even in small towns.
There has been a flurry of card launches in the recent path from various banks including state-run lenders and the country’s largest private lender HDFC Bank.
Credit card rush
On September 20, HDFC Bank partnered with Paytm to launch a co-branded credit card, while Federal Bank launched three variants of credit cards in association with Visa earlier in the month. State-run lenders including Bank of Baroda and Union Bank of India have also rolled out co-branded cards, while Axis Bank launched a wellness credit card in January 2021.
In April 2021, AU Small Finance Bank (SFB) became the first SFB to roll out credit cards and so far has issued 40,000 cards, half of them to first-time users.
According to bankers and industry experts, the growth momentum in the credit card biz is expected to continue and double in next 18-24 months from current levels.
“The growth is going to be robust. There was a shake up last year with COVID-related risk and in the longer term, we expect robust growth in the market for the top few players,” said Sanjeev Moghe, EVP & Head, Cards and Payments, Axis Bank.
The growth could be either organic or based on partnerships (co-branded cards), Moghe added.
According to industry estimates, 60 million cards in the market are held by 35 million people in India with a market capitalisation attributable around $60 billion.
Nitin Gupta, Founder & CEO, Uni, offering a pay-later card, explains the potential behind the growing and profitable credit card business in India. Gupta said SBI Cards has a $12bn market cap and has 12 million cards, HDFC Bank has 15 million cards and 25 percent of its profit comes from its credit card business, it’s a $110 billion bank by market cap.
With over 150 million people shopping online and over 200 million having a presence on credit bureaus over the next 5 years these 35 million Indians and 60 million cards should grow to 100 million Indians and 200 million cards, Gupta said. An incremental $100 billion worth market cap is going to be created in India in the next 5 year from the credit card industry, Gupta said.
So what will drive the growth?
Mayank Markanday, Chief Of Credit Card Business, AU Small Finance Bank said around 80 percent of credit cards are in 40 cities only, and for the rest of the country penetration of credit cards wasn't that significant as banks felt there were no avenues for card holders to spend.
The pandemic has led to rise in digital consumption and logistics reaching tier-3 and tier-4 cities and suddenly everything is online as people have started shopping online, and customers are asking for credit cards, Markanday added.
AU Small Finance Bank wants to onboard more customers who have not got credit cards because of their geographical location (beyond 40 cities).
As India is underpenetrated when it comes to credit, unsecured lending happens to be an easy proposition by banks who have also managed the risks associated with credit cards.
In the last few years, the institutions have actively invested in building a strong risk infrastructure by leveraging data science. This has led to an efficient way to manage credit card risk, said Vishal Balabhadruni, Research Analyst at CapitalVia Global Research.
The growth in disposable income of customers along with cheap credit and increasing digital transactions have led to an increase in the issue of credit cards, Balabhadruni added.
Banks had slowed down new launches last year because of COVID-19.
As revenge travel was a thing, credit card issuances are going through the same revenge launch mode, said Madhusudanan R, Cofounder, M2P Fintech, providing API infrastructure to banks and fintechs to roll out customised credit cards. Last year when the pandemic hit, banks were unaware how it would play out. That put a break on new product launches and banks took time to digitise their processes, Madhusudanan added.
According to Madhusudanan, balance sheet play of credit cards is probably the best product from a return perspective. PSU Banks too have started pushing the credit card play and banks today can issue credit cards from start to finish in 2-3 months. A lot of these factors have come together and are driving the card issuance, said Madhusudanan.
Where is the market headed?
This industry is highly concentrated with top six players accounting for 81% of cards and there's need for more players, said Amit Gupta, VP-Fund Manager, PMS at ICICI Securities.
Credit card spends as a proportion of total card spends has risen from 11 percent in 2017 to currently 18 percent which is quite sharp growth and this is where more new offerings are coming, Gupta of ICICI Securities added.
According to Moghe of Axis Bank, credit card as a product works pretty well and still has the aspirational pull along with rewards and convenience to pay back.
Combining all of these factors it’s a secular trend and fairly a profitable business, Moghe said.
The penetration will double in two-three years’ time from current levels, said Markanday of AU Small Finance Bank.
Banks could possibly use a buy-now-pay-later channel as a customer acquisition strategy. Madhusudanan explains, there is a thin line of difference between BNPL and credit card products, the latter has risk underwriting at its core. Banks could start with a small ticket credit under BNPL and issue a credit card to their customer a year later as they get more information.
The growth will continue to accelerate, currently on average one million cards are issued in a month, it could potentially go to 3-4 million down the line in 18-24 months, said Madhusudanan.