India has always had a low penetration of credit cards, and digital payments are primarily being driven by debit cards, net banking, wallets or UPI, all of which use the savings bank account as the source of funds. That is showing some early signs of change.
A clutch of early-stage fintech startups have partnered with some ambitious private-sector banks to popularise credit cards across commercial as well as retail segments.
Technology players like M2P Solutions and Zeta are helping legacy financial institutions scale up their backend to integrate card payment services quickly and at a low cost.
Another clutch of players like FPL Technologies, Karbon, Enkash, and neo banking startup Open are trying to get customers through their digital distribution channels.
Together, they hope to expand the credit-card base in India by at least three times in the next couple of years.
Peak into history
India has 845 million debit cards and 57 million credit cards at present. There are 400 million Indians with a bureau score -- that is they have borrowed money from formal channels in some way or the other. Why are there only 57 million credit cards when 400 million consumers have been evaluated for credit? Can 350 million consumers be ineligible for a product?
No. The answer is the skewed pricing model of credit cards, regulatory restrictions, distribution pain points and lack of interest among many banks to get into the business. But entrepreneurs want to change that.
“Six to seven banks enjoy 85 percent market share in the credit card business. There are no public sector banks, except Bank of Baroda and State Bank of India. This reflects the massive business opportunity here,” said Anurag Sinha, co-founder, FPL Technologies.
The startup allows consumers to apply for a credit card through the OneScore app, which it runs.
Sinha said that there are multiple pain points around credit cards like redeeming rewards, and call centres remain the only touch point for customers. Interest rates on revolving the outstanding are very high. All these problems have kept Indians away from credit cards.
Can tech help?
Startups feel they can leverage technology to solve these problems. The credit card game can be classified into three buckets of business: credit, convenience and rewards. Players like American Express and Cred play in the rewards space, commercial credit cards try to offer convenience like interactive dashboards, control over payments, great customer experience, and the third are core credit card players who want to make money through interest.
“Making money on credit cards is tough. You have to get the right product and get the right mix of customers to make money. We can help banks get the right product and help them acquire new customers,” said Sandeep Srinivasa, co-founder, Redcarpet, a Delhi-based startup, which works with banks to offer credit cards.
For instance, Enkash is working with State Bank of Mauritius to offer credit cards to small businesses, otherwise not catered to by banks. Enkash does onboarding of customers, statement generation, soft collections and many other services while the risk is primarily borne by the bank.
“We are helping banks quickly ramp up their credit-card base,” said Yadvendra Tyagi, co-founder of Enkash.
Businesses need customised solutions for their cards, like 15-day cycle, instead of the regular 45-day cycle, vendor payouts and the like. Players like Enkash customise such solutions. Tyagi explained while banks work with the large corporates, fintechs can work with vendors, offering them credit cards with lower spending limits, to begin with. This will help expand the base, he said.
Bengaluru-based Open is also trying to build up a credit card story. The startup helps small businesses open current accounts digitally. Now Open is bundling a credit card, along with its other offerings.
“We are running it on beta, with 5,000 cards distributed. The average spend on these cards is Rs 50,000. The card weaves into our expense management piece as well,” said Anish Achuthan, cofounder, Open Financial Technologies.
Startups can tailor-make rewards for businesses, something a bank cannot do. For instance, instead of standard reward points, travel miles or hotel vouchers can be offered on bill payments. This can help an entrepreneur get good deals on his business tours.
While ease of use is the mantra for commercial credit cards, retail customer acquisition is going through the co-branded route.
The co-branded story
One of the most successful co-branded credit cards in India was, perhaps, the Jet Privilege. Imagine a set of top executives whose banks want to offer a credit line. Which is the best place to catch all of them together? Of course, through the top airlines of the country, which was then, Jet Airways.
Now, consumer-oriented startups want to replicate that success, not only for the super privileged but also for the digital-savvy consuming class of the country.
Case in point: Paytm Citibank, Ola-SBI and IRCTC-SBI. Banks believe co-branding is the way to go to acquire customers fast and cheap. In all these partnerships, Paytm, Ola and IRCTC bring the customers, banks take the credit risk.
“Many startups have a 40-50 million transacting user base. They can underwrite these customers on the basis of their spending habits, and the best consumers can be offered a credit card,” said Madhusudanan R, founder, M2P Solutions.
M2P Solutions helps set up banks and brands on the same platform through their technology solutions and also offers product management.
Industry insiders say that the co-branded story is something many startups want to build and a lot of these partnerships could be going live within the next six months.
This process reduces the customer acquisition cost massively and increases value proposition for brands as well.
Industry insiders have pointed out that the demand for co-branded credit cards is soaring and supply is constrained. Banks like RBL Bank, IDFC First Bank and State Bank of Mauritius are using this opportunity to strike deals and hoping to ramp up a transacting credit-card user base quickly.
“We help banks prepare for these integrations at scale and also charge them less. We are nimble and can modify our offerings as per the requirement,” Madhusudanan said.
The biggest advantage of a card product is control and visibility on spends for the bank and the fintech. As Sinha from FPL Technologies pointed out, there is a reason brands want to offer credit cards, which, unlike a personal loan, gives a lot more visibility on consumer behaviour.
A personal loan, for instance, he pointed out, is released into the customer’s bank account. After that, the bank will have no visibility on the spend.
“Both credit cards and savings accounts offer a continued interaction,” he said.
Srinivasa of Redcarpet pointed out that a credit card helps build brand loyalty. It is a plastic card used to pay at multiple points, the card carries the logo of the brand, the name of the bank, and it creates massive visibility for brands.
Now with solutions like auto debit on UPI, Srinavasa said that he expects post-paid options to become more prevalent in ecommerce. Brands which offer post-paid options is taking a stepping stone to a full-fledged credit card, he added.
As the card acceptance infrastructure grows and the merchant discount rate on debit cards inch towards zero, banks will also be keen on credit cards for high-value customers.
Merchant Discount Rate (MDR) is the price merchants have to pay their banks for availing digital payment services. While MDR on RuPay debit cards and UPI is zero, the MDR on credit cards is market-driven.
The credit card acquisition business sounds straight forward, but it is not so. Take the example of ride-hailing major Uber scaling down its financial services offerings in the United States earlier this year. It had plans to foray into credit cards and so many other financial services, but none of that seems to have worked out.
Of course, COVID-19 has played a role here. While ‘embedded finance’ which stands for financial products coupled with other services is the future, not every player will be able to ace it.
Skeptics point out that credit card is also a very tricky product. It is easy to roll out, but, after all, the revenue depends on repayments. Not many consumers understand how interest gets accrued on a credit card. The rate of interest is very high ranging up to as high as 35 to 40 percent per annum. Hence, average customers might get caught in a debt trap.