Moneycontrol Pro Panorama | The irresistible world of credit cards

India’s banks are banking on the retail customers in driving credit and cards are a lucrative business when done right.

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Every day, someone somewhere is swiping plastic money to fulfil their desires through credit.

The history of credit cards can be traced back to the 1920s in the US when hotel chains, oil companies and other firms issued them to customers that made regular purchases at their outlets. The first formal credit card that could be charged was issued by Diners Club in 1950 and then there was no looking back. Diners Club came to India in 1969, being the first to issue credit cards here as well.

Credit cards became a bit more popular after Andhra Bank introduced the first credit card in 1981 and Central Bank of India followed. Both were powered by Visa. This was the time Citibank began to offer Indians a taste of international credit card experience. Citibank was a big mover in the credit card growth and acceptance curve in India. That said, plastic credit predominantly remained the tools of a select few in a society unwilling to accept borrowing as a form of fulfilling one’s desires.

Until the liberalisation of 1990s, the boom in India’s consumption was restricted and so were credit cards. Earliest available data from the Reserve Bank of India (RBI) show that 17 million cards were in force in April 2011 of which 2.2 million were by Citibank. HDFC Bank and State Bank of India (SBI) were way ahead in terms of cards in force. But Citibank won when it came to total amount of transactions.

Citibank’s cards earned big money for the bank because its users were big spenders. The per card transaction value was higher compared with most Indian banks and the credit that borrowers revolved (postponed repayment) was also high. Note that Citibank’s card delinquencies weren’t out of the ordinary.

As a Citibank card was coveted by many decades ago, its business was coveted by many domestic banks. Finally, Axis Bank swooped in to buy Citibank’s retail business when the latter chose to exit India as part of its global strategy.

What is so appealing about credit cards and more so about Citibank credit card business?

Credit cards give the freedom to purchase goods or services on credit -- perceived to be free of interest -- for 45 days. You buy now and pay 45 days later the amount you would have coughed up right away if it was a cash or a debit transaction. That 45-day free money is mouth-watering. For this the lender, credit issuers, get a fee from the merchant for the convenience of using their card system and from the customer through an annual fee. Post 45 days, the borrower must repay or face a stiff interest rate -- far higher than normal personal loans.

As stated earlier, Citibank credit card customers are big spenders. Big spenders are typically perceived to be those that belong to the high net worth segment. For Axis Bank, getting Citibank’s customers is a fantastic cross-selling opportunity. Since credit cards are also a high margin business -- when done properly -- Axis Bank is looking at a gradual increase in its margins.

Citibank’s acquisition has already catapulted Axis Bank to the top five in the credit card market, giving it a market share of 14 percent. For Axis Bank to expand on Citibank’s impeccable card business profitability, it has to get the pricing right and target clients with precision.

India’s banks are banking on the retail customers in driving credit and cards are a lucrative business when done right. Axis Bank’s strategy is clear as well. The world of credit cards has changed dramatically over the decades. The consumption frenzy has resulted in co-branded cards, cards with specific benefits targeted at specific activities, and cards that attach a premium depending on the income of the customer -- think snob value. The sheer swathe of different types of credit cards issued by banks is mind boggling and at the same time liberating for Indians looking to shop.

The question to ask is this—Will India have enough consumers to keep up this credit momentum or alternatively will its existing consumers keep up their spending spree? For now, the signs from lenders such as Bajaj Finance, HDFC Bank, ICICI Bank and Axis Bank seem to suggest a strong continuation.

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Aparna IyerMoneycontrol Pro