India has generally been a debit card market with more than 824 million such cards in the system compared to just close to 50 million credit cards. This can be attributed to the notion of credit cards being a ‘foreign consumer product’ made for ultra-rich people. The initial credit cardholders in India were mainly people who had travelled or lived abroad and were thus familiar with the operation of the credit card system.
In early 1970, with the increased urban income and higher standards of living, especially in the urban area – the era of ‘consumerism’ began creating up-market consumers. This coupled with the arrival of new consumer products and services led to an increase in commercial activity and consequently, the number of young corporate executives increased. These developments had created a good potential for credit cards in the metropolitan cities of India. Both public and private banks saw this change in consumer behaviour and finally adopted credit cards.
Fast forward to the present, credit cards have been growing at a healthy rate in India with more than a million new customers being added in the last month despite the pandemic!
Besides banks, many fintech firms have emerged in this space using the digital India movement and the increase of urban spending in India. While Cred is one of the biggest players in the space, large tech companies like Paytm, Flipkart and Ola too have started their own credit cards.
This growth coupled with the Indian audience accepting credit cards as a valuable form of payment option has led to an increase in the average spend per card and also the number of transactions. According to data from the Reserve Bank of India, a total of INR 6.07 Lakh crores was spent using credit cards in India.
Credit Card Market Structure:
The Indian credit card market is a fairly crowded place with 74 players operating. The top 5 players, however, have a comfortable 78% share by the number of cards and 75% share by credit card spend. HDFC bank is the leader at close to 28% share followed by SBI cards at 18%, which is trailed by ICICI, Axis, and Citi.
HDFC bank, issued close to 12.5 million credit cards in the last fiscal year making it the clear leader, but with SBI Cards with its recently issued IPO, plans to overtake HDFC in the next 3 years using the brand name of SBI coupled up with new innovations.
The foreign players have been suffering the most in terms of market share. For example, Citi had a market share of 13% in FY14 which dropped to 5% in FY19. Axis bank has profited the most with this, growing its card base at a CAGR of 34%. SBI comes second with an impressive 24%, followed by HDFC and ICICI at 19% and 16% respectively. One major catalyst that changed the growth rate from low double-digit to the high teens to early twenties rates was demonetization. Growth rates for the top 5 players went up from 11% in the year before demonetization to 17% in the year of demonetization.
Despite being the fifth-largest player in the space, Citi boosts the highest average spend on its card touching close to 2 lakh per card. The other four major players have had nearly the same steady growth in spend per card at 11-12%.
Fintech is another important aspect of the credit card market, with every other fin-tech startup these days trying to venture into lending. These firms are trying to use non-conventional data points to extend lines of credit to people who otherwise wouldn’t have had access to them, thereby greatly expanding the pie to whom credit can be made available and grow fast based on the need at the end of the spectrum. In its current form, these firms are trying to expand the pie and are unlikely to affect traditional credit card players significantly. To top it all, this space is expected to be highly regulated as it grows with restrictions not only on the types of data you can use to extend credit and the privacy of the people involved but also the rates that can be potentially charged to borrowers, which could be major headwinds for the sector. Only firms with a lower cost of acquisition and better lending algorithms (data) will be able to be part of the market.
A small segment of the market are the NBFCs who offer consumers, credit on e-commerce and other platforms with attractively structured no-cost or low-cost EMI options to customers. The growth in demand here is significantly driven by e-commerce, and delinquency rates of this mode are broadly in line with credit cards. With the continued increase in e-commerce, thanks to Jio and Amazon, this sector is expected to grow rapidly in the months to come.
Credit Card Penetration:
Despite the growth, the penetration of credit cards has been pretty low with only 3 in 100 people having a credit card. Though we are significantly behind the leader here: USA, a developed nation, what’s surprising to fathom is that we are also behind emerging markets players like Brazil at 73%, China at 42%, and Indonesia at 7%.
In terms of G-20 countries, India has the lowest penetration and also well below the international benchmark set by the World Bank which is set at 30%. A part of this can be attributed to Indian credit card firms becoming extremely conservative post the 2009 crisis, drastically slashing the cards in circulation. The other reason is the high cost that is incurred in setting up a credit card. These costs include customer acquisition cost which involves giving freebies to customers on joining, risk absorption, logistics, and other paperwork costs.
There are still psychological reasons responsible for the penetration reaching higher levels. A conservative middle-class India still remains relatively scared of the credit card and credit in general. Stories of high fees and rates of the days gone by combined with a general aversion to credit unless necessary requires a significant effort from the credit card company front to bring down. While attitudes around credit are changing thanks to globalization, this is still a significant psychological block to overcome.
Credit Card Growth:
There are many ways in which credit card adoption can be increased by banks and fintech firms –
1. Partnership:
Partnerships with organizations and educational institutes will continue to be the major channel used by credit card companies. It solves two main issues: one, the cost of origination becomes low since you can capture a larger audience at one go, and second, you have lower concerns around recovery since you generally select audiences who have a higher propensity to pay back. HDFC Bank has been making steady progress, recently onboarding folks from top B-Schools with its attractive 10x rewards and lifetime free cards. With this, it effectively gets access to a cohort that will go on to become high spenders, which will indirectly increase its leverage over other competitors in the ecosystem (in the future).
Another mode of partnership that firms have been using is co-branded cards, partnering with everyone from ride-hailing apps to petrol pumps. These serve as a good tool to ensure loyalty to the partner with the use of reward points and also helps in the marketing of the cards. SBI has been the leader in this space with 18 co-branded cards. Apart from loyalty, they also massively reduce the cost of underwriting for the financial institutions since these companies have a wealth of data to understand the customer and their buying patterns.
2. Merchants:
With the onset of Jio-mart and Jio enabled Kirana shops, more merchants will start keeping Point of Sale (PoS) terminals and accepting credit cards. As the innovations around contactless and mobile PoS enter the mainstream, customers will see more advantages in maintaining a credit card.
With the outbreak of the virus, shops and restaurants have started to accept digital payments as this avoids human contact which is a must in the current scenario. This will help to increase the acceptance of credit cards and digital payments in general.
3. Legal Work:
To increase adoption various measures like education on the management of credit cards, proliferation and regulatory acceptance of e-signatures to enable low-cost low-friction customer onboarding can be used other than the traditional push marketing to increase adoption in the country.
Currently, with the country at a standstill, the drivers for credit card growth will be greater organized retail spending and deeper penetration of e-commerce players like Flipkart and Amazon into tier 2 and tier 3 cities. And the growth of ‘contactless delivery’ will spur growth in credit card ownership. But once the pandemic subsidies, Indian economy will be in a downturn, which could get extremely tricky for credit card companies as India will be over-levered, and the ability (due to lower pay) and willingness (because a lot higher importance of expenses for staples and debt repayments for assets like a house) of people to pay back credit card debt might go down significantly.
Until now, India has primarily been a debit-card rich market with a majority of the cardholder population having only debit cards and that too not more than one or two. But the increase in digital payment platforms has helped in increasing not only the debit card penetration but has also helped in increasing the amount of population that uses Credit Cards for their expenditures. The key to continuing this growth would be to tap the potential of this ever-growing credit market through customizing product construct and seamlessly catering to the increased demands and expectations of consumers while still being able to efficiently manage risks.
In summary, it looks like an extremely interesting space bound to have both a positive and negative effects due to the pandemic, with multiple levers of long term growth and a very interesting growth story in India.
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