A hot credit card trend is giving banks a cold sweat

medium nocaption116794445Hrishikesh Singh, a Mumbai-based content marketing professional, is weighing heavy on credit card companies. He has seven credit cards to his name.When the 28-year-old got married last December, nearly 80% of his wedding expenses were spent via his Amex and Axis Magnus Card. He accumulated enough reward points to fund his five-day hotel stay for his honeymoon in Sri Lanka. After regularly using the credit cards, he realised that even if there is an annual fee, the benefits offered by banks could more than make up for the cost.“Since the pandemic, we moved to online deliveries of groceries and medicine. All I had to do was make those payments using a credit card. That gives me significant points and other benefits,” says Singh as he shows his credit cards — two each from American Express and HDFC Bank, and one each from Axis Bank, HSBC and ICIC Bank.Even though data shows that credit cards have strict eligibility criteria, more and more issuers are now luring customers with attractive offers.According to Aditya Gupta, founder and chief executive officer of Credilio, one of India’s largest credit card distributors, if 100 people apply for a credit card in India, only 15-20 get it. But customers who qualify for credit cards have become smarter. Most of them now know how to get the maximum benefits while avoiding the potential debt traps that come from owning credit cards.“There are 42mn credit card users and 100mn credit cards issued, so on an average every user has 2.2 cards,” Gupta adds. medium110330622The country has more than 101mn credit cards and Indians spent about ₹18.3 lakh crore, up 27% year on year, via credit cards last financial year. Yet, credit card companies are not celebrating.Blame a smart breed of customers for this.Take for example SBI Cards, India’s second largest with nearly 19% market share in credit card issuance.SBI Cards has seen its revenue and total expenditure growing on a par in FY24. From FY19 to FY24, its revenue from operations rose 2.4 times from ₹6,999 crore to ₹16,968 crore. Total expenditure also rose 2.4 times during the same period from ₹5,952 crore to ₹14,251 crore. As a result, the company’s margins have shrunk and its share prices have corrected over the past year.Credit cards companies, aka banks or issuers, have three major streams of earning revenue. First is the different kinds of fees (annual charge, late fee, etc) they charge the customer. Second is the interest income on revolvers and EMI transactions. Third is the interchange fee of around 1.5%. On the expenditure side they have customer-acquisition cost, cost of funds, benefits like rewards and cashbacks and operational cost.A revolver is a customer who carries a balance on their credit card account from month to month, while a transactor is someone who makes payment of full dues every month.SBI Cards had 49% revolvers as a share of total receivables, 17% transactors and 34% EMI customers in April 2020. The situation in March 2024 is very different. It now has 39% transactors, 24% revolvers and 37% EMI customers.When SBI Cards went public, its initial public offering (IPO) was compared to US-listed American Express. However, the stock is currently trading below its IPO price of ₹755 per share. On a one-year basis, the stock is down 17% while the benchmark indices are up 20%. Compare this to American Express, which is up over 60% while the S&P 500 has risen 28% over the past one year, shows Trendlyne data.While the average cards per user is still higher in the US, since 2017 the number has been on a downtrend. Data from multiple reports shows that roughly 50% of Americans have a credit card while only 3% of Indians have them. medium110330671The tribe of smart credit card holdersA bunch of credit card users among this 3% are getting smarter, denting the margins of card companies. Many among them have learnt from their own mistakes of the past.New Delhi-based branding and marketing professional Divya has a rich history of credit cards. In 2010, she started her journey with HDFC, got hooked to American Express Platinum, hated her short stint as a customer with Kotak Mahindra Bank, got charged for annual fee by Axis for a card that was issued but never dispatched and is currently enrolling for her second ICICI Bank card.“It is not a blessing to have a credit card,” says Divya, half-jokingly.About a decade ago, Divya used to be a revolver customer for HDFC Bank and American Express. She continued paying minimum dues on her card for several years until a friend explained to her about how interest gets charged and calculated on credit card bill dues.Divya may not have known about how credit cards earn from compounding interest but like most middle-class Indians she feared debt. Since then, she has seldom missed her credit card bill payments and has always paid in full.While many might rightly hate credit cards after such an experience, Divya didn’t. She has taken the bull by its horns and now hunts for credit cards that offer the best rewards.“I make most of my transactions on my credit cards to maximise the reward points. On my Amex card annually, I get enough reward points to get about three domestic air tickets free, apart from other discounts,” she says.Hrishikesh and Divya are part of a growing tribe of transactor credit card users in India, especially during the pandemic, when many people from metros and urban cities moved to online shopping even for essentials such as groceries and medicines. As they hunted for benefits such as discounts and cashbacks, credit cards emerged as the preferred payment option.According to a McKinsey report on the US credit card market, the birthplace of the product, revolver customers generate about 85-90% of the issuers’ revenues and net of rewards. They also account for around 60% of the users in the US. Profit per account stands at around $240 for revolvers but at just $25 for transactors, says the report.Multiple cards, static spendingReserve Bank of India (RBI) data shows that between FY19 and FY24, card issuances have risen 116% from 47mn to 101mn. In the same period, average spends per card has grown just 31%. As the same customers are being issued multiple cards, consumer spends on credit card are being divided across multiple cards and benefits are being used up effectively. When customers take multiple credit cards, they usually have a better understanding for what benefits they seek in a credit card offer.When Singh decided to take his first credit card in 2020, he chose the ICICI Amazon Credit Card because it was highly recommended on social media. Barring the marriage-related expenses mentioned earlier, Singh’s spending has remained the same over the past few months.“Just because I have seven cards does not mean I have increased my spending. Rather, I use these cards for specific benefits such as reward points, cashback, etc,” he says, adding that regular spending is mainly divided between Amex and Tata Neu HDFC Infinity. medium110330704Credilio’s Gupta says that 75% of the credit cards sold in India are to customers who already have an existing credit card. When customers take multiple credit cards, they usually have a better understanding of what benefits they seek in a credit card offer. For example, Divya wants an ICICI Privilege account to get a credit card with more discounts on e-commerce sites and cashback rewards.“When a customer is taking a second, third or fourth card, they have a very clear objective. They want cards that give e-commerce discounts or reward points for travel or offers on food delivery,” says Gupta.Many of the top credit card issuers like IDFC First Bank, Axis Bank, ICICI Bank, among others are cutting down on benefits now, according to reports. Banks have increased the threshold on spending to access airport lounge, increasing membership fees, and even reducing issuances to certain categories like tier-3 city customers and self-employed.“The idea was to choose a card that suits your spending. For instance, my Axis Magnus card is coming up for renewal, but I would not be continuing because the benefits have been significantly reduced after devaluation,” says Singh, adding that paying an annual fee of ₹12,500, it does not make any sense after the benefits have been reduced.On the flip side, access to multiple credit cards is also leading to a rise in delinquencies, as some customers are taking multiple EMIs or maxing out limits. Some of these stresses are visible in earnings of SBI Cards, the only listed credit card issuer, which can be a proxy for the industry.“In the light of sustained delinquency flows, the company (SBI Cards) has taken requisite corrective actions in certain geographies and customer segments... It was noticeable in H2 FY24 that new sourcing was curtailed in the segments of self-employed, category B salaried, below 30 years age group and tier-3 locations and beyond,” Yes Securities said in a recent report on SBI Cards.High competition, rising costsGenerally, banks like credit cards because, one, it’s a sticky product that opens opportunities of cross-selling and, second, it can boost profitability given the high interest cost of revolvers.When it comes to benefits, banks pay for around 60% of the costs while co-branded partners pay for the rest, says a credit card division head at a mid-level bank. Co-branding partners give card issuers access to their customers when partnering with banks. In return, the customers get financing to purchase more from the co-branded partners. Co-branding partners are mostly e-commerce platforms, airlines, travel and entertainment websites.“The cost of acquiring a customer for credit card via a DSA (direct selling agent) is, on an average, approximately ₹4,000 per customer,” says Adhil Shetty, CEO at BankBazaar.com adding that competition among credit card companies is likely to get intense as four-five banks are in the process of launching credit cards.There are fintech companies, too, that offer co-branded credit cards. But these companies could eventually become competitors to existing issuers, as they also see credit cards to acquire sticky customers.However, recent RBI norms have clarified that co-branded players cannot have access to customer data and the same will rest with the banks alone. Fintech companies also look at cross-selling as a huge lever to improve revenues.“Many co-branded fintech players are now looking to become licensed issuers because they too want access to customer data in order to able to cross-sell products,” says Shilpa Mankar Ahluwalia, partner and lead - fintech at law firm Shardul Amarchand Mangaldas & Co.One of the things that makes credit card business attractive in India, despite the issues mentioned above, is the low-cost EMI feature. It is a profitable, relatively low-risk business. According to Shetty, this is one area where the Indian market has out-innovated its western counterparts.The power of EMIWhile the share of revolvers in the top line is dropping for SBI Cards, the share of EMI customers is rising.In low-cost or zero-interest EMI, the bank gets paid the interest component by the product seller, which in many cases can be an e-commerce platform or an offline branded chain store. Customer defaults in the category are relatively low and this feature also brings the customer to the bank rather than the bank paying a hefty acquisition cost.The challenge here is while revolvers pay interest of around 36-38%, EMI customers are charged an interest of 15%.“In EMIs, banks earn at a lower IRR (internal rate of return), but the loss rates are much lower, whereas in revolver, losses tend to be higher. We are talking about loss rates which are dramatically different, and so are the risk banks take in running both books,” Shetty explains.Credit cards are inherently a risky product as they encourage customers to spend beyond their current means. While transactors are the safest customers, they don’t contribute much to the profits of credit card issuers. EMI customers, on the other hand, are slightly better from a profit generation point of view. Revolvers are high-risk customers. While the bank can squeeze them for profits by virtue of compounding interest, the chances of default from these customers are highest.Divya recalls her friend had warned her that minimum payment is generally used by people who do not have money to pay their bills in full. Even though she has rid herself of paying minimum due bills, she says she knows many young people who knowingly pay just minimum dues every month.The average debt of individuals enrolling for debt consolidation is around ₹4 lakh and 70% of this is from credit cards, says Ritesh Srivastava, founder of FREED, a debt-relief platform that helps debt-burdened consumers.“Consumers want that ease of extended payment cycle and with the lending guidelines of buy now, pay later become stricter, banks are racing to capture this space by offering loans on credit cards on EMIs at 0.99% monthly interest rate, which looks very attractive,” says Srivastava.For a product that is already being squeezed for benefits by transactors and seeing growth in relatively low IRR business like zero-cost EMI, increasing number of defaulting customers is worrying.The gross NPA (non-performing asset) ratio of SBI Cards is showing signs of further deterioration, with gross NPA ratio up 12 basis points (bps) quarter-on-quarter and 41 bps year-on-year to 2.8% at the end of March. In its Q4 results call, SBI Cards said it is taking “corrective actions in certain geographies and customer segments” due to “sustained delinquency flows”.The final cutAt the time of the SBI Cards listing, many brokerages had given a subscribe rating for the IPO with some comparing the potential of the homegrown major to becoming what American Express is in the US.Four years later, with more issuers chasing fewer customers, the margins of credit card companies are being squeezed. Despite the thinning margins, credit cards remain a lucrative business for banks due to the cross-selling opportunities they offer. But it needs to attract new customers.There are roughly 400mn digitally transacting customers. But these all cannot qualify for unsecured credit cards as many might not meet the qualifying criteria. One way the credit card companies could tap these customers could be by helping the digitally transacting population to build their creditworthiness.Secured credit cards, cards backed by fixed deposits, are one of the ways in which credit history could be built for new customers. Secured credit cards have been in existence but they have not been marketed by banks until now.But until new credit card issuers don’t find fresh customers, the likes of Singh and Divya will continue to get the best deals.