Is the Indian credit card market tumbling into mayhem?
A business model crisis is looming over the Indian credit card industry
“The credit card system, particularly the revenue structures, that have remained intact for the last 40 odd years might just be about to go down in shambles.”
There’s much fanfare about India’s evolving credit card landscape. In the last five years, the number of credit cards nearly doubled to 87 million, as per RBI data of May 2023. At this rate, we will touch the 100 million credit cards milestone in a couple of quarters. Along with credit card issuance, the transaction volume, value, and average ticket size have also grown significantly. However, it is not as exhilarating as it appears, at least not for many credit card players.
Those familiar with the industry know that the revenue streams of credit card players are fairly straightforward; there’s Merchant Discount Rate (MDR), annual fees, interest charges, late payment fees, and foreign exchange markup.
What’s interesting, however, is that, despite significant growth in market size, profit margins are thinning. For starters, customer acquisition cost has been soaring for card issuers. The credit card market is so crowded that competitive advantage comes at a price for issuers — ‘annual fee waivers’ and ‘grand reward programmes’ have become non-negotiable selling points. And these marketing tactics have been eating away at the bottom line of banks.
Banks no longer find lounges as relaxing as before
Last month, The Ken published a story on how banks’ biggest selling point — free airport lounge access has come to bite them. Rising air travel alongside credit card issuances led to 8.5 million footfalls across airport lounges in 2023 — up from 3.5 million a year ago. Banks did not foresee this type of usage and are now burdened with increased costs. The story reported that banks cough up Rs 800 for every domestic-lounge access and around Rs 1,500 for an international-lounge access to lounge providers such as Dreamfolks. Extending free lounge access to non-premium card users who enjoy waivers in annual fees have left card issuers with no real way to recover this cost. And when customers don’t make any spends on these cards and only use them for lounge access, it hits where it hurts the most.
This is why top card issuers have been revising their lounge policies, hiking annual and late payment fees only to attract the ire of Twitterati.
Declining revolvers are making banks dizzy
Besides footing travellers’ airport lounge bills, banks are increasingly concerned about the declining number of their most profitable set of users — the so-called ‘revolvers’. Revolvers are those who carry their outstanding balance to the next month or those that convert their balance to EMIs. The Ken reported that users are increasingly choosing to pay their card dues in full, depriving banks from earning about 42% interest per annum.
UPI is throwing a spanner in the works of credit card players
Another significant source of revenue that could be impacted, besides annual fees and interest charges, is the MDR. In June of last year, the RBI introduced credit services on the Unified Payments Interface (UPI), allowing only RuPay credit cards to be linked. As a result, card network giants like Visa and Mastercard have already begun losing out on MDR, which is currently capped at 2%. Moreover, transactions valued up to Rs 2000 continue to be exempt from MDR, further diminishing its potential as a revenue stream.
The RBI is taking it even further by expanding the scope of UPI to include the operation of pre-sanctioned credit lines. Furthermore, there's a new trend where fintech companies are partnering with banks to introduce credit on UPI products, offering rewards for even small transactions. All these measures could pave the way for UPI to replace credit cards, particularly in the low-value transactions segment, leading to a substantial decline in transaction volumes for credit card companies and subsequently limiting their opportunities to earn through MDR.
The urgent need to rethink card economics
The truth is credit cards are still a largely underpenetrated market — only 3% of the population has a formal credit card. Its growing size is not fully attributable to unique users. Even though 87 million cards have been issued, the number of unique users hasn’t changed much. Experts say, Indians hold 1.75-2.25 credit cards on average. And the few that have jumped on the credit card bandwagon have perfected the art of optimisation. Users pay rents via credit cards to boost spends and earn fat rewards — sometimes so fat that they cover their total spends.
Clearly, there’s a need to rethink loyalty programmes. Issuers could consider moving toward partly or fully merchant-funded on-card financing offers, rewards, or both to help them sustain their profitability in the face of mounting margin pressures. The key will be to deliver value not only to transactors but also to revolvers, who benefit from BNPL products that are partly or fully funded by merchants.
Banks wanted people to borrow and now they are. But, it’ll be a while before the entire exercise in access and inclusion reaps material rewards. Till then, it’s anybody’s guess who gets the credit.