Credit cards have been a fixture in India for the past 25-30 years. However, in recent times, they've surged in popularity within Indian society, with the number of credit card issuances consistently rising. Despite this positive trend, only a small fraction, about 3.5% of India’s population, actively utilizes credit cards for financial transactions, as per a CNBC TV18 report.
The increasing popularity of credit cards raises an important question:
Why are credit cards in India undergoing devaluation despite being part of a growing industry?
Over the past couple of years, numerous credit card companies have devalued their offerings. Benefits like rewards points, lounge access, movie perks, insurance coverage, and fuel incentives have dwindled. Additionally, extra charges are being levied on rent and utility bill payments. This trend seems alarming. Let’s delve into the reasons behind it.
Why credit cards over others loans(personal loan & OD’s)?
1. They're not perceived as traditional loans in India.
2. They're relatively easy to obtain compared to other loan options, which involve complex procedures and fees.
To grasp the devaluation of credit cards, it's necessary to understand the revenue and expenses of credit card companies:
Revenue:
1. Interchange Fees: Credit card companies earn through interchange fees, a percentage of each transaction paid by the merchant's bank. This covers transaction processing costs and risk.
2. Interest Charges: Cardholders paying interest on outstanding balances contribute significantly to credit card companies' revenue, with interest rates ranging from 15% to 25% annually.
3. Fees and Penalties: Late payment fees, annual charges, and penalties for actions like cash advances or foreign transactions add to the revenue stream.
Expenses:
1. Interest Costs: Credit card companies pay interest to finance the credit they extend to cardholders. This expense forms a significant portion of their costs.
2. Customer Acquisition Costs: Marketing expenses, sign-up bonuses, and promotional offers are incurred to attract new customers.
3. Rewards and Cash Back: Credit card companies offer rewards programs to encourage card usage, bearing substantial costs depending on usage patterns.
4. Marketing Expenditure: Advertising campaigns and sponsorships contribute to customer acquisition and retention efforts.
5. Defaults: Losses occur when cardholders fail to repay their balances, including the principal amount and associated collection costs.
With this understanding, it becomes evident that credit card companies operate on high net interest margins. While banks typically achieve a net interest margin of 3-4%, credit card companies often achieve 12-14% due to their structure.
The recent devaluation of credit cards stems from declining net interest margins. This is evident in the financials of companies like SBI Cards, where net interest margins dropped from 15.90% in FY21 to 12.10% in FY23.
Several factors contribute to this decline:
1. Changing Financial Behaviour: People are moving away from paying just the minimum due amount and are increasingly paying substantial portions of their credit card statements.
2. No-Cost EMI/Easy Monthly Instalments: By converting outstanding amounts into EMIs, the interest rates decrease to 12-18%, leading to reduced revenue for credit card companies.
3. Savvy Consumers: Consumers are strategically using credit cards to maximize rewards, which strains credit card companies financially.
Conclusion- The income of credit card companies is decreasing, while expenses are rising. Unable to increase interest charges due to regulatory constraints, credit card companies are left with no choice but to reduce benefits and offerings on their cards.
