Indian credit card market poised for exponential growth by Sutherland Global Services

Indian Credit Card Market Poised for Exponential Growth November 2013

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India is underpenetrated in credit card ownership when benchmarked with global peers Credit Card Penetration

Commentary

Adults with a Credit Card (%) China India

8% 2%

62%

Brazil Pakistan

• Credit card market in India is among the least penetrated markets globally. There are less than 20 Mn credit cards in circulation, which represents a penetration rate of less than 2% among the country’s 1.2 Bn population

– Spending through credit cards continued to increase in the past five years. It rose 29% to INR 124,393 crore in 2012-13 from INR 96,613 crore in the previous fiscal

29% 1%

Russia

• The increased usage of credit cards by customers has attracted the attention of bankers towards expanding their credit card portfolio. Also, banks are more comfortable in handling electronic payments since there is no physical cash transfer involved

10%

Bangladesh

Nigeria

• Adoption of credit cards is on the rise in India, and customers are getting increasingly comfortable with paying by credit cards

Japan

64%

Mexico

64%

• The majority of the credit card business is still concentrated among the top lenders. Barring SBI, the largest public sector bank in India, private and foreign banks are the largest credit card issuers

Source: World Bank; Sutherland Research

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Public Sector Banksâ&#x20AC;&#x2122; Credit Card Portfolio

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With about an 18% share, PSU banks have the smallest pie of the credit card market. Performance wise too, they lag private and foreign peers Market Share by Credit Cards Issued

17%

25%

55% Public

Total: 17.7 Mn

18%

57% Private

Foreign

Total: 19.6 Mn

Number of Credit Card Transactions* (FY 2013)

Foreign Banks 36%

Cards in Mn

28%

FY 2013

40 35 30 25 20 15 10 5 0

3,573.6

4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0

3,116.7

3,063.5 2,264.8

19.6 11.1 3.5

5.0

Public Sector Private Sector Foreign Banks Banks Banks

Overall

Amount per Transaction (INR)

FY 2012

Cards Issued vs. Amount Transacted per Transaction

Amount of Credit Card Transactions* (FY 2013) Public Sector Banks 12%

Public Sector Banks 16%

Foreign Banks 41% Private Sector Banks 47%

Private Sector Banks 48%

Total no of Transactions at (ATM + POS): 399.2 Mn

Amount of Transactions at (ATM + POS): INR 1244.3 Bn

Source: RBI; Sutherland Research

* ATM and POS

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SBI is the only public sector bank to have a noteworthy presence in the Indian credit card market

Bank

Cards Issued – FY 2013

Cards Issued – FY 2012

125,175

120,625

4,550

3.8%

80,208

69,529

10,679

15.4%

121,062

120,120

942

0.8%

Bank of Maharashtra

16,897

26,332

(9,435)

-35.8%

Canara Bank

61,039

57,586

3,453

6.0%

Central Bank of India

54,611

55,703

(1,092)

-2.0%

Corporation Bank

61,891

59,560

2,331

3.9%

Indian Bank

52,104

43,449

8,655

19.9%

Indian Overseas Bank

44,171

34,568

9,603

27.8%

Oriental Bank of Commerce

15,968

–

15,968

115,781

102,997

12,784

12.4%

Syndicate Bank

67,195

65,436

1,759

2.7%

Union Bank of India

46,579

42,190

4,389

10.4%

Vijaya Bank

40,505

40,214

291

0.7%

2,572,777

2,225,141

347,636

15.6%

3475963

3,063,450

412,513

13.5%

Andhra Bank Bank of Baroda (BOBCards) Bank of India

Punjab National Bank

State Bank of India (SBI Card) Total

Total Additions

Growth Rate (%)

Net Profit FY 2013 (INR Crore)

19.92

-13.0

136.3

Source: Sutherland Research

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Reasons for Failure of Public Sector Banks

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Factors hindering performance of the credit card portfolio of public sector banks

PSU banks such as IOB do negligible marketing and promotions for their credit card portfolio

Bank of Maharashtra issues its customers credit cards as SBI co-branded cards and thus uses SBI expertise and infrastructure

Lack of aggressive marketing

Limited number of corporate and new-generation urban clientele

Poor technology infrastructure

Possible Reasons for Poor Performance Absence of newage branding and product innovation Very few PSU banks offer the interest-free EMI facility for highervalue transactions done using credit card

Poor transacted amount per card per month

March 2013: INR 1,775 for Syndicate Bank as compared to INR 22,219 for AMEX

Poor customer service perception

Source: Sutherland Research

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Go-to-Market Strategy for PSU Banks

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Why PSU banks should take the credit card business seriously? Right time to enter the Credit Card portfolio If a public sector bank wants to enter or expand the Credit Card business, this is the right time for it. Here are some of the reasons why PSU banks should take this path.

Incomplete portfolio Credit Card forms an integral and important part of any bankâ&#x20AC;&#x2122;s portfolio, which it can utilize as an instrument to cross-sell and up-sell other banking products as well. Hence, PSU banks need to add the credit card portfolio to stay competitive

Market conditions are improving to pre-recession levels The Indian banking sector, especially the credit card business, was impacted by the recent global financial crisis. However, with the recovery in the financial environment, players like ICICI Bank, who was the leader in this business in 2008, has now started again to expand its credit card base after a gap of almost four years

26 applicants seeking a bank license from the RBI 26 Indian companies including conglomerates like Tata Sons, Aditya Birla Nuvo Ltd., India Bulls and others have expressed their desire to seek banking license and thereby enter the credit card market. This creates an urgency to act before the competition becomes intense with new entrants in the credit card market

NBFCs also planning to explore the market Non-banking Financial Companies (NBFCs) like Bajaj Finserve have recently sought RBIâ&#x20AC;&#x2122;s permission to float a credit card business on their own. These companies want to enter the domain to tap the potential of increasing spend through credit cards by consumers due to factors like growing online shopping trends in India and elsewhere

Delaying the project means more competition The above-listed points highlight enough reasons for PSU banks to consider entering the credit card business, because in near future the competition is surely going to intensify with new entrants and aggressiveness of the existing players. Moreover, PSU banks should leverage their existing infrastructure and resources to start or expand their credit card operations Source: Sutherland Research

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SWOT analysis of PSU banks for credit card operations

Strengths

Weaknesses

 Huge customer base and existing branch network

 Legacy of Indian public sector banks

 Enhanced technological infrastructure in place

 Late entrant in the banking market domain

 Large base of loyal customers  Good brand recall

Opportunities

Threats

 Low penetration of credit cards in India (immature market)

 Intense competition from private and foreign banks

 Cross-sell and up-sell to existing clients

 Threat of high delinquency rates

 Gain access to untapped rural markets

 Entry of NBFC players (Bajaj Finserv)

Source: Sutherland Research

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PSU banks willing to enter or expand in the Indian credit card market need to borrow few winning strategies from the leaders • Focus on the existing customer base • Increased presence in the merchant acquiring business • Developing new strategic partnerships

• Improved focus on customer service • Target professional customers’ segment

• Aggressive plans for the credit card division for FY 2014 • Continued focus on the existing customer base

• Focus on Rural Customers • Continued innovation to provide secured payment environment

• Focus on adding customers with better risk profile • Innovative plans to add new customers • Growing in the high net-worth, high spending and • Simplification of the application process more profitable customer segment • Growing strategic partners • Continuous focus on increasing customer spend

• Target new customer segments • Simplification of the application process • Focused on growing strategic partnerships

• Focus on Social Media

• Strengthening the digital strategy • Growing strategic partners • Acquisition of the existing credit card portfolio of other banks Source: Sutherland Research

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PSU banks need to get rid of constraints specific to them and frame an effective strategy to compete with leaders in the credit card business

Decide on an operating business model

Key Constraints  Lack of aggressive marketing plan  Lack of aggressive and efficient sales channel

• • • •

Joint Venture In-house Retail Separate business unit Outsourcing

Build strategic alliances with the following • •

Network partners (MasterCard or VISA) Co-branding partners (Travel, Retail, etc.)

•

Rewards partners

 Lack of product innovation and product ideas

Build knowledge and expertise about the product features

 Lack of customer awareness

• •

Train existing staff Recruit new staff

 Absence of strategic alliances  Absence of sales and promotion through online platform (social media)  Poor customer service

Decide on a strategic marketing plan • •

Target existing customers • Also, target multiple customer segments

Implement efficient online strategy

Product innovation and efficient customer service •

Innovate and offer products based on customer requirements

•

Get in place a dedicated 24/7 customer service platform

Source: Sutherland Research

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PSU banks will need to apply a new approach to achieve success in credit card operations

Employ new staff or train existing staff for the Credit Card business

DIFFERENTLY

ACT

Make proper utilization of existing infrastructure

Build aggressive marketing strategy

Develop key strategic partnerships with various merchants (travel, retail, etc.) for co-branding and reward points

Target multiple customer segments (not rely only on the existing customer base)

Promote product awareness among existing customers and corporate clientele

Make use of social media and other digital platforms

Source: Sutherland Research

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Thank You