Credit card cos cash in with carrot & stick

Mumbai: After burning their fingers in 2007-08, credit card issuers have discovered a new model which has turned the business profitable. While financial savvy middle-class customers can still strike good deals with issuers, new customers are finding it tough to get their applications cleared. 

    Post-2008 several issuers-—Barclays, Deutsche Bank, ICICI Bank, Kotak Bank, Standard Chartered Bank— scaled back their operations. Established players like Citibank and SBI Card also cut back but both banks are back issuing cards again. HDFC Bank, which was a late entrant into the business, has turned out to be a clear leader grabbing market share after others vacated the space. "After turning around in 2010-11, we have made significant profits in FY12," said Narahari Kadambi, CEO, SBI Cards. He attributes this to several factors most of which focus on disciplined customers. 
    Almost every card applicant would need to get a decent score from Credit Information Bureau of India (Cibil) which means he should have a track record of borrowing without default. The other strategy is nip defaults before they happen. Borrowers are no longer encouraged to pay the minimum amount due and are instead offered an installment scheme for large purchases which is more of a personal loan than a credit card roll-over. Finally, there is a big thrust on electronic payments. Card companies are targeting new categories of services online, encouraging customers to pay online and also offering rewards to those who opt for e-statements. As a result, defaults for the industry which were estimated to be as high as 13% four years ago are now half that percentage. 
    "Banks are targeting card users with stronger value added propositions with focus on activation and usage of the card. Outcome is fewer inactive cards and overall value of transactions has risen even though there are fewer cards in the industry," says Parag Rao, head credit cards, HDFC Bank. One example is annual fees are back but are almost fully reimbursed through freebies such as air tickets. "Further there is also focus on emerging categories of spends such as utility bill payments, insurance premia, internet transactions," Rao adds. Over the last two years most of air ticket booking has moved online as also train tickets. A lot of high value payments such as insurance premium are taking place online, which has resulted in the value of average transaction rising to over Rs 3,000. This has resulted in cards becoming transaction instruments with most holders settling in full at the end of the month. This reduces risk for lenders but also lowers earnings. Rao says this is where cards are headed to. "Issuers need to expand usage by focusing on convenience features so that credit cards also become a preferred payment tool for small value day-to-day transactions," he says. 
    The danger of a low-risk strategy is that it makes cards more exclusive. Today as many as seven out of 10 applications from non-account holders are getting rejected. Banks are now targeting their savings account holders for issuance of new cards. For customers who do not have any borrowing track record or proof of steady income, SBI Cards is issuing cards against fixed deposits up to the limit that they enjoy.