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1/n Credit card business is going through a tectonic shift and here’s all that’s happening.
CC transfers value from the poor to the rich that is, those who don’t pay in full also called revolvers (relative poor), subsidizes those who pay in full called transactors (relv rich) https://twitter.com/amitTwitr/status/1349954321052434434
CC transfers value from the poor to the rich that is, those who don’t pay in full also called revolvers (relative poor), subsidizes those who pay in full called transactors (relv rich) https://twitter.com/amitTwitr/status/1349954321052434434
2/n The interest cost that banks incur on a transactor is recovered by charging additionally from revolvers, thereby, the business model is fundamentally skewed towards attracting more revolvers. (transactor pays 0 APR, while revolvers are at 42$ APR)
3/n But here’s the problem, those who can’t pay in full, there is a fine line between intention to repay and ability to repay, when these 2 don’t meet, you have defaults.
4/n Traditionally, behemoths like Capital one, Citi, leveraged data science to balance a pool of customers to balance between revolvers and maximizing returns.
5/n Historically, such modelling also called Credit policy, is that as a lender, who do you issue a card or lend, at what income levels and at what credit score (where available) how much to lend, in absentia of any of the above, what surrogates can establish customer profile
6/n An example, if a businessman takes a dozen trips with an airline, does this constitute a surrogate for credit worthiness like a salaried white collar individual, the birth of Co-brands as a surrogate and a sourcing channel started with this.
7/n Side note: By far the most successful fleet of Co-brands globally are with airlines, where the flight data is used as a surrogate and the rewards in terms of free flights were a perfect recipe to gain a maximum share of customers wallet.
8/n Lenders over time fine-tuned underwriting models, figured out new surrogates, aka new Co-brand partnerships across high street retailers, Entertainment businesses, e-commerce, affinity actors also came into the mix like campus, sport brands et all
9/n the single driving factor being to identify a pool of revolvers and create a common glue to gain a share of their wallet
10/n In the Indian context, although CC have been around for over 20 yrs, only around GFC the first major impetus on expanding the base was provided, largely led by foreign banks, post GFC meltdown meant, most of these banks coiled back and we were tottering sub 10 mil until 2010
11/n Meanwhile, The Credit Information Companies (Regulation) Act, 2005 paved the way for set up of credit bureau in India, and this slowly allowed reporting of defaults and by the turn of 2010, there was indexing of credit profile at industry level possible, albeit nascent.
12/n Meanwhile, Indian private banks, attracted by the revenue pools of CC, started building the book, the only surrogate for a long period of time was the liability base, that meant, open market sourcing was limited to the extent of cobrands and small share from Foreign banks.
13/n All this changed over the past few years, where the likes of SBI cards (read IPO RHP) and a few private banks led the charge in-terms of new customer sourcing, and the growth has been terrific with monthly issuance consistently clocking over a million new cards.
14/n Although CC growth over the past decade has not been remarkable, that is not the case with unsecured lending or lending for that matter, to-date there are about 400 million + records in the bureau, clearly, there is lending happening, rampantly.
15/n What’s changing, there are 3 or 4 tectonic shifts that are unfolding globally, the rise of BNPL, in markets like Australia has led to consistent de-growth of CC business. The Affirm listing and a market cap of ~ $25 Bil (half of Kotak Bank for context)
16/n And more players getting ready to go public demonstrating scaled up alternate retail financing models. FANG getting more serious about Financial services play, rise of alternate digital payment methods like UPI helping layer payment on top of any credit line
17/n and the general enthusiasm around fintech are all leading to better choices for customers over and beyond the credit card based consumption credit.
18/n Lending in itself is at an inflection point in India, the lines are blurring between PL, CC and Consumer durable loans. When one mashes, lending over UPI to be offered at check out, its BNPL over a new mobile payment method without the guardrails and regulatory costs of CC.
19/n This model re-orientation is what should scare the private banks, as CC both in form and business is no longer about 40%+ APR and a shiny plastic (or metal), but really about being present at the moment of truth when a consumption credit is availed.
20/n if you weed out the transactors and offer it at checkout, highly likely that APR’s could drop to < 20% and if you strip out and treat it like personal loan, you are already in teens and that’s what the promise of IDFC Bank I would imagine with a 9% APR for select customers.
21/n From the vantage point of where I sit, the sheer nos of signup’s on our programable credit card stack, we are seeing a secular shift in the business model from banks to fintech or brands, accelerating the new normal of Banks becoming “Balance sheet as a service providers”
22/22 India will blaze a new trail in consumption credit over the next decade, Credit will remain, I’m not so sure about the CC business in current form. We are happy to be the arms dealers in the mix and hope to see half a dozen unicorns born out of addressing this latent demand
