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The Advent of Co-branded Credit Cards in India

There were 25 crore credit card transactions in April this year. The surge in credit card transactions marks a new milestone in India's payment landscape.

Credit card transactions in India have surged, surpassing debit card usage after the introduction of UPI. In April this year, there were 25 crore credit card transactions compared to 22 crore debit card transactions. The total value of credit card transactions was ₹1.33 lakh crore, while debit cards amounted to ₹53,000 crore.

One of the key factors driving the preference for credit cards is the 48-day interest-free period, allowing consumers to manage their finances better and allocate liquid cash for daily needs while shifting spending responsibility to credit card issuers. 

Growing Credit Use

The growth of credit card usage has been nothing short of meteoric, with a remarkable 20% increase, while debit card swipes have experienced a notable decline of 31%. This trajectory has propelled the number of credit card users to a staggering 8.5 crore, a substantial jump from 7.5 crore just a year ago.

Younger credit-growth drivers drive this surge with a strong demand for high-end upgrades, drawing the attention of some of the industry's most prominent players. Banks and businesses are taking note of this trend and have issued fresh instructions to their customer-facing teams to cater to this emerging category of credit seekers.

Amidst this financial landscape, co-branded credit cards have become a strategic response to evolving demands. 

How do Co-branded Credit Cards Work? 

Co-branded credit cards have emerged as powerful financial instrumentsfrom strategic partnerships between banks and brands or merchants. These cards offer an enticing rewards program, allowing cardholders to earn significant value back on their expenses. Typically, co-branded credit cards bear the logos of both the issuing bank and the affiliated brand, including prominent names like Flipkart, Amazon, Indigo, Vistara, and more. It is interesting to note that the largest segment in the co-branded card market comprises retailers. These collaborations result in merchandise discounts, points, or other rewards for cardholders from sponsoring merchants. 

What Financial Prudence to Have Before Getting a Credit Card?

  • Assess your finances
  • Create monthly budget
  • Check credit score
  • Research cards
  • Calculate interest costs
  • Set a credit limit
  • Emergency fund
  • Compare offers
  • See long-term benefits

How many Credit Cards Should a Person have?

The ideal number of credit cards varies based on individual needs, but 1-2 cards are generally recommended for credit building, rewards optimization, and financial management. It's essential to balance the benefits with responsible usage.

How to get Credit Cards Closed on Time?

To close a credit card on time, pay off the balance, contact the issuer for closure, and ensure zero balance before confirming. Monitor statements and credit reports afterward.

A Few Types of Co-Branded Credit Cards

Open Limit vs. Closed Limit

Open-limit co-branded credit cards can be used on any marketplace where they are integrated, while close-limit co-branded credit cards are exclusive to a single marketplace. For example, the HDFC Bank Diners ClubMiles Card is an open-limit card that can be used at domestic and international airports and can be used to purchase tickets for multiple airlines. However, the Axis Bank Vistara Card is a close-limit credit card that can only be used for Vistara Airlines.

Physical Cards vs. Virtual Cards

Co-branded credit cards can be issued in physical and virtual forms (app-based). A physical co-branded card is a physicl plastic card that can be used like a regular credit card. It can be used at any merchant that accepts credit cards, both online and offline. A virtual co-branded card is a digital card stored on your phone or computer. It can only be used online, but it can be used at any merchant that accepts cards that are supported by the card network.

Costing: Traditional vs. Co-branded Credit Cards

FIs incur two types of costs when running card programs: fixed and variable. Fixed costs, such as annual card and transaction processing fees, are unchanging. Variable costs, such as marketing costs and NPAs, vary depending on transaction volumes.

Co-branded card programs can help FIs reduce costs by sharing overhead and other variable costs with merchants. Merchants also agree to invest in marketing, branding, and customer acquisition strategies, reducing the program's net cost.

Benefits of Co-branded Credit Cards

For Consumers:

  • Exclusive Rewards, including cashback, discounts, and loyalty points, provide significant value back on expenses
  • Enhanced Customer Experience because consumers appreciate the rewards and benefits offered by the partnered brand
  • Personalized Perks based on spending behavior, preferences, or loyalty status with the partnered brand
  • Seamless Integration with existing loyalty programs or membership rewards offered by the partnered brand, maximizing overall value

For Banks:

  • Customer Acquisition by attracting new customers, leveraging the brand's appeal, and increasing the bank's customer base.
  • Enhanced Revenue due to increased co-branded card usage with higher transaction volumes.
  • Brand Association and better market positioning via partnering with reputable brands, attracting more customers
  • Cross-selling Opportunities for other banking products and services to cardholders
  • Improved Customer Retention as consumers stay loyal due to the card's enticing rewards and perks

For Retailers/Businesses:

  • Increased Customer Engagement as customers interact with the partnered brand, driving sales and loyalty
  • Higher Spending to spend more to maximize rewards and benefits, boosting the retailer's revenue
  • Brand Visibility by showcasing the retailer's logo on the card, reinforcing brand visibility and awareness
  • Brand Loyalty as cardholders develop a connection to the brand through exclusive benefits and rewards
  • Data Insights from banks about consumer spending trends, enabling retailers to understand customer preferences and behavior better
  • Future Business Opportunities because of strengthened partnerships between retailers and banks

Case In Point: Amazon and Flipkart Pioneering the Game

An early adopter and thriving in the co-branded credit cards bandwagon is the Amazon Pay ICICI Bank credit card. Launched in 2018, the card crossed the milestone of issuing 1 million cards in just 20 months, y August 2022. Many of the newly acquired card users were previously not customers of ICICI Bank. Following this lead, Flipkart launched its co-branded card with Axis Bank. By February 2023, around 10% of the 83 million credit cards in circulation in India were Amazon and Flipkart co-branded credit cards. These co-branded cards comprise 30% of ICICI Banks' portfolio and 38% of Axis Bank's business, respectively. 

Partnership Between Banks and Brands

Currently, one in three newly issued credit cards are co-branded, a significant increase from the 10% a decade ago.

The digital-first co-branded cards have surpassed expectations for issuer banks regarding adoption, activation, usage frequency, spending per card, and other usage metrics. However, co-branded cards are not a unanimously supported avenue by the banking sector.

Banks play a crucial role in a co-branded credit card partnership encompassing KYC, underwriting, collection, refunds, and settlements. However, each partnership's revenue and expenditure distribution varies, determined only by achieving specific milestones. Out of the 40 million unique users of credit cards, as high as 30% of cards see minimal usage, and the expensive credit card technology stack's costs for these are not covered by the annual fees charged by banks (INR 500 - INR 1,000). Hence, smaller private and most public sector banks adopt a less aggressive approach in this domain.

Parameter to measure successful Co-Branded CC partnership

  • Governance: Establishing clear guidelines and agreements to ensure smooth co-branding operations and compliance
  • Revenue sharing model: Defining how profits from the co-branded credit card will be shared between partners
  • Tech-enabled credit analytics: Utilizing advanced technology to analyze credit data and assess customer creditworthiness effectively
  • Leveraging data to drive usage/spending: Utilizing customer data insights to encourage higher card usage and spending
  • Distribution model: Developing a strategic plan for distributing the co-branded credit card to the target audience
  • Product propositions: Offering unique and attractive features on the co-branded credit card to entice customers

Case In Point: Banks and Brands Unable to Replicate the Success

Several large digital brands, including Paytm, Tata Neu, Zomato, EasyDiner, and MakeMyTrip, have co-branded partnerships with banks. However, they could not quite achieve the remarkable results of Amazon and Flipkart. 

On the other hand, the credit card market leaders, HDFC and SBI Card, have been cautious in this space, resulting in slower adoption and limited growth. With their vast customer base, both banks initially hesitated to enter the co-branded market. HDFC, despite having partnerships with significant brands like Indigo, faces challenges due to its initial hesitancy and lack of agility in the digital realm. In contrast, Axis Bank stands out as tech-savvy and aggressive in embracing co-branded cards. Even if co-branded cards hold great potential in the financial industry, successful cards like Flipkart's took considerable time to break even.

Roadblocks for Co-branded Credit Cards

While co-branded credit cards offer numerous benefits, all stakeholders must know the potential risks and considerations associated with these partnerships.

For Brands:

  1. Saturated Market: E-commerce co-branding programs struggle to stand out in a crowded market with fierce competitors
  2. Ageing Infrastructure: Outdated issuer infrastructure leads to negative customer experiences and reduced loyalty
  3. Customer Churn: Brands risk losing customers to competitors rapidly as they become more spoiled for choice

For Customers:

  1. Increasing Credit Card Debt: New credit card benefits lead to growing credit card debt and financial risks for both banks and customers
  2. Overspending & Credit Scores: Increased e-commerce popularity results in overspending, adversely impacting credit scores and affecting customers' financial well-being.

For Issuing Banks:

  1. Rising Delinquency Rates: 90-day overdue payments have reached 2.94% during the quarter ending June 2023, posing concerns for banks and customers
  2. Other Payment Methods: Increasingly convenient and lucrative payment methods like UPI, fintech solutions, and EMI on debit cards, it is challenging to onboard with co-branded cards
  3. Stringent Regulations: The RBI has been proactive about protecting customer interest and strictly following up on regulatory mandates 

Case In Point: SBM Banks India Faces Setbacks Due to KYC Non-Compliance 

Over the past five months, SBM India's fintech co-branded cards, including forex cards, corporate cards, and prepaid cards, have been blocked due to the bank's non-compliance with KYC norms. This has impacted millions, particularly over eight lakh corporate credit card users from startups and SME sectors. Despite completing the re-KYC process in April, the cards remain inactive, and the bank has not provided any assurance of reactivation. SBM India's partnership with over 45 fintechs has helped drive its retail business, but the recent restrictions have caused widespread panic among users. The RBI's directive to stop LRS transactions added to the uncertainty, affecting forex card holders. The bank's unresponsiveness to user concerns has drawn criticism, especially given its reputation as a startup-friendly entity.

Government's Recents Interventions in Credit Card Space

  • Overseas transfers up to Rs 700,000 per annum under LRS will not face tax collected at the source
  • TCS will be levied at 5% for the first Rs 700,000 per individual per annum in case of buying overseas tour program packages
  • The higher rate of 20% will apply to expenditures above this limit

Ever wonder about the impact of the above rules on co-branded credit cards? It is nil. Co-branded credit cards are currently nascent in India and are mainly launched to operate within India. A small percentage of co-branded credit cards are catering to overseas remittances. There is still time before we will see the actual impact of this rule on co-branded credit cards and when they begin to collaborate with players outside India.

Co-branded Credit Cards vs. Other Payment Options

In the dynamic landscape of payment options, co-branded credit cards hold a unique position compared to other payment methods like regular credit cards, debit cards, Unified Payments Interface (UPI), etc. We evaluate these options through a standard matrix and consider their impact on banks, brands, and customers.

Can UPI Replace Credit, Debit, and Co-branded Cards?

According to an Economic Times article, UPI is expected to dominate transactions below INR 2,000, while more significant transactions may continue using cards. The rise of UPI has outpaced cards significantly, with nearly 60 times growth since 2016. With increased adoption in Tier 2 and Tier 3 cities and sectors like EdTech, E-commerce, Gaming, and Healthcare, UPI has become a major player in the digital payment space.

While cash and cards will still exist, UPI's increasing presence is reshaping the payment landscape. However, whether UPI completely overtakes the market from debit and credit cards depends on various stakeholders, including banks, technology companies, regulators, governments, and consumers.

Case In Point: Cred Enabled RuPay Credit Card Payments via UPI

CRED, in partnership with NPCI, has introduced the onboarding of RuPay credit cards for UPI payments through its application. This integration offers users triple benefits, allowing them to use credit cards for UPI transactions, eliminating the need for physical cards, and earning more rewards on both their credit cards and the CRED platform. The move is seen as revolutionizing digital payments in India and driving the country's digitization journey. CRED members can now access multiple UPI payment options, and the app has become the 4th most preferred UPI app. With UPI accounting for over 75% of retail digital transactions, the convergence of credit cards and UPI is expected to accelerate the growth of digital payments in the country.

Future Trends

RBI's proposal to link credit cards to UPI will create a more convenient payment option, allowing customers to use UPI for large transactions while enjoying credit card benefits like reward points. This integration will simplify the payment process, boost digital transactions, and accelerate UPI adoption. With 26% market share in volume and 53% in value, credit cards' linkage to UPI will drive India closer to a cashless economy and eliminate the need to carry credit cards. Razorpay has become India's first payment gateway to support credit cards on UPI. 

According to experts, new spending categories, such as domestic travel and entertainment, luxury expenses, rentals, and no education, have also witnessed significant growth in the credit industry.

Exploring Niche Co-Branding Partnerships for Differentiated Offerings 

In mature economies, co-branding engagements have been successful in various sectors like travel, fuel, and retail. Banks and financial institutions can explore potential niche partnerships to capitalize on unique customer propositions. For instance:

  • Healthcare: Issuing co-branded cards can offer discounts on health services, annual health check-ups, room rentals, and ambulance cover.
  • Commercial Sports: Curated offers, discounts, and rewards on sporting goods and merchandise can provide significant visibility among sports enthusiasts.
  • Electronics: Target customers with higher spending in this category by offering cashback and rewards on purchases of televisions, ACs, smartphones, and tablets.

Closing Thoughts

The credit card market confronts challenges, including high rewards and credit costs that may not be sustainable. The appeal of credit cards hinges on rewards, but if customers avoid revolving credit, it could strain the platform's ability to offer rewards, impacting attractiveness. Balancing co-branded and traditional credit cards, adapting to new payment technologies and consumer demands, and constant innovation can ensure credit cards remain relevant and appealing in the evolving digital landscape.

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The Advent of Co-branded Credit Cards in India

  • January 23, 2024
Financial Ripples

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