"Issuing plastic is the easiest thing in the world."

It's easy to misinterpret a statement like the one above by Standard Chartered Bank's consumer banking head in India, Harpal Duggal. Before explaining what Duggal meant by that, let’s see what he didn’t mean to imply when he talked to The Financial Express: the card business is a piece of cake (no, it isn't); success means issuing more and more cards to new customers (it's a start, but nothing more); and once you have sold a couple of lakhs of cards, you can start working out your margins in the business (fat chance!).

What Duggal meant was that it is easy to issue plastic to customers; what is difficult is to get them to really use it. And that’s the secret to success in the credit cards business. You can issue a million cards to all comers, but if they don't use it, you make no money. In fact, every card customer has an overhead cost for card-issuers till he starts spending and paying the card company back. Margins in the card business flow directly from the commission (usually, around two per cent) that merchant establishments pay card companies for money spent by cardholders on their premises. The profit formula, therefore, is almost entirely related to spending volumes per card.

That's where the worry beads start forming. According to Visa International, the average Indian plastic holder uses his card less than once a month (10.7 times a year). The figure in Malaysia is 27.1, Singapore 25, Hongkong 19.2 and Indonesia 12.8. Australia tops with 47.3. The annual average card-spend on a Visa ‘Classic’ card is $328 in India (just about Rs 1,200 per month). Only Indonesia is lower at $179. Even in the upper class ‘Gold’ segment, it is still a poor $897 (Rs 3,200 per month).

Visa's spend-profiles indicate travel and entertainment (T&E) to account for the biggest chunk at 32 per cent, followed by retail and departmental stores at 24 per cent, non-traditional outlets at 18 per cent with miscellaneous (not tracked) at 26 per cent.

Given this spending pattern, it does not take a genius to decide that 'Gold' is where the action should be. But, as Citibank's business manager-cards, MN Murali, points out, "The target market for 'Gold' is definitely smaller than the 'Silver' card, and the latter is, not surprisingly growing faster. Trends indicate that the self-employed spend more than the salaried."

But if the card business is so difficult to succeed in, why are so many players queuing up for the action? The short answer is: they are looking at the future potential, not just past performance. The numbers certainly paint a healthy picture of growth. The Indian domestic card-base and card-spends are growing at the fast clip of 25-30 per cent per annum and may continue to grow at that rate for the next five years. This means the doubling time is less than three years. Over the next five years, if the growth rate is maintained, the card industry will be around Rs 25,000-30,000 crore, up from Rs 7,500-8,500 crore today.

That’s what excites the card issuers more than anything else. Outside the software export industry (growth rate: 40 per cent per annum), these kinds of sustained growth rates are rare. Which is why the card business has witnessed some of the most frenzied bouts of innovation seen anywhere: hefty rewards programmes, co-branded cards aimed at new niches, and global cards from StanChart, Citibank and American Express Travel Related Services (AmEx TRS). The last-named has launched what could, arguably, be called the boldest cannibalisation move in India: it has offered existing credit-card holders lower interest and balance transfers from other cards at 1.99 per cent per annum. Clearly, AmEx is hoping to challenge market leader Citibank’s dominance in credit cards (where you can carry over dues) the same way it is fighting Diners in charge cards (where you have to clear your dues within the stipulated time).

AmEx TRS is going to get lots of company. The State Bank of India (SBI) along with GE Caps joined the party last year; and more players are ready to join in, ICICI Ltd and ABN Amro Bank, among them.

Card issuers are gung-ho
"With approximately 2.5 million cardholders and 3.3 million cards in circulation, India is slowly coming of age in the payment cards business," says Visa’s executive vice-president (South-Asia and greater China), James G Murray, who adds that the local market is akin to that in the People's Republic of China, and Eastern Europe.

SBI Cards & Payment Services Pvt Ltd's chief executive officer, Vishal Pandit, is of the view that the credit cards market will touch the six million mark by 2001. "The biggest driver of this growth will be merchant acquiring, which, as of now, is restricted to the metros and major towns, and focussed on higher-end products," says Pandit.

AmEx TRS' country manager (India & Area countries), Sanjay Rishi, is coy about giving numbers. The card-base, in itself, does not mean anything," says Rishi, but asserts: AmEx can grow the business and give more value-for money. Industry sources put AmEx TRS’ charge-card base at around 80,000, Citibank Diners’ at 1,30,000 and Bank of Baroda’s (BoB) at 60,000. India is a key market in AmEx TRS’ scheme of things for the Asia-Pacific region. It is optimistic that new card issuances will top at a healthy 110 per cent per annum in the region where issuances have grown by 57 per cent with billings at 37 per cent over the last few years. AmEx TRS estimates T&E spends by Indian corporates alone to touch $3 billion by the year 2000!

Says Rishi: The credit and charge cards concept is picking up across the world. In India, this market is witnessing rapid growth, From half a million in 1992. The card population today stands at 2.5 million, growing at a healthy 25 to 30 per cent. However, the Indian card market is still young and untapped, and hence offers a huge potential.

Smarter players getting bigger
The surprise, if any, is why Indian players are so far behind. Despite their reach and early start, state-run bank players like BoB, Bank of India and Central Bank of India have not exactly set the markets afire, displaying a singular lack of imagination when it comes to strategies and product-innovation. Industry estimates put the collective share of state-run banks at not more than 20 per cent. This suggests that being a Godzilla matters less than being nimble-footed.

Citibank currently occupies pole-position with over a million cards, followed by StanChart with 600,000. HSBC and ANZ Grindlays Bank reportedly have card-bases ranging anywhere between 200,000 to 300,000. Citibank, which has had a head-start over the competition, claims that a large proportion of its cardholders are first-timers, but StanChart, and a relatively later day entrant, HSBC, are categorical, be as that may, their incremental acquisition of card members is second to none.

Observes Duggal at StanChart: Everyone saw the business merely as an extension of their retail business. It is separate. Payback is longer... that is assuming that you have got it right in the first place. The growth is coming from non-cardholders. The point though is that there is a definite concentration of growth towards the bigger players. The industry is consolidating.

The top three (read: Citibank, StanChart and HSBC) have scored primarily on account of three overt factors: the ability to structure products aimed at niches, marketing savvy, and the strength to invest in technology.

StanChart, for example, went in for a co-branded card with Hindustan Lever (HLL) for the latter’s ‘Aviance’ range of products. The launch was the first instance of a card issuer targeting the entrepreneural class: women who hawk the ‘Aviance’ range, but without any financial support from HLL. The 45-day interest-free period on the ‘StanChart-Aviance’ card helps these direct marketing agents to source more of the ‘Aviance’ range even as it gifts StanChart with bigger spends. A classic case of a card issuer and a corporate coming together to create a ‘win-win’ situation.

HSBC’s a relative late-starter offerings include a co-branded card in association with the Shoppers’ Stop, and an affinity card with Calcutta’s Tollygunge Club (An affinity card is targeted at the emotional side. The basic idea is to get you hooked on). Like its rivals, aggressive cross-selling is on top of the agenda, and the card’s business is now a key component of its overall retail strategy. Says HSBC’s senior manager, personal banking & cards (India), Richard JO Cromwell: India is a key market for us... we are looking at growing our retail business and have a 60 per cent and above lean (weightage) vis-a-vis corporate banking, and credit cards is a key component of this.

In the case of Citibank, being a market leader gives it the leeway of not having to make frequent announcements of being an innovator which it is no doubt. But whatever it does, it tends to have an effect across a broad spectrum. Recently, it decided in association with MasterCard International to issue electronic cards that will be accepted only at outlets with electronic data capture (EDC) terminals. The offering is targeted at the higher-spending clientele: at least Rs 3,000 a month and not be acceptable at non-EDC terminals.

Says Murali, EDCs help customers stay within their credit-limits as all transactions are on-line. Around 8,000 EDCs exist today. EDCs are expensive (around Rs 25,000 apiece) and banks can afford to install EDCs only at merchant outlets that deliver higher sales. In other words, Citibank, has in a single stroke, ensured that non-EDC outlets will upgrade themselves rather than lose business. Citibank, after all, is the largest card issuer.

AmEx’s balance transfer at 1.99 per cent per month is an instance of a johnny-come-lately using lower interest rates as an entry point USP. Despite protests (they are cannibalising, have tried these gimmicks in Thailand and Singapore, but have failed, have no reach compared to Visa and MasterCard ), AmEx TRS has managed to create quite a stir. StanChart reacted by coming out with a 1.75 per cent per annum inaugural offer linking it with its global card launch. Industry estimates put response to AmEx TRS at 75,000 and moving up. We believe in giving customers value for money. Why should you pay interest rates of 2.95 or three per cent per month? asks Rishi. Recently, however, AmEx has raised interest rates to 2.39 per cent, though balance transfers can still be done at 1.99 per cent.

Distinguishing those at the top is also the fact that they have been better at structuring and niche identification. Citibank recently introduced a loan-on-phone scheme where customers with a good credit history can call and receive immediate loans over the phone itself. This is repayable in installments, which is debited to the monthly billing statement in equal installments. Close rival StanChart has introduced Instabuys, a credit-card financing option that facilitates the purchase of consumer durables with a repayment structure mirroring Citibank’s loan-on-phone scheme. Forget the earlier day carpet bombing. Value proposition, and the ability to identify niches is of paramount importance, says StanChart’s Duggal.

Global cards, for one, is a niche that is hot right now. StanChart was the first to offer a single card for domestic and international use. It was quickly followed by Citibank, AmEx TRS and a co-branded one: StanChart-Thomas Cook.

Overseas-spends by Indian travelling abroad totals $2 billion, and Rishi at AmEx TRS says it is on par with local card-spends. AmEx’s figures indicate that the total number of international trips by Indians is around three million per annum. Of this, the ratio of business travel to leisure is 60:40. Foreign exchange bought by Indians is placed at Rs 5,000 crore. Other findings are that 71 per cent of those travelling abroad will have shopping on their list of priorities and 22 per cent will spend more than $2,000 per trip.

AmEx TRS, say independent observes, enjoys an edge in the global card niche because it is a travel house with a closed-loop network. This enables AmEx TRS to structure better discounts and services, both local and, in particular, in the international markets. The reasoning being that AmEx TRS offerings will be valid across markets, rather than the ‘piecemeal’ approach that competition offers. This is further validated by StanChart’s move to stymie AmEx TRS’s distinct advantage by launching a co-branded card in association with Thomas Cook.

And this is not all. As the card market matures, co-brands and affinities will fuel growth. This has been the experience in advanced countries. India still has scope for regular credit cards. However, there are segments looking for affinity and co-branded cards, says Murali.

Citibank has in its suite affinity cards with Modern School, India Habitat Centre, Classic Golf, CRY, WWF, Army and Airforce. Co-brands include those with the Times group of publications and India Oil. StanChart has like offerings with Mahindra’s, Cox & Kings, Thomas Cook and HLL’s Aviance, and an affinity card with the IIMs and Mayo College. Among state-run banks, such strategic tie-ups are few, and well hidden from the customer’s point of view like in the case of BoB-Bharat Petroleum.

Citibank has taken the game to another level by making sure that its cards don’t remain just a purchase facilitator, but one that helps make all kinds of payments on essentials.

Says Murali, We are today working with Visa and MasterCard to get cards accepted for paying electricity, telephone and insurance charges.

An often overlooked factor is also the common sense to leverage, and work along with the payment networks: be it Visa or MasterCard . Like say when a Visa gets a Sachin Tendulkar to endorse its products and services or takes the initiative to provide Visa cardholders preferential ticket allocation for cricket matches, and ties up with the cricket associations of Mumbai, Delhi & Districts, Karnataka, Tamil Nadu and Punjab.

While Visa itself does not offer cards or financial services directly to consumers and merchants, it plays a pivotal role in advancing new payment products and technologies for the benefit of its members and their cardholders. says Murray while mentioning that all this is also part of Visa’s desire to create its identity in India.

Growth though is being stifled
Less apparent, not exactly secondary, but more crucial are issues relating to acceptance outlets, sharing of negative credit (default) histories, recovery, and the inability of state-run banks to grow the market. Structural bottlenecks like obsolete technology, the skew in the number of outlets towards the bigger metros, and a few not-quite-there cities, have led to less than desirable card-penetration levels.

AmEx TRS, being a proprietory network, can effectively relate product offerings to the growth in vendor outlets. We are a closed loop network that enables us unlike others to effectively design marketing programmes and benefits for cardmembers in association with the merchants, says AmEx TRS’ Rishi. This, however, is not quite the case with those on the Visa and MasterCard networks.

There are about 100,000 outlets. Many of the outlets have sales of less than Rs 30,000 a month. Citibank opened up new areas of acceptance like petrol pumps and hospitals. A large number of EDCs could be developed if merchant outlets share the cost of EDCs. Two or more banks can also share the cost of EDCs, explains Murali.

Visa’s Murray says the wider ability of payment cards will be driven by the entry of large financial institutions like ICICI Ltd and SBI, enhancing the geographical coverage of payment products and services.

SBI-GE, is currently not in the acquiring business (an upfront payment that is made by a bank to a merchant outlet when a spend is registered. If you spend Rs 100 on ‘A’ bank card at outlet ‘B’, bank ‘C’ gives the outlet Rs 98), but is working closely with Visa to go on stream. The focus of SBI Cards is to increase the reach and penetration of payment cards through SBI’s extensive distribution network, and also increase acceptance at merchant establishments where payment cards can be used through our agreement with Visa. We have set a philosophy in place of an acquiring-led acquisition business to achieve this.

Recovery of bad debts, and sharing information on defaulters have always engaged card issuers, more so now given that the industry is galloping, and the preference for plastic is growing. Says Citibank’s Murali: A handful of people owe us and the banking industry large sums of money; they misuse the infrastructure deficiencies and the media to escape responsibility. The reference here is to the recent media focus on Citibank’s alleged use of agents who have no qualms about using highhanded ways to recover credit card dues.

A start has been made both at the card issuer and industry to address the fairness of recovery procedures, and the related issue of negative file sharing (default lists). Citibank, on its part, has appointed former Mumbai Commissioner of Police Julio Reberio as a consultant to review collection agencies and processes while both Visa and MasterCard and the franchisees have teamed to share negative files.

All this adds up to a situation wherein growth is greatly being driven by a handful of foreign banks, who in their endeavour to carve out a bigger market share wind up, to a great extent, cannibalising one another or carpet-bombing a relatively small demographic base.

Says Duggal at StanChart: It is the easiest thing in the world to issue plastic, but managing your portfolio is the key really. The main issues, I feel are the development of infrastructure, a profit model based on ground realities rather than one swayed by sundry market projections and a very strong MIS.