Many smaller banks are leveraging on secured credit cards to source new customers, at a time when the Reserve Bank of India (RBI) has express displeasure over the unfettered growth in unsecured personal loans. The reason: The customer acquisition cost for secured credit cards is around 25% that of a unsecured credit card, which makes the product capital efficient. And over time, these customers may eventually graduate to an unsecured credit card depending on the credit behaviour, spends behaviour, and “stickiness” with the issuer.
In April, AU Small Finance Bank launched its first secured credit card, NOMO (no missing out). The card is designed for users who may not meet criteria for unsecured credit cards due to low credit score, limited credit history or the lack of income proof. Even Utkarsh Small Finance Bank has announced plans to launch secured credit cards, whereas DCB Bank plans to re-launch the product.
“There are many customers to whom we could not offer cards because either they have limited or do not have the required credit history. When you have a secured card in place, it opens a lot of opportunities to acquire such customers,” Mayank Markanday, head of digital bank, AU Small Finance Bank said, adding that such a product provides customers with access to credit and helps them build their credit history.
The number of outstanding credit cards rose to nearly 103 million as on April 30 from 102 million as on March 31, latest data from the Reserve Bank of India (RBI) showed. The average spends per card is at Rs 15,307. Experts note that while secured cards comprise a mere 5% of fresh issuances, it may rise to 20-25% in the next few years as banks capitalise on the demand for credit cards.
“The demand for a credit card is high, but yet a lot of people are not able to get it. Now, secured credit card fits into this gap that currently exists,” Adhil Shetty, chief executive officer, Bankbazaar.com said.
Akin to other secured loan products, customers can avail a secured credit card against a fixed deposit. Here, issuers typically offer a credit limit of up to 90% of the deposit amount, which helps issuers minimise credit losses. Instead of availing a loan against the fixed deposit, customers can avail benefits like cashbacks and reward points through the credit card.
“Customers can continue to earn through their fixed deposits at the prevailing interest rate. The FD is fine as long they continue to pay credit card dues. However, the bank will take over the FD in case of delinquencies and everything will just move on,” Shetty said.
While many traditional credit card variants do not come with an annual fee, issuers can earn an annual fee on a majority of secured cards. Additionally, they can also earn income through foreign transaction fees, balance transfer fees, and late payment fees.
“A secured credit card was not a retail or mass product. In recent times, entities like IDFC First Bank, OneCard, and SBM Bank has made the customer onboarding journey seamless,” Aditya Gupta, chief executive officer and founder, Credilio said, adding that many large banks will launch secured cards in the next three-to-six months.
Currently, financial services platform Credilio offers a secured credit card in partnership with SBM Bank. The platform is working with three more banks to create a secured card product.
In recent times, the RBI has been nudging entities to keep their unsecured personal loan growth rates under check, and this has led to a greater focus on products like secured credit cards, say experts. On the other hand, customers can also make unified payments interface(UPI) payments through RuPay cards.
“Personally, I think secured cards is a win-win situation for both the industry and the customers. This innovation offers an excellent balance between conduct risk and financial risk,” Vivek Iyer, Partner, Grant Thornton Bharat said.