1/ Thread on the fascinating Credit Card economics ahead of SBI Cards IPO. Quoting someone - “Credit Cards (CC) is in the business of transferring money from poor to the rich.''
2/ Qn I’ve always wondered: is credit card a payments product? Or is it a rewards product? Or is it a credit product? Or is it a social status signalling product? Or is it all of them? Let’s uncover this.
3/ Total consumer to merchant flow in India is >$1.2T, of which $100B i.e. ~7% flows via CC (same as DC). While the share of offline merchant flow is ~4%, the share of online flow is as high as >35%.
4/ Credit card industry is highly highly profitable having ~1% of spends as net cash flow /PAT. Thus the PAT pool of the industry is ~$1B. There are very few products /industries who can boast of such high PAT pool.
5/ There are ~50M credit cards in India. ~50% are active i.e. ~25M. Defn of active is at least 1 txn in the last 30 days. There are ~25M unique card holders i.e. ~2% of Indians. Clearly, a product for the cream of India.
6/ Math is as follows. Spend per month per active card is ~Rs 25K (or $350). Issuer makes a PAT of 1% i.e. Rs 250 /mo ($3.5). This translates to $42 /active card /yr. Multiply by 25M cards. You get ~$1B total PAT.
7/ CC is a beautiful product. CC issuer sells the CC for the rewards and ease of payments. However, ends up making enough interest and fee income from each CC (more than what they do from personal loans).
8/ Credit card book is ~1/6th of annual spends i.e. a ~$17B book. Of this book, only ~35% is interest free. ~40% is revolving book which accrues a super high ~42% interest. And remaining ~25% book is on EMI or PL taken on CC limit.
9/ This accrues ~18% interest. Blended the overall ~$17B book accrues ~22% interest income. Or ~4% of annual spends (factor of 1/6th). Compare this with HDFC PL book which accrues only ~14%.
10/ CC holders often don’t know they end up paying higher interest than any kind of loan they’ve even taken - on something they initially take for rewards and ease of payments.
11/ CC industry classifies their customers into 3 kinds i.e. revolvers, transactors and defaulters. Usually, of 100 customers, 20-25 are revolvers, <10 are defaulters, and 65-70 are transactors.
12/ Revolvers are the profitable customers who don’t pay their CC bill in full, and do partial payments - often the min amount, and revolve. CC issuer tries to not make loss on transactors, though often they end up.
13/ It’s very likely that you and me are transactors. We often gain at the expense of revolvers. They’re the ones who pay for the great rewards and benefits we often get on our premium CCs.
14/ Who’re these revolvers? Usually white collar 30-60K monthly take home people, who use CC once for a large unexpected expense like medical bill, or wedding expense, or for a high end gadget, and fall in the CC debt trap.
15/ Also, often CC business model is not well understood. MDR is considered as the primary income stream. MDR barely manages to pay up for the direct cost associated with any CC transaction.
16/ Net blended interchange the issuer ends up getting is often ~1.5%. This is post paying networks like Visa. And accounting for spend categories like utility bills etc, which MDR is regulated at a mere ~0.8%.
17/ There are 2 direct costs with each txn i.e. cost of reward points, often in the ~0.7% bracket blended. And credit cost of ~0.9% for the interest free period. MDR of ~1.5% just covers up for these two costs.
18/ Money is made from interest income and fee income. Like highlighted earlier ~4% of spend is interest income. Fee income is another ~0.7%. Key fees include late fee, currency mark up fee and 15 other fees that issuers levy.
19/ CC’s often charge an annual fee, which usually end up being ~1% of the annual spends. Though most of it is passsed back to the customer as reward points or benefits.
20/ Thus the business model of a credit card end up being a more attractive version of the personal loans business.
21/ Net net. On each active card, the issuer makes $3.5 PAT /mo. Churn is ~1% /mo. Thus avg life = 100 months. Leading to a lifetime value of $350 in PAT from each card. Industry is seeing CC doubling every 5-6 yrs.
22/ It’s likely, issuer will get a valuation of >$1K for each active card. SBIC records show it has ~8.5M total cards. My guess is active is likely to be ~4.5M. And there is enough speculation that they will end up getting >$7B in IPO valuation <end>
