Daybreak - Credit-card issuers can't count on their favourite users anymore

Episode Date: March 15, 2023

For credit card issuers, 'revolvers' are the most profitable customers. They are users who carry over a balance from one month to another instead of paying the entire due amount.These users pay as much as 40% interest per annum by revolving and help the credit card issuer make obscene amounts of profits.But lately, dues from ‘revolvers’ have been falling. There is a shift in their behaviour pattern.Tune in to find out why

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcast, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganesh, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the same. secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they managed to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into.

to the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production. Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get an alert, as soon as we release our first episode, please follow Intermission on Spotify and Apple Podcast. or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode.

Do you know who the most loaded set of customers are for credit card issuers? Revolvers. I'm serious. For credit card issuers, revolvers are the most valuable set of customers. They are basically users who carry a balance from one month to another instead of paying the entire due amount. Let me explain. Say you have a credit card with a $50,000

limit. You use this card to buy a phone worth $30,000. So the remaining amount that you can still use is $20,000. When your bill is generated for that month, you have to pay the $30,000 in full. And once you do that, your credit limit goes back to the original $50,000. But this is not the only option that you get. The card issuer tells you,

hey, you know what? You can pay a minimum amount instead of the entire $30,000 in one go. We will move the remaining balance to your next bill, carry it forward essentially. This practice is called revolving and I am sure that you can tell why they are really important for credit card issuers. Every month when you decide to pay the minimum amount instead of the full amount, it keeps adding to your credit limit. But there is a catch here. When you don't pay your credit card balance in full, your credit card issuer charges you interest on the remaining balance.

This is called revolving credit. And interest on this can go as high as 42% per annum for users. And that is a lot of money. So revolvers in India contribute the most to the credit card issuer's profits. In fact, around 30% of credit card users actually contribute the most to the income a credit card issuer makes by charging interest. Issuers have been making obscene amounts of money through revolvers. But Arundati Ramanathan, deputy editor at the Ken, who wrote about this in a recent report, says that this kind of business was too good to last forever. With increasing financial

awareness thanks to the internet and a variety of other lending options, revolvers are slowly moving away from carrying balance from one month to the next. So what does this mean for banks who issue these credit cards? Welcome to Daybreak, a business podcast from the Kemp. I'm your host, Nikda Sharma, and I don't chase the news cycle. Instead, thrice a week on Mondays, Wednesdays and Fridays, I will come to you with one business story that is worth understanding and worth your time. Today is Wednesday, the 15th of March.

The important thing to understand before we dive into this is this. People who spend more using credit cards are the ones who tend to revolve more. SBI Cards and Payment Services Limited, which is the credit card arm of India's largest state-run lender, the State Bank of India, is a good case to understand how and why revolving is declining in the country. It is the country's only standalone credit card issuer, which is also the second largest by the number of cards issued. It is seeing of fallen users who would pay as much as 42% interest per annum. The average spending through SBI credit cards dropped 21% to 1.1 lakh rupees in the year that ended in March 2021. This resulted in fewer revolvers for the company.

And what was worse was that many revolvers turned delinquent, meaning that they moved out of the credit card ecosystem. And one of the reasons for this was of course, the pandemic when there were lesser avenues for people to splurge. Even the dues that SBI was supposed to get from revolvers saw a sharp fall. From 40% in 2020, it fell to just 28% the next year. Now, there are a bunch of reasons apart from the pandemic that is bringing about this change in the behavior pattern of revolvers. Let me take you through some of the important ones. The number one reason for this decline in credit card revolvers is of course the availability of better, cheaper borrowing options. Credit card users, because they have a credit history, are among the most credit worthy customers for banks.

So even when they buy things without planning, which kind of forces them to revolve, it is not hard for them to get credit from other sources. Non-banks or NBFCs offer them credit at cheaper interest rates. This could be anything from 12 to 18% to pay off their credit card dues. For example, credit, an app which you must have heard of, is often used for paying credit card bills. They offer new instant credit at 14% interest rate through the credit cash feature. Credit card issuers too offer an option to convert any purchase into equal monthly installments or EMI's at 18 to 24% interest. But a credit card executive at Citibank told Arundhati that they usually target transactors who are customers who pay their bills on time.

A former SBI card executive told us that the bank will call you and get you to convert your purchase into an EMI if it is, say, above $2,500. This is basically how lenders entice people who use credit cards only as a payment method into taking credit. Another banker told Arundati that the best way to earn interest income is to get people to revolve. And if that doesn't work, the second best option is to get them to pay EMIs. And cheap credit is not the only factor making credit card users give up the habit of revolving. Something that Arundati says customers should have stayed away from in the first place.

There are other reasons too. Stay tuned to find out. The Ken spoke to credit card executives and they told us that financial influencers on social media are making customers more aware of how they should use their credit cards to their benefit. You must have seen so many of these ads pop up on YouTube. Men and women telling you how to manage your money and how you can make insane amounts of profits in a shockingly short span of time. A lot of them do sound a bit shady. In fact, the government of India even came up with a set of

guidelines just about a week ago to ensure that these influencers comply with the Consumer Protection Act and any associated rules or guidelines, and also so that they do not mislead their audiences when endorsing products or services. These guidelines say that endorsements must be made in a simple and clear language and terms such as advertisement, sponsored, collaboration or paid promotion should be used for transparency. But irrespective of all this, there is a no denying the role that some of these influencers have paid in increasing financial literacy and awareness amongst common people. Also, fintechs like credit have played a big role in reminding people to pay their credit card bills on time. And not just this. There is what Arundati calls

a joker in the pack as well. Turns out, a lot of people are using credit cards to pay their rents. If a customer is paying less than $50,000 as rent, they do not know. need to give their Pancard details while using a credit card to make the transfer. This means that one can use a credit card to send the amount to different bank accounts of their own in the guise of paying the house owner and use that money to pay off credit card dues. Platforms like CRED and No Broker have actually popularized this method. This decline in revolving customers is actually a timely check on issuers who are only adding more and more credit cards. India is actually now close to 80 million credit cards, and this is

15% more compared to January last year. And there will be more of them as the country's credit card network Ruppay hopes to issue more cards to support credit card payments via UPI. But like Arundati says, overall forcing banks to find a way to bite the bullet on revolve is a major win for credit card users. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps,

and podcast extras. Head to the ken.com and click on the red subscribe button on the top of the website. I am Snigda Sharma, your host, and today's episode was edited by my colleague, you've seen.