Daybreak - Free airport lounge access helped sell more credit cards. Now its come to bite banks

Episode Date: July 6, 2023

Credit card companies, in their rush to sell more and more cards use a whole gamut of attractive offers—the most popular one being free access to airport lounges. Thanks to this and the sharp rise in domestic air travellers, last year, airport lounges saw of football of over 8.5 million people.What was once an exclusive service became a top-selling feature, even for non-premium cards issued by banks. Lounge access became overused and an expensive bill to foot for credit card issuers. Earlier last month, Axis Bank, the country’s fourth-largest credit-card issuer, revised its lounge policy. But retracting the freebie altogether is not a risk banks can afford to take.What are they doing then?Tune in.Recommendation:Credit-card issuers can’t bank on their most profitable users Daybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, 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 Ganeshan, 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 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 manage 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 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 alert, as soon as we release our first video. 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. Once upon a time, airport lounges used to be pretty exclusive. Not everyone could afford to have access to them. Now, there are never-ending queues outside these very lounges. So what happened? Did everyone suddenly get rich? Nope.

Did a lot of people get credit cards? Yes. In the last five years, the number of credit cards that have been issued has nearly doubled to 85 million. This is as of March 20203 based on RBI data. And credit card companies, as we all know, are in a rush to sell more and more credit cards. And to do this, they use a whole deal. gamut of attractive offers. And one of the most popular ones is giving free access to airport loungers. Last year, airport lounges saw a footfall of over 8 million people. So, what was once exclusive

became a top-selling feature, even for non-premium cards issued by banks. In fact, the lounge access freebie became such a top-selling point for banks that they actually started setting up kiosks selling credit cards right outside these airport lounges. You must have noticed them while traveling. But earlier last month, we heard news that Access Bank, which is the country's fourth largest credit card issuer, revised its lounge policy. The bank was like, no more free access to lounges past the immigration point for non-premium card holders. So what do you think could have happened? Turns out, this whole free airport lounge access is coming back to bite the banks. Welcome to Daybreak, a business podcast from the Ken.

I'm your host Nickda Sharma and I don't chase the new 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 Friday the 7th of July. Originally, it was card networks like Visa and Master. who were footing the bill for offering airport lounges as a premium perk. But there were differences between the lounge benefits offered by the two networks. Now, because banks want to give a uniform access experience to their users,

they decided to take the cost of offering this benefit. This was told to the Ken's Arundati Ramanathan by a senior executive at a lounge provider. So, in 2019 and 2020, many banks, switched to footing most of the bill on their own. And because the card on which users make travel-related spends is bound to be the primary card for the customer, travel was a key spend to capture for credit card issuers. But domestic air traffic has been growing at an unprecedented speed.

It has risen by almost 60% to 10 million people in February 23. This increase in the number of air travellers, especially post-pandemic, means credit card holders are overusing their lounge access. Plus, more and more Indians now have credit cards, and most of them even have more than one. That is why it is not rare to see cardholders these days whipping out multiple cards at the concierge

to check which one gives them free access to the lounge. But all this is not going down well for the banks. Stay tuned to find out more. So banks pay about $800 for every domestic lounge access to lounge providers such as Dreamfolks. And for an international lounge access, they pay around $1,500. Now, because of how popular this freebie has become, for banks, not only did it become a pain, but it also became very costly. But banks can't just give out something like this one day and take it away the next. So they are taking tiny baby steps in restricting lounge access for non-premium credit card holders.

Take Access Bank, for example. It made quite a smart cost-cutting move by doing away with free lounge access beyond the immigration point for people who do not have a premium credit card. Access Bank's president and head of cards and payments, Sanjeev Moga, told Arundati that the bank took this step because there was duplication in domestic and international access in many cases. He explained it by saying that if you're at an airport where both lounges are present, the customer can go to the domestic one. India's largest private lender, HGFC Bank though, realized this much sooner.

In 2021, it increased its free lounge access from 18 to 50 for non-premium credit card holders. But just a few months later, it went back to offering only 18. You see, when you use a credit card, your rewards and loyalty spends are basically linked to your spending on the card. These are financed by the merchant discount rate that the banks charge. A credit card senior executive at a private bank that we spoke to even called this problem alarming. Just about three to five years ago, banks were spending only around 10 basis points of the total product cost on lounges.

That spiked to 25 basis points. It became their single largest feature cost. It was a matter of concern indeed. In the next segment, I will tell you just how much banks have to pay for giving people free lounge access at airports. Stay tuned. To get a better sense of why this backfired on banks in the first place, Arundati decided to look at the financials of

dream folks, the country's largest lounge provider. In the year that ended in March 2023, the company saw a 174% jump in its revenue compared to just a year ago. A senior executive at a lounge provider told us that nearly 40% of a bank's credit card portfolio is given free lounge access. But interestingly, only up to 5% of the cards actually see lounge usage. He told us about those who hold cards like IDFC First Banks Select or ICICI Bank's platinum card where they pay little to no fees for the product. He said that these people use lounges on average about 0.5 times a year. But these types of users make up 60% of the card base. And this drives up the cost for banks. And it hits them where it hurts the most when customers do not make any spends on

these cards, but they only use these cards for lounge access. Naturally, banks have realized what is going on, and a few of them are set to make bigger changes in the way that they provide this benefit. But like I said earlier, you cannot give out a freebie like this and suddenly snatch it away. It might cost the banks dearly. It is too risky. Even a large credit card issuer like ICICI bank is hesitating to take away this feature entirely. So lounges won't go away, but conditions will be imposed to rationalize lounge spend. The senior lounge executive told the Ken that the top banks are going to move to spend-based lounge access over the next one year. Nothing will be available for free anymore. With this, banks hope to kill two birds with one stone. One, to make

lounge is great again, and two, to flush out all the free loaders from their card base. But as you can imagine, banks are working on eggshells with this one. Like Arundati says, in the end, all it will take is one bank to come down hard on this. And most will follow soon. The question is, which bank is it going to be? 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 Rajiv Sien.