Daybreak - Why being the leader of debit cards in India is bad for SBI

Episode Date: November 29, 2023

The State Bank of India controls the biggest chunk of India's debit card market:. It also had the largest network of ATMs and CRMs (Cash Recycling Machines) spread across the country.  And ATM withdrawals make up more than 80% of annual debit transactions so SBI seems to be clearly winning. But being the market leader of debit cards in India is actually turning out to be a problem for the public lender. Debit cards might be ahead of credit cards in terms of circulation but they are dying a slow death in the Indian market. In fact, a lot of industry experts agree that debit cards, in their current physical form, may actually become obsolete in the coming decade. So by being the biggest player in this market that is fading away, SBI is also taking the largest beating from its decline. But instead of cutting its losses, SBI is still doggedly trying to save this dying product. Why?Tune in to find out.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 an alert as soon as we release our first episode, please follow Intermission on Spotify and Apple Podcasts 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. Just a little short of a billion. That is the number of debit cards that are currently in circulation in India.

To put this in perspective, this is 10 times the number of credit cards out there. And the State Bank of India, or SBI, controls the biggest chunk of this market at 27%. And to further solidify its stock position, SBI, as of September this year, also had the largest network of ATMs and CRMs. CRMs are cash recycling machines. It has 65,000 branches spread across the country. Even if you combine the number of ATMs that India's top three private banks, HDFC, ICICI and Access Bank have, it is still not as much as SBI. This is quite obviously a clear advantage for SBI, because ATM withdrawals make up for more than 80% of annual debit transactions.

So, SBI is winning, right? I mean, at the end of the day, after all the quarterly result wars and the marketing campaigns, it ultimately boils down to who has the largest share of the market. but what if I told you that being the market leader of debit cards in India is actually a bad thing for SBI? Hear me out. Debit cards might be a head of credit cards in terms of circulation, but, and I'm sure you've noticed this too, they are dying a slow death in the Indian market. Think about it. How often have you been using your debit card lately? In the three years between 2020 and 2020, debit cards pending actually flatlined in India. In fact, a lot of industry experts agree that debit cards, in their current form at least,

may actually become obsolete in the coming decade or so. So basically, by being the biggest player in this market that is fading away, SBI is also taking the biggest beating from its decline. But the irony does not end there. Instead of cutting its losses, SBI is still directing all its, its efforts to try and save this dying product. Welcome to Daybreak, a business podcast from the Ken. I'm a host, Nickda 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 29th of November. If you have an SBI debit card, then I'm sure you've noticed that in the last few months, SBI has been going all out on promoting these cards. The bank has been pushing its customers to make more transactions using debit cards. And for this, it is using a barrage of social media campaigns, YouTube ads, and daily emails for things like online payments and in-store purchases.

For example, throughout the ICC Men's Cricket World Cup and the weeks leading up to the Wally, it ran an aggressive reward points campaign called the SBI rewards carniv. double-dharmaka. Users could get double the usual number of reward points if they bought jewelry, apparel, electronics, or if they spent on travel using debit cards, both online and offline. But you might think there is nothing unusual about banks flooding their customers with festive cash bags, instant discounts and rewards, right? But for SBI though, this may very well be its last chance to at least start stalling if not reversing the decline of its share in debit card spendings. You see, according to the Reserve Bank of India's figures, yearly debit card

transactions have remained stagnant at around 7 lakh crore rupees in the last three years. And on top of this, overall debit card payments also declined in the year that ended in March 2023 compared to a year ago. This is because of two main reasons. First, of course, is that the UPI wave has been sweeping the country. And second, Indians who are generally skeptical, of dealing in credit are actually warming up to the idea of credit cards. Let us look at the numbers to give you a clearer picture. While debit card payments have fallen, credit card spending nearly doubled between 2020 and 2023. UPI meanwhile isn't a whole different league. Transactions jumped more than seven times in the same period. So as you can see, a new consumer spending pattern is emerging.

The Ken reporter Narayanan spoke to a senior executive at private lender federal bank. He said that post the pandemic, people are using UPI for smaller merchant payments for up to $2,000 and credit cards for transactions between $10,000 to $15,000. So debit cards now have to exist in this in-between tricky space. A lot of bankers did tell us that people might actually stop using them in their physical form to make payments in the next five to six years. Which is why, you can understand why for SBI, being the biggest player, is actually a burden instead of a blessing.

The lender lost nearly 58 million debit card users between March 2019 and September 2023. And between April and September this year, it also saw the largest fall in the value of debit card transactions among many other banks. This was for both card machine transactions and ATM withdrawals. But then comes the main question.

Why then is SBI still pushing so hard for a product that might eventually become extinct? Stay tuned to find out. The simple answer to why SBI is trying to keep its debit card business alive is basic economics. Yes, debit cards are slowly dying and yes, UPI and credit cards are eating away at its customer base. but SBI still cannot ignore the revenue that its debit cards generate. Let us look at the two main ways that banks make money of debit cards. First, depending on the kind of card and its usage, SBI charges an annual fee anywhere between 120 to 350 rupees on debit cards.

Now, multiply this number by the number of users and you will see that there is quite a bit at stake there. And then there is the interchange fee. SBI gets this when users make point-of-sale transactions, meaning the fee it gets when debit card machines are used to make payments in stores, restores, etc. It also gets a marginal interchange fee when people use its ATMs to withdraw money from a card that is issued by another bank, especially in rural areas where many private banks do not have ATMs.

And this could be a good enough amount considering that SBI has the advantage of having the most number of ATMs amongst all its rivals. And not to forget, another reason why banks love debit cards is a thing called float funds. This is the money that people keep in their savings account that are linked to their debit cards. These funds act as an easy source of funds for banks to carry on their day-to-day banking activities. Now, this is just the revenue side of things. There is a whole lot at stake when it comes to costs. To keep generating the revenue from debit cards, SBI has to spend quite a lot on the whole infrastructure on which debit cards depend. In the year that ended in March 23, SBI spent nearly 9,000 crore rupees on the maintenance

of ATMs, debit cards, CRMs and other technical expenses. And the revenue and cost aside, there is actually one more thing that might be keeping SBI hooked to debit cards, at least for the near future. Hang on till the next segment to hear you. all about it. UPI is everywhere now and the level of convenience that it offers is hard to match. But let's not forget that on the flip side, debit cards are still the mainstay when it comes to withdrawing cash from ATMs. How else can you get cash? Checks, obviously that is the last option. Cash withdrawals using debit cards still stood at nearly 33 lakh crore rupees for the year that ended in March 20203.

And ATM withdrawals made up 80% of debit card transactions in the same year. So while debit cards might be going out of fashion to make payments, SBI still has an advantage in operating 65,000 ATMs across the country for cash withdrawals. But unfortunately for SBI, this cannot be a long-term bet. And that is because UPI-based ATMs have entered the scene. In September this year, Hitachi Payment Services Private Limited launched the country's first UPI-based ATM at the Global FinTech Fest in Mumbai. And even though users are currently wired to withdraw cash using debit cards, it's only a matter of time before UPI's user-friendly interface replaces that.

So, as things stand, it looks like for India's biggest lender, it is going to be a question of when and not if. 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 slice 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, that is t-he-k-en.com, and click on the red subscribe button on the top of the website. I am Snigda Sharma, your host.

The script for today's episode was written by Dikshamunjal and the episode was edited by my colleague Rajiv Sien.