The growth of credit cards which slowed down in 2020-21 due to the pandemic will get impacted further after the Reserve Bank of India (RBI) imposed restrictions on the global payment system operator Mastercard.
On Wednesday, the banking regulator barred Mastercard Asia / Pacific Pte. Ltd. (Mastercard) from onboarding new domestic customers – for debit, credit, and prepaid cards – onto its card network, from July 22, 2021. This follows after the payment system operator failed to comply with norms on locally storing payment system data. Mastercard operates a card network in the country under the Payment and Settlement Systems (PSS Act). Visa and homegrown Rupay of National Payments Corporation of India (NPCI) is the other payment system operator in the country.
The previous financial year saw credit card growth slowing down significantly, as only around 5 million cards were added during the entire year, as compared with 10 million cards that were added in the previous three financial years. As of March 31, 2021, there were 62 billion credit cards in the system, which moved up to 62.4 billion by the end of May.
Apart from the pandemic which hit the business activity of the banks, regulatory developments have also led to tepid growth of the credit card market in 2020-21.
HDFC Bank – the largest credit card issuer in the Indian market – was banned by the RBI in December 2020 from issuing new cards following repeated instances of outages in the bank’s internet and mobile banking platforms. The largest private sector lender which had a card base of 15.38 million in November, saw its card base declining to 14.85 million in May. HDFC Bank was adding around 2 lakh cards every month before the ban. As a result of the ban on HDFC Bank, the overall growth of credit cards in the system also suffered. In recent media interactions, HDFC Bank officials said the lender has upgraded its systems and has submitted a plan to the regulator for the future without giving any indications on when the restrictions could be lifted.
Then again in April this year, RBI imposed restrictions on American Express Banking Corp (Amex) and Diners Club International from onboarding new domestic customers onto their card networks from May 1, 2021, as these entities have been found non-compliant with the central bank’s directions on the local storage of payment system data.
The recent ban on Mastercard will further impact credit card growth as the payment system operator captures 30-35% of the credit card market – with some of the private and foreign banks solely issuing credit cards on the Mastercard platform.
RBL Bank – for example – the fifth largest credit card issuer – issues cards only with Mastercard. Yes Bank is the other private sector lender. Citi group also predominantly prefers Mastercard for both its credit and debit card customers. Citi, however, is in the process of exiting its consumer banking business from India and other 12 markets. Citi has already started to scale down its credit card business.
Impact on banks
According to a Nomura report, apart from RBL Bank and Yes Bank which solely issue Mastercard credit cards – ICICI Bank, HDFC Bank, IndusInd Bank, and Axis Bank also issue credit cards with Mastercard as the operator.
About 40% of the IndusInd Bank cards are with Mastercard, while for ICICI Bank and Axis Bank it is 36% and 35%. For HDFC Bank, 45% of the credit cards are with Mastercard. SBI Card – the second largest card issuer of the country after HDFC Bank – has a much lower association, at 10%. The Tata Credit Card – a co-branded card between SBI Card and Tata Capital – issues credit cards only with Mastercard as operator.
“Managements of both Axis and ICICI Bank have in the recent past talked about their co-branded cards with Flipkart and Amazon, respectively, to be the fastest-growing card schemes,” the Nomura report said.
“These card schemes are 14% and 15% of outstanding cards for Axis and ICICI, respectively. While Amazon ICICI card is allied to Visa, The Flipkart Axis card is allied to Mastercard, and hence is a potential medium-term risk, should the current status-quo continue,” Nomura said.
Bajaj Finserv – a large non-banking finance company – which issues a co-branded card with RBL Bank – solely issues Mastercard credit cards.
“The issuance of co-branded cards with Mastercard will also stop due to the RBI restriction. If a particular Mastercard co-branded credit card has a high contribution to the overall mix of a credit card player, it will have a higher impact on the issuer’s business growth,” broking firm ICICI Securities said in a report. Axis Bank’s co-branded card with Flipkart, RBL’s co-branded card with Bookmyshow, SBI Card’s Club Vistara – all these are used with Mastercard as payment system operator.
Some of the lenders like RBL Bank have said it has now entered into an agreement with Visa for credit cards. However, RBL Bank said it will take 8-10 weeks to start issuing cards on the Visa payment network post the technology integration.
“In the interim, our Bank’s current run rate of approx. 100,000 new credit card issuances per month could potentially be impacted till such time that there is clarity from the regulator on issuing new credit cards on the Mastercard network or till the technical integration with Visa is complete,” RBL Bank said.
Banking industry officials said even those banks who are not solely dependent on Mastercard, will take time to make the technological adjustments. These banks have to work on a war footing to avoid any delay of new card issuances since the Mastercard ban comes into effect on July 22.
Card spending
Interestingly, credit card spending, though impacted during the second wave of the Covid-19 pandemic in April and May, was much less than the first wave.
RBI data shows credit card spends were Rs 59,409 crore in April and Rs 55,033 crore in May – which fell from Rs 72,689 crore in March. In January and February, credit card spends were above Rs 60,000 crore each month.
The impact on credit card spending due to the second wave of the pandemic was far less than the first one. Spends in each of April and May of this year were much higher than monthly spending between April and September last year – when the first wave was on.
It is to be seen how the latest regulatory mandate of Mastercard impacts spending patterns in the festive months which starts from August.
(The writer is a senior Mumbai-based journalist)