India’s millennial credit card boom runs into Ambani

By Andy Mukherjee

For every 100 people in India, there are only three credit cards. A comparable penetration figure for the US is 320.

Statistics like these suggest that India’s first initial public offering of a credit card issuer is either an opportunity with boundless prospects — or a victim of arrested development. Which is it?

The upcoming sale of shares in SBI Cards and Payment Services Ltd. will give investors a chance to find out. Between them, the controlling shareholder, State Bank of India, and its 26% partner, Carlyle Group, plan to sell up to 130.5 million shares. Throw in a simultaneous offer of new shares, and it could be a 96 billion rupee ($1.3 billion) IPO, India’s biggest in the current financial year, according to local media reports.

Business is booming at the country’s second-largest card issuer. After Carlyle arrived in 2017 to replace GE Capital in the two-decade-old venture, earnings were 7.4 rupees a share in the year through March 2018.

Younger millennials and Generation Z — those born after 2000 — are driving this growth. In India’s fiscal year ended in March 2016, barely 2% of credit card transactions were originated by people below 25 years of age. That number has jumped to 10%.

Add the 26-30 age group, and the youth share of plastic is 35%, beating people over 40 by as much as eight percentage points.

Yet only about 5% of Indians’ consumption per capita takes place through credit cards. After growing 12% annually over four years, average spending per card is stalling.

E-commerce, which is increasingly the most obvious use of a credit card, will account for barely 7% of India’s $1.2 trillion-a-year retail industry by 2021, according to Deloitte Consulting.

Another 18% will go to malls, department stores and other forms of organized retail. But three-quarters of the market will remain with mom-and-pop stores. An average shop can hope to receive $775 in monthly business from cardholders. Card issuers would garner revenue of $11 of that, but the bank that acquired the merchant and fitted it up would receive just $1.50 a month. It’s simply not worth anyone’s while to expand the business into smaller towns dominated by small shops.

Increasingly ubiquitous smartphones are far more suitable for payment authentication in a low-middle-income country than credit cards. Google Pay and Walmart’s PhonePe are leading people-to-people mobile payments in India, using the so-called unified payments interface, a system linking India’s banks.

The same system will also drive people-to-merchant payments. Credit will just be an added layer. Banks will compete for whoever can bring them a lot of customers.

India’s richest man, Mukesh Ambani, has 355 million customers for his 4G mobile network, Jio. Unsurprisingly, the oil-to-telecom tycoon wants to connect 30 million small retailers with common inventory-management, billing and tax platforms as well as low-cost payment terminals. He won’t be alone. Even in Indian e-commerce, Walmart Inc.’s Flipkart Online Services Pvt is promoting “cardless” credit.

The parent State Bank’s opportunity in unsecured retail loans will be far larger than that of its IPO-bound cards unit. India’s largest commercial bank will make its low-cost deposits available to Ambani, Walmart and other digital commerce hopefuls who might be looking to sweeten their proposition to customers with a dollop of credit.

That should still leave plenty of headroom for SBI Cards to grow. Its 18% market share means the company will remain a sought-after choice for co-branded partnerships, such as with Indian Railways and ride-hailing app Ola.

Carlyle’s partial exit would value the U.S. buyout firm’s 26% stake at about seven times what it paid in 2017, according to Reuters. That’s a neat pile to make from plastic in such a short time, and in a country where it hasn’t really taken off. IPO investors will be content with a lot less.