SBI Cards: Tapping an Incredible Untapped Market

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About the SBI Cards

SBI Cards was incorporated as “SBI Cards and Payment Services Private Limited” on May 15, 1998, as a JV between SBI and GE Capital. In 2017, GE Capital’s ownership stake was acquired by SBI (74%) and CA Rover Holdings, an affiliate of Carlyle Group (26%).

It is a Non-Banking Financial Company – Systemically Important Non-Deposit Taking Company (“NBFC-ND-SI”) registered with the RBI.

SBI Cards is one of India’s leading providers of credit cards.

It offers a broad credit card portfolio of SBI Card branded portfolio and Co-branded portfolio which included four primary SBI Card branded credit cards: Simply Save, Simply Click, Prime, and Elite, each catering to a varying set of cardholder needs.

It is also the largest co-brand credit card issuer in India and has partnerships with several major players in the travel, fuel, fashion, healthcare, and mobility industries, including Air India, Apollo Hospitals, BPCL, Etihad Guest, Fbb, IRCTC, OLA Money and Yatra, among others.

SBI Cards is the SECOND LARGEST credit card issuer in India after HDFC Bank with an 18.2% market share of the Indian credit card market in terms of the number of credit cards outstanding and 17.9% market share of the Indian credit card market in terms of total credit card spends with 1.05 cr credit cards outstanding as of and ₹1,30,915 cr in a total of credit card spends in fiscal 2019.

It has a diversified customer acquisition network with a sales force of 32,677 outsourced sales personnel as of December 31, 2019, operating out of 145 Indian cities and which engages prospective customers through multiple channels, including physical points of sale in bank branches, retail stores, malls, fuel stations, railway stations, airports, corporate parks, and offices.

It is the leading player in open market customer acquisition with 3,190 open market points of sale and SBI’s extensive network of 21,961 branches across India.

Business Model

There are total of three parties involved in a transaction i.e. card issuing bank, acquiring bank (bank installing POS machine), and the payment network (VISA and Mastercard).

The transaction begins with the purchase of goods and services using the credit card. When a cardholder swipes a card in the POS machine at the merchant place, the transaction will be authorized by the payment network and after that, the payment is made by the card-issuing bank net of interchange fees.

After receiving the payment, the acquiring bank will pay to the merchant net of acquiring fees (MDR Charges).

So, these interchange fees constitute more than 50% of the total fees income.

SBI Cards

UNDER-PENETRATED MARKET IN INDIA- HUGE OPPORTUNITY LIES GOING AHEAD…

SBI Cards - Credit Card Penetration in India
LOWEST DOMESTIC CREDIT AS A PROPORTION OF GDP…
LOWEST CREDIT CARD PENETRATION…

Credit card penetration in India is lowest among all other countries in the world.

This shows average number of cards per hundred people, which means out of 100 people in India only 3 people hold credit card. While the debit card penetration is 65%.

So, with the stabilization of income levels and increasing credit penetration in India it is expected that the credit card will grow in near future.

SBI CARDS – 2nd LARGEST MARKET LEADER IN TERMS OF OUTSTANDING CREDIT CARDS IN FORCE & TOTAL SPENDS:

SBI Cards - Market Leader
Source : Company, RBI
Source: SBI Cards, RBI

SBI Cards has grown faster than its industry. In the past five years, the industry’s card in force has grown at 20% CAGR while spends and loan o/s has grown at 30% CAGR.

There are a total of 70+ credit card issuer companies in India where the top 5 players dominate the market constituting 79% total cards outstanding.

SBI Cards & BOB cards are the only NBFC issuing credit cards in India while all other issuers are the banks.

HDFC bank, being the bank does not focus solely on this business as it does not contribute much to the overall profits while SBI Cards has a carved-out business that focuses mainly on this.

So, it is believed that this 31 mn carded population base may reach 100 mn in the medium term implying a 20%+ growth in the number of cards over the next 4-5 years with SBI cards, the only pure-play credit card issuer company will reap out its benefits.

The increasing trend in consumer discretionary spending, digital payments, credit awareness, high-value proposition in credit cards as compared to UPI and e-wallets will lead to the increasing credit card penetration in India.

Also with the advent of CIBIL post-GFC (Global Financial Crisis) in 2008, credit cards are being issued to those individuals or corporates with good credit history so as to reduce the risk of delinquency.

So, it is expected that there would be more than 20-25% growth in spends due to an increase in cards in force and also spend per card which is evitable from the current scenario where people have started using credit cards in paying their utility bills, online education, groceries, etc.

SBI Bank’s Strong Parentage Support

SBI bank is the largest bank in India in terms of deposits and branches.

It has a customer base of 43 crore which represents almost 1/3rd of India’s population and out of them 27 cr customers (63%) have debit cards.

Now if we assume that out of those 27 cr customers only 7-8% of customers (on a conservative basis) have reasonable income level and have good credit scores eligible for Credit cards, SBI Cards can still tap 6x more customers that SBIC’s current customer base.

Credit cards as a % of debit cards are lowest in the case of SBI Cards which is just 6% as of March 2020 while it was 2% in FY17 whereas this ratio is comparatively high in case of other banks.

This shows that SBI cards still have a big pie to cater to.

Source: RBI

The management has also mentioned that SBIC has a shared agreement with SBI bank where the latter will provide the personal and account details with the former for better underwriting process of cardholders before issuing credit cards to them.

SBIC gives their filter criteria to the bank and on the basis of that banks give them a list of customers which fits that criteria, after that, that list goes through the CIBIL screening which then checks the credit history, default history, CIBIL scores, etc.

Project Shikhar was also launched in October 2017 in which SBIC’s cards are being marketed to SBI’s customer base of 435 mn people.

This has led to an increase in new accounts by 45.5% in FY18 and 52.2% in FY19. It is clearly evident that SBIC has very good support from its parent which will definitely help it to grow going forward.

SBI Cards is also a market leader in sourcing its customers from Open Market Operations.

It sources 62% of its customers from the open market only in FY20. The open market acquisition is an expensive model as the conversion rate of customers is very high and also the credit cost in the case of those customers is also high.

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So as to reduce this risk company has come with Recording Strategy where the cards in the open market are being issued to only those customers who already have one credit card and also the card limit is decided only after verifying all its details through CIBIL.

CHANNEL-WISE SPLIT OF CARDS-IN-FORCE

Source: Company
*Banca, i.e selling to the existing bank customers

Co-branded cards by way of partnerships with various businesses have also contributed to the growth of the credit card market.

The increased use of cards for purposes such as travel, shopping, lifestyle purchases, utility bill payments, etc., have increased the spend per card.

Based on market interactions, issuers such as SBI Card, RBL and Citi Bank have a 40.0% to 50.0% market share of the open market channel with SBI Card being the leader in the open market cardholder acquisitions in India due to its strong focus, highest share, and scale via this channel of overall sourcing.

Co-branded cards are cards that are issued in partnership with other business which offers the products or services and the lending is provided by the card issuer company.

Customer is benefitted by getting extra gifts and rewards by using these cards and both partners get benefitted by getting access to each other’s customers and SBIC also gets space in the partner’s retail space to market their cards.

Cardholders can use these cards anywhere a credit card is accepted, including other retailers or merchants.

But rewards or other benefits that are earned at our co-brand partners’ platform, such as earning points, they can use for additional purchases at a co-brand partner’s store, discounts on merchandise, or, in the case of an airline, earning frequent-flyer miles they can redeem when traveling.

In the current situation, management has seen a shift in the spending patterns i.e using their credit cards for paying their grocery bills, utility bills, online education fees etc which is very a small ticket item but involves usage, a number of times.

So, now the management is focussing on coming up with their co-branded cards in partnership with such businesses or merchants.

Increase in New Account Sourcing through Open Market Route

From the above charts, it is clear that now the company has started maintaining the balance in sourcing new accounts from both open market and Banca channel with a comparative rise in internal sourcing/Banca channel from FY17.

Also, during this lockdown period salesman was also not able to source their customers through malls, airports, retail outlets, or any other physical presence, so management has focused on obtaining customers through Banca channel only.

Also, with the period of time, open market sourcing was also majorly contributed by co-branded cards only with declining share through retail acquisition.

Source: SBI Cards

30-day and 90 days active accounts are calculated by taking all those accounts that have entered one transaction in 30 days and 90 days respectively.

The cards remain inactive for so long because majorly every bank issue the card as a LIFETIME free card or with no upfront fees so people just issue their cards and don’t use it for their spending.

As we have seen in the above charts that SBI Cards has 60% of its card in force from the open market, so in order to increase the use of credit cards, SBI Cards has come up with a PAYWALL strategy in which upfront fees is charged from the customers and this fee is after then converted into vouchers or gifts or reward points which make the cardholder to use the card in order to redeem those rewards.

SBI Cards has a majority (i.e 60%) of its total o/s cards acquired through external sourcing which involves huge risk and high credit cost.

And in order to mitigate this, SBI Cards offers their card in the open market to only those who already have one card which accounts for 78% of its customer base while the rest 22% includes those customers who are either New to Credit or New to Product which is completely internal sourcing.

No doubt that this strategy will not completely eliminate the risk but it will definitely reduce the risk of SBI Cards.

SBI CARDS’ – CORPORATE & RETAIL MIX

Source: Company

According to CRISIL Research estimates, the proportion of corporate cards, both in terms of volume and value, stands at approximately 10.0% to 15.0%.

In corporate card spends, Travel Management Company accounts for most of the proportion compared to other expenses like purchases, vendor payments, or spending by employees.

SBI Cards offers the following cards: SBI Signature Corporate Card; SBI Platinum Corporate Card; SBI Central Travel Account Card; SBI Corporate Utility Card; SBI Corporate Purchase Card; and the SBI Corporate Virtual Card.

These cards are highly customizable and also on some cards annual fees are charged up to ₹499. It has corporate only 0.5% of the total o/s cards while its share in total spends accounts for 25% as of 31st December 2019.

SBI Cards majorly earns fee income from corporate cards as the corporates will least likely to pay 20-40% interest cost on term/ revolver loans.

Corporate spends majorly come under transactors only and SBIC earns 0% interest income on transactors. Also, there are more chances of slippages in the case of corporate lending as compared to retail lending.

Low bargaining power against corporate clients also means a meaningful part of the MDR must be passed back to the corporate clients as kickbacks or rewards or interest-free credit periods.

Also, in the lockdown period, SBI Cards has seen no spending from corporate cards and the management said that they have converted all their corporate cards into Travel & Entertainment (T&E) type in which cards are used mainly by the employees and prior permission is needed.

Source: Company

85%+ cards are issued to the salaried people while 70% of the rest 15% is issued to the self-employed professionals.

This will definitely lead to high credit costs for SBI Cards but that risk has already been taken into account in the interest rates.

This is the reason why the SBI Cards has such high margins. During the lockdown, many people have lost their jobs which will bring a one-time hit to the company’s credit cost or increases their NPA but it is expected to recover it soon.

REVENUE MODEL

SBI Cards is basically providing two services- short term consumer credit and ease of payment service.

So its revenue model basically includes 50% interest income and 45% fee income while the rest 5% i.e other income such as business development income, insurance commission, etc.

Spend-based fees (24% of the total revenue) include interchange fees or MDR fees which constitute the major part of the total fee income.

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Interchange fees are the reward to the company for providing payment services.

There is no regulation of MDR charges in India which leads to a disproportionate share of card issuing company in fees, but the card-issuing company passes on some of its MDR fees to its customers in the form of reward points or gifts.

Instance-based fees (14% of the total revenue) include cash withdrawal fees, late payment fees, over-limit penalties, processing fees, reward point redemption fees, etc. Going forward it is expected that this part of fees will remain stable or increase at a slower pace.

Subscription fees (6% of the total revenue) includes the membership fees which is charged by the company on an annual basis which may decrease going forward.

Interest income is mainly earned from two types of receivables only, revolving and term loan.

SBI Cards does not earn any income from transaction kinds of receivables.

Cardholders have the option to “revolve” or convert their balances into monthly installments and repay their obligations over a period of time and at a fixed interest rate set forth in their cardholder agreements.

The delinquency level in the case of transaction receivable is less as these receivables are paid within the due date and consequently don’t accrue interest charges.

Business Development Incentive is an incentive given by the payment networks to the company on the achievement of the specified payment volume and increased product acceptance mentioned in a contract.

INCREASING TREND IN INTEREST INCOME AND INTERCHANGE FEES

Source: Company

Two major revenue contributors, interest, and interchange fees has grown at a high double-digit in the last 3 years.

There is an increasing mix of EMI-based and revolvers kind of receivables which will lead to the increase in interest income of SBI Cards but at the same time, it will bring pressure on credit costs and also increases the NPA of the company.

Historically, NPAs have remained quite a under control but due to the current pandemic situation and the moratorium given to 10% of the customers as of March’20, it is expected that the current ratio is not sustainable and it may increase to 1-1.5% in FY21.

There may exist the probability that the government may impose interest rates cap on revolver loans as it is already prevailing in many other countries.

Also, there exist some other restrictions such as credit card limits, minimum monthly incomes or minimum payments required, etc.

Presently card issuing company also promotes the cardholders to adopt EMI-based loans, this will reduce the interest income earned by them but will also reduce the default ratio and credit cost involved.

Fees earned on spends or interchange fees are a percentage of the MDR charges which go to the issuing bank.

This is usually approximately 75.0% to 80.0% of the overall MDR. This light-touch regulation on interest rates on the revolver and EMI-based loans and MDR fees results in higher ROAs for such businesses which are quite unsustainable in the future.

As per CRISIL Research, overall spends of the industry is expected to increase at a CAGR of 20% till FY24, so this will directly lead to the increase in interchange fees of the company.

At the same time, increased usage of cards will make customers more cautious of other charges, from cash-withdrawal to over-limit charges, and hence this will reduce the instance-based fees of the company.

There is also a regulatory risk related to interchange fees which involve a cap on MDR charges by the government in order to boost digital payments while the cap already exists in case of debit card payments.

Due to the absence of any regulation on MDR charges, there is an unproportionate distribution between the card issuer, merchant, and payment networks.

But according to me, it is quite unfair for the card issuing companies as this is a major chunk of their revenue model so the removal or cap on it will discourage them to issue cards and will completely disrupt their revenue stream.

ASSET QUALITY OF SBI CARDS

Source: SBI Cards, Macquarie Report

SBI Cards has maintained its asset quality over the years but does the company is operationally efficient??

Let’s look at some of the operational metrics of the SBI Cards.

The company has a very high Net Interest Margins in the range of 15-16% which is expected to remain the same or in an increasing trend going forward as credit cards are a form of unsecured lending which priced in all its risk into its interest rates and also due to its parental support, SBI cards is able to source its funds at a lower interest rate which helps them in maintaining high spread.


As SBI Cards source around 80-85% of its borrowings from its SBI bank and bank also holds 70% stake in the company.

So, it is quite reasonable to expect that the funding access to the company at arm’s length will not change in the near future. Due to its strong parentage only, it is the only NBFC that enjoys the highest CRISIL AAA rating.

OPERATIONAL EFFICIENCY OF SBI CARDS

Source: Company

With the passage of time, the company is able to leverage its operations as its cost to income ratio has declined from 63% in FY17 to 57% in FY20.

The sales & promotion cost forms around 22% of the total income which is expected to remain the same or increases due to an increase in cards-in-force or more customer acquisition of the company.

The reward points redemption is <1% of the total spends for the company which may increase going forward due to an increase in retail spends or to retain the customer stickiness as competitors may attract their customers by offering better discounts/cashback or other reward points.

Major players such as Amazon, Flipkart, Paytm, GPay, UPI, etc have now entered the market in the form of payment network which attracts the customers by offering better discounts or cashback or reward points but this will only increase the competition for the SBI cards where it will have to increase its sales promotion or rewards costs and not disrupt the whole business model for the company.

SBI Cards not only provides the ease of payment but also provides the interest-free credit period of 45-50 days to the customer which is not provided by such payment networks, so that’s why the disruption of the whole business model is not possible.

Source: Company

Company’s ROAA has been on an increasing trend from 4% in 2017 to 5.5% in 2020 (exc. COVID ROAA is 7.2%) which is expected to remain strong in the long term, but is expected to reduce marginally in the medium term due to the global pandemic leading to increase credit costs and also the marginal reduction in fee income.

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Its ROAE has also remained quite stable in the last few years but has increased to 35% in FY20 excluding the impact of COVID as against 28.4% in FY19.

Source: Company
*for the fiscal year 2019 (above parameters are based on total assets)

SHAREHOLDING PATTERN

FINANCIAL SNAPSHOT

INVESTMENT RATIONALE

1. Supported by strong brand name and established promoter:

The company Promoter, SBI, is India’s largest commercial bank in terms of deposits, advances, and the number of branches as of September 30, 2019, according to the RBI.

Their relationship with SBI provides SBI Card with access to SBI’s extensive branch network of 21,961 branches across India and enables them to market their credit cards to SBI’s largely untapped customer base comprising 44.55 crore customers as of December 31, 2019.

SBI Cards is the second-largest player in the credit card industry with a strong and trusted brand name among people.

Along with strong open-market and cobrand card acquisition channels, we believe SBIC is well placed to capture a rising share of India’s credit card penetration story (expect cards in use to triple in 5-6 years).

2. Robust distribution network and customer acquisition:

The company is the leader in acquiring customers through open market operations.

So, it not only has the Banca channel but also have a sales force of 32,677 outsourced sales personnel as of December 31, 2019, operating out of 145 Indian cities and which engages prospective customers through multiple channels.

They have also integrated their digital customer acquisition platform with the SBI YONO interface, which enables them to market their products to SBI’s customers through the SBI YONO mobile application.

Also, with the increasing use of technology and awareness of credit products among rural area SBI Cards will be the one in tapping the market.

3. Professional management and smart strategies:

Despite being its public sector parentage, SBI Cards is always run by the hired professionals and there is no PSU culture at the company.

Various good strategies adopted by the management include (1) introducing a pay-wall (no free cards) to ensure higher active cards, (2) introducing a comprehensive product suite including co-brand cards, (3) employing a re-carding strategy in the open market, (4) sourcing from SBI via a tri-patriate agreement involving credit bureau, CIBIL.

4. Origination among Millennials and NTC Customers:

New-to-Credit (NTC) customers are those who get their bureau recorded for the first time.

As there is lower penetration in smaller cities, the number of NTC customers originations has increased at a CAGR of 20% to reach 3.0 million in fiscal 2018 in the last three years where SBI cards have opened a huge proportion of NTC customers in the past three years.

The proportion of credit card originations among millennials (persons below 30 years of age) has increased over the last four years from 19.0% in fiscal 2015 to 35.0% in fiscal 2019, and the share of customers below 25 years of age has increased ten-fold from fiscal 2015 to fiscal 2019.

Also, with the attitudinal shift among millennials to take debt and increase in consumer discretionary spending, going forward the credit card penetration among millennials might increase manifold.

KEY CONCERNS

Asset quality risk: A downturn in the retail asset quality cycle, are inevitable, but not imminent in our view.

Current robust industry practices, India’s poor digital payments infrastructure, low card penetration, and the ability to pass on part of potential cuts in merchant discount rate (MDR) to customers offer hedges against such risks.

However, given that this is a new industry sub-segment being listed and disclosure levels are low, there are potential risks from “unknown unknowns”. Post-GFC, the quality of retail credit bureau scores and underwriting practices have not been thoroughly tested with a retail asset quality stress cycle either.

Disruption from Paytm, UPI, and other emerging technologies: There is a huge competition from Paytm, as recently Paytm Payments Bank has launched its credit card named Paytm First Card which will bring threat to already existing credit cards in the market.

Paytm was introduced in 2010, in just 10 years it has 150 million “active” users and has 40mn outstanding debit cards in use.

The pace at which it is growing is commendable which again brings a threat to the company.

No doubt that these are just the platforms and not the credit-issuing companies, they might increase the competition and not just disrupt it.

So SBI cards have to continuously update its technology and increase its rewards as a percentage of its total spends in order to acquire and sustain its customers along with it to remain profitable.

Entry of NBFC in this industry: Currently SBI cards and BOB are the only NBFCs who are permitted by RBI to issue credit cards while other issuers are the banks.

So, going forward if other NBFCs like Bajaj Finance are allowed to issue credit cards on their own then it may lead to an increase in competition to the company and hamper its profitability.

Regulatory intervention on interest rates, interchange fees, and operations: Light regulation on MDR is consciously allowed by RBI (so long as not unduly exploitative) as an incentive for the industry to invest in the digital payment infra of the country.

Merchant acquisition business in India is not very profitable, as card issuers command a disproportionate share in interchange fees. We thus believe the likelihood of MDR cuts is low.

Even if we get this wrong, SBIC has room to pass on ~75bps of cuts in MDR onto customers by reducing reward points and interest-free periods, as has been the case in other countries.

CONCLUSION

In the upcoming decade, there might be a “MEGATREND” backed by the consumption boom and increasing financial services, both of which will result in an increase in consumer discretionary spending and consumer credit industry, making people to take unsecured loans to fulfill their needs.

No doubt that personal loan (73% of total unsecured loan) will increase but the benefit of a pre-approved loan limit may boost the credit card penetration.

SBI Card with strong parentage, having experience of more than 2 decades and a strong distribution network can take the benefit of this growing payment ecosystem.

The risk of it being replaced by UPI or new technology payment landscape will still remain which they need to monitor regularly and keep themselves competitive in order to maintain their leadership.

Players in the market are currently enjoying the tailwinds but they have to ride the tide with the winds of change.

This post has been written by Research Analyst – RIDHIMA GOYAL (CA) – for FinMedium Research Desk.

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