Navigating the Evolution of India's Credit Card Industry

India's credit card industry has reached a significant milestone, surpassing 100 million active credit cards in circulation, albeit a bit later than anticipated. This achievement underscores the dynamic evolution of financial habits in the country, reflecting both challenges and opportunities within the sector.

A closer look at the data released by the Reserve Bank of India (RBI) reveals the dominance of the country's top banks in the credit card market.

HDFC Bank leads the pack with a substantial market share, followed closely by the State Bank of India, ICICI Bank, and Axis Bank.

These institutions collectively account for a significant portion of the active credit cards in circulation, showcasing their influence in shaping the industry landscape.

The meteoric rise of credit cards over the past few years has been remarkable. From 62 million credit cards in circulation at the end of March 2021 to over 100 million today, the industry has witnessed a staggering 62% surge in just three years. This growth can be attributed to various factors, including reduced entry barriers and the proliferation of co-branded offerings tailored to diverse consumer segments.

Today, credit cards serve not only as a convenient financial tool but also as a gateway to rewards, benefits, and the enhancement of credit scores. The RBI's decision to allow the linking of RuPay credit cards to UPI has further catalyzed adoption, providing users with additional avenues for seamless transactions.

However, despite the exponential growth in credit card adoption, recent trends suggest a shifting landscape. Overall credit card spending witnessed a sequential decline in February 2024, signaling a potential inflection point in consumer behavior. Projections indicate a continued decline in credit card transactions, with UPI poised to emerge as the dominant payment mode by 2027.

The integration of UPI with credit cards presents both opportunities and challenges for the industry.

While RuPay currently enjoys the privilege of linking with UPI, discussions are underway regarding the potential inclusion of VISA and Mastercard. Nevertheless, VISA and Mastercard continue to lead the Indian market, highlighting the uphill battle faced by domestic alternatives.

Revenue models for credit card issuers:

Credit card issuers in India generate revenue through various channels. Interest income is the main source of income for card issuers, making up 40–50% of their total revenue. This interest income is derived from revolving customers who carry balances on their cards and pay interest on the outstanding amounts. The interest charged by issuers ranges from 18% to 42%, depending on the specific credit product.

Another significant revenue stream for issuers is interchange fee income. Interchange fees are charged by issuers to process credit card transactions, and they contribute around 20–25% of the overall revenue. The exact interchange fee varies based on the card type and customer segment.

Apart from interest and interchange fees, issuers also earn revenue from various charges, such as joining/annual fees, over-limit fees, late payment fees, cash advance fees, and conversion fees for transactions and balances. The ma

The recent wave of card devaluations by major credit card issuers has added another layer of complexity to the industry landscape. Reduced benefits and revised reward structures have left users seeking alternate options to maximize their rewards before the changes take effect. These strategic measures, though necessary for sustainability, may impact new credit card applications and temporarily dampen demand.

Despite the challenges, credit cards remain a luxury for many in India, with penetration levels significantly below global benchmarks. With less than 4% of Indians owning credit cards, there remains substantial untapped potential for growth. However, the rise of UPI presents a formidable obstacle, offering consumers a convenient alternative to traditional payment methods.

Indian credit card industry is at a crossroads, navigating the delicate balance between growth and adaptation. As consumer preferences evolve and technological advancements reshape the payments landscape, stakeholders must remain agile to capitalize on emerging opportunities and address evolving challenges.

The journey ahead promises to be both challenging and transformative, as India continues its march towards financial inclusion and innovation.