The following is a guest post by Michael from CreditCardForum.com. He has conducted hundreds of credit card reviews for his site (his favorite being cash back credit cards) and has been analyzing the credit industry for years. Today, he will be discussing the international growth of credit cards and where he believes India will fit into the picture.
One of the most lucrative investments ever made by Warren Buffett was in the Coca-Cola company. In 1988, he began gobbling up their stock. At the time, Wall Street thought he was insane; the consensus was that Coca-Cola had already saturated America and other Western countries, so there was no room left to grow. It was considered to be a fully mature company.
Buffett saw things differently. Even though the Western markets were already saturated, he realized that many international markets were largely untapped… that is where the future growth would be. So he bought $1.02 billion of their stock, which worked out to be 7% of the company at the time.
Well as it turns out, Buffett was right. Over the next twenty years growth flourished overseas. Today, Buffett’s stake in the company is valued at around $11 billion and pays nearly a quarter-billion a year in dividends alone!
What does Coca-Cola have to do with credit cards?
It’s astonishing just how quickly debit and credit cards have become of the payment method of choice in America. Nowadays, people pay for just about everything using them. Personally speaking, I probably only use cash five or six times per year, and credit cards the rest of the time. In today’s fast-paced, technologically driven world, we are seeing plastic replace paper currency at a rapid rate.
I see this situation as being similar to Coca-Cola in 1988. Today, Visa, MasterCard, American Express, and Discover have already conquered America… but what about internationally? In the majority of the world, debit cards and credit cards are still a rarity, but that’s quickly changing. The aforementioned companies are seeing double-digit annual growth rates overseas. Not surprisingly, it is the technologically-savvy, growing countries – like India – where credit card usage is increasing the most.
What will the future hold for credit cards in India?
China and India are the two most populous countries, with 1.34 and 1.18 billion people, respectively. Although the populations are similar in size, last year the Chinese spent nearly $24 billion on credit cards, which is 12 times more than the $2 billion spent in India. However this difference is rather insignificant at such an early stage, since both figures still only represent a trivial fraction of each country’s economy.
In order to gauge where India is heading we must consider the following factors:
Past Growth Rate: According to the Indian research firm RNCOS, the country saw a CAGR of around 40% between FY 2006 and FY 2009 for credit cards.
Short Term Future Growth: The aforementioned firm predicts a CAGR of 20% between FY 2011 and FY 2013. According to their press release “…the payment card market is highly untapped and is still at its nascent stage due to a very low level of penetration in terms of payment card usage.â€
Long Term Future Growth: The biggest obstacle facing long term growth will be infrastructure. According to the RBI, approximately 40% of citizens still do not have a bank account. Increased adaption of banking will be a key component in how quickly card usage is adapted. Furthermore, businesses will need to have greater ability and the willingness to incorporate debit/credit card processing. Lastly – and most importantly – society must also be willing to adapt the transition from paper to plastic.
Government Participation: One factor we can be relatively confident in is that the government has and will continue to be supportive of the card industry. The RBI has proposed launching domestic payment card and a POS network for card payments.
How I believe credit cards will be different from those in the United States
Nowadays, just about every credit card in the U.S. offers cash back, points, or some other form of rewards on purchases… but it wasn’t always that way. During the 60’s, 70’s, and 80’s, rewards were almost non-existent and most credit cards even charged an annual fee. It wasn’t until the American market started approaching full saturation that we saw cash back credit cards, travel rewards credit cards, and other “gimmicks†offered by banks to try and stand out from the competition. In summary, these extra perks would probably not be offered if the market wasn’t so competitive. For that reason, I do not believe we will see Indian credit cards offering widespread rewards for many years (the market first must become much more saturated).
There is also the possibility that we may never see such lucrative credit card rewards programs in India. Why? Because there are only two reasons it’s possible for banks to give 1% to 5% cash back on American credit cards:
(1) Credit card companies charge merchants processing fees, which average 2% and higher. These fees help cover the costs of the rewards. Many countries crack down on these fees and limit the amount merchants can be charged. For example, the Royal Bank of Australia capped these fees at only 0.5% in 2003. If India were to also drastically cut the fees, rewards would be far less likely.
(2) In the United States, the savings rate is very low. Since the recession it is historically “high†at 6%, but usually it is even less than that. Compare this to a country like India, where the savings rate is around 30%. Because Americans have so little money saved, many do not pay their credit account in full each month or they use credit cards for balance transfers… both of these forms of borrowing involve paying interest payments and/or transfer fees. That, in turn, also helps to offset the banks expense of offering rewards. However in a country like India where savings is high, I expect the population will generally be less likely to use this expensive type of borrowing. Therefore, it may not be profitable for banks to offer cash back credit cards and the like.
Conclusion
In my personal opinion, I believe the credit card business today is very similar to where Coca-Cola’s business stood in 1988 – there are massive untapped growth opportunities. Although India’s current infrastructure may not be considered the most ideal for the adaption of card payments at this time, I believe they are well poised. As a country that highly values science and technology, I am confident their usage of card payments will become widespread. It’s not a question of if, but when.
Although this article looks full of detail, a bad underlying mistake has been made. The credit card in India may grow once the society has reached a certain degree of maturity. Unfortunately, this is highly unpredictable (1) because as a cash-based society there is high aversion towards debt (credit cards are perceived as such) (2) debit cards have been experiencing a relentless growth that is highly unlikely to stop. Forecast may be wrong or right (not questioning that) but data displayed here is wrong in the first place. Credit cards declined by 6% and 10% in terms of value and volume transactions, respectively (2008-2009). In the same time span, debit cards rose by 38% and 42% (value and volume transactions). Dont know where you got this data but I work in research and within these markets. Data released in a such a unsubstantiated way is misleading and counterproductive for researchers who take everything for founded. Not picking on the writer but the firm that made this data publicly available….
Credit card penetration will have significant impact on the buying and spending behavior of the consumers. Unaccounted transactions (which usually happens in the unorganized sector) will lessen, thereby reducing tax evasion. The service charge of 2% per transaction and the hidden charges are some of the challenges that will prompt consumers to do cash transaction rather than using smart card. The hefty interest rate after the designated credit period is also something that the regulator will have to keep a tab on.