Credit card cos revisit their revenue model

NEW DELHI: Credit card companies are revisiting their revenue models to sustain usage of cards and attract new clients. What could be in the

offing is a lower or differential interest rate on credit cards. To make up for revenue loss on this front, companies may be levying a variety of fees, including an annual fee, annual or monthly maintenance cost, charges for direct services provided such as cheque representation charges and cash collection fees.

Credit card issuers such as State Bank of India Cards, ING Vysya Bank, and Deutsche Bank have all hinted that they are giving this option a serious thought, given the dynamics of the industry. “We are always evaluating ways to enhance the value proposition for our customers. As a part of this process we are looking at the option of bringing down interest rates,” Diwakar Gupta, CEO of SBI Cards told SundayET.

As a step in this direction, SBI Cards had initiated the reintroduction of charging the annual membership fees earlier this year. “The annual fee-paid card encourages a much better customer connect and promotes need-based issuance of cards. Such customers appreciate the value proposition of the offering better and builds a better and healthier credit card business,” Mr Gupta said. With the company’s new card numbers not dipping since reinitiating fees, Mr Gupta said it validates their belief in the strategy.

In the credit card industry, experts said the typical business model has two options, ‘roll over’ of outstanding with Annual Percentage Rate (APR) of over 35% and annual renewal fees ranging between Rs 2,000 to Rs 5,000 for high end cards. The card portfolio assumes a much higher default rate than other credit portfolios and calls for additional provisions, particularly during economic downturns.

“A large part of the operating costs are incremental collection costs, and one way to keep out poor profiles coming in and managing higher collection costs is to impose a variety of fees,” Robin Roy, associate director — financial services, PricewaterhouseCoopers (PwC) said.

Sonalee Panda, product & marketing head at ING Vysya Bank believes the growing delinquency among credit card holders, coupled with increased administration costs, are compelling reasons for the banks to increase fee. “The fee structure on credit cards in the country has been constant for more than two years, now,” she said.