End of the plastic smile: Tectonic change is roiling credit card industry

Tectonic change is roiling the credit card industry, and the rules of the game are being reset

Last month, the Reserve Bank of India (RBI) relaxed the deadline for banks to comply with the additional factor authentication for recurring online payments by six months, to September 30, 2021. Reason: Over 18 months after the central bank mandated the switchover in August 2019, banks are still not ready. But regulatory forbearance may not save them from the march of technology. Take a look at the credit card industry, where tectonic changes are on the way.
 
You have close to 60 million credit cards, but only about 35 million are with unique customers — millions of cards are just one more in crowded wallets. It’s an expensive business to be in — cold-callers have to be paid Rs 4,000 per card issued; there are 24x7 call centres to maintain, billing disputes, reward programmes to run, and frauds to be factored in. Plus, small-ticket collections are just not worth the cost.
 
And to the extent that issuers make money only when customers roll over spends (and have a primary card as well), it follows that they don’t make enough of it. The average card-spend — a claimed Rs 9,000 — is misleading; it is much lower. There’s also growing realisation that the business could be reimagined outside of the Visa and MasterCard networks.
 
On the ground
 
Tokenisation and virtual cards have reared their heads (the terms are used inter-changeably). Think of the first as “chips” used at a poker game — valuable because they represent much more than pieces of plastic. In tokenisation, the 16-digit number on the credit card is never flashed at merchant outlets — you get a code much like a one-time password. Deal done, the token may expire. Virtual cards are just that — virtual, but you can tokenise them as well.
 
“With commerce increasingly going digital, the payments industry has expanded to provide plastic as well as digital credentials,” says T R Ramachandran, Visa’s Group Country Manager (India & South Asia). “It helps banks and digital payment providers to offer their consumers a safe, simple, and consistent purchasing experience, regardless of where they are and what form factor they are using.”

 
Adds Tanya Naik, head of online and omnichannel business at Pine Labs, a platform that provides merchants with payments solutions: “From a processing standpoint, it’s truly seamless across payment processors, gateways and banks. This model can help merchants move customers to online payments while at stores, or click- and-collect as required.”
 
This means you can originate a transaction and pay through a variety of devices — desktops, laptops, tablets, or your watch. You can also ensure that if a device is compromised, the mother card — physical or virtual — is not. If you were to weave in the internet of things into the plot, you can pay via your oven, too. The tricky part is while you can do all of this, you can’t expect this of banks, which need two years to comply with an RBI circular on auto-debits.
 
Another layer of complexity
 
All this is tough enough. Now, the Unified Payments Interface (UPI) is adding another layer of complexity. Merchants don’t see any value in paying the inter-change when the UPI freeway is available. In fact, the success of zero inter-change (on transactions of up to Rs 2,000) at over 200 million outlets means new revenue models are in the offing. And, juxtaposing the technology and acceptance network to an under-penetrated credit card market opens the doors for new-age entities to build a business through credit and credit-line solutions, even outside the Visa and MasterCard platforms.

 
Take the RBL Bank-vCard, a downloadable mobile credit app. Issued together with a physical MasterCard, it allows traditional inter-change revenue opportunities, plus a vCard credit line — a daily interest-bearing product creating interest-based income. Instead of focusing on salaried super prime customers, vCard helps builds a portfolio to service prime and near-prime customers through products. Several small finance banks and non-banking financial companies are said to be in discussions with fintechs to adopt this model.
 
“It’s an insult to one’s intelligence to state that the changes are only in the form factor. They will alter the business model itself,” says Vishal Ranjan, founder and chief executive officer of vCard.

 
The National Payments Corporation of India is evolving policies regarding interchange for UPI credit cards. How is the merchant discount rate (MDR) to be seen in these credit cards? “Processing virtual cards through the UPI implies interoperability of the best kind. However, the funding type for virtual cards needs to be clarified,” explains Naik.
 
If virtual cards are issued as standalone credit, she adds, the transaction MDR on UPI cannot apply, given that the underlying nature of the transaction is a credit transaction. And for virtual cards that are in the nature of an overdraft facility on the bank account, the interchange rules may work as a UPI transaction, as the underlying funding instrument is a bank account.
Clearly, the plastic smiles are wearing thin.