By Raghu Mohan

India is generating more credit card spenders than spending places. While card-base and spends are growing at a spiffy 25-30 per cent annually, the number of merchant establishments which accept cards is growing relatively sluggishly. The figure was put at 75,000-80,000 a couple of years ago, and now stands at 100,000 on both the Visa and MasterCard loops. As opposed to that, there are 2.5 million cardholders and 3.3 million cards (some, obviously have more than one) and the numbers are growing very strongly.

What’s worse, 60 per cent of the card-accepting establishments are located in the big five metros. Further, of the 100,000 outlets only 5,000 or so are outfitted with electronic data capture (EDC) terminals.

Clearly, the merchant base needs to be expanded. The establishment base should increase, especially in the newer towns where first-time users are being targeted, including towns that display a significant growth in the middle-class population, says SBI-GE’s CEO Vishal Pandit. Over the last one year since the launch of the SBI’s card, the country’s largest bank has issued over 115,000 cards. It’s future success will depend on how fast the merchant establishment spreads in the non-metro centres.

The reasons for this metro-skew are not hard to find. They include: a) the inability of card issuers with a huge network to leverage their reach; b) poor co-ordination among players in identification of vendor outlets; c) discount rates; d) the high costs involved in bringing outlet on-line; and e) telecommunications infrastructure.

Industry insiders say that thin spreads where card issuers typically earn less than two per cent as gross commission on card spends make expansion of the merchant network uneconomical. But the slow spread of card-accepting outlets is also making card spends low relative to their potential. It is a catch-22 situation really, says Citibank’s manager-cards, MN Murali. Where do you begin?

Says BoB Cards chief executive officer Ashok Chopra: The bulk of merchant outlets, at 100,000 or so, are located largely across 15 to 16 cities. It is one thing that state-run banks have not been able to grow the number of outlets or business. The fact of the matter is that merchant outlets are still not aware of the carry costs of cash, and they need to be educated. This is symptomatic of a predominantly cash-society going plastic.

Identification of first-time card acceptance outlets is primarily a trial and error affair. There is no co-ordinated effort among card-issuers or the payment networks to identify prospective outlets. Tracking is done mainly across three sectors: travel, entertainment and retail merchandising. In the metros, the process is not seen as a big challenge, but it is tough when it comes to ‘B’ cities.

If getting merchant establishments to accept cards is itself one hell of a task, getting banks to invest in electronic data capture terminals (EDCs) has proved even more difficult. The reason is cost. Says Citibank’s Murali: A large number of outlets have card sales of Rs 30,000 per month. Banks have to incur the cost of marketing, picking up charge-slips, processing, sending hot-card warning bulletins, delivering payment drafts, reconciliation, merchant training and fraud control. The discount rates less cost of funding earned from these merchants is not enough to pay for these huge costs.

To illustrate: On a Rs 100 spend, Rs 2 goes to the acquirer (the bank which pays the merchant for card spend). Of this, Rs 1.10 is pocketed by the card issuing bank (it is Rs 1.60 at a manual outlet), which shares a fixed amount with the payment networks (Visa and MasterCard). The acquirer gets 90 paise. While there exists an informal agreement among Visa and MasterCard franchisees that they will not undercut (1.75 per cent is the floor), the reality is otherwise on account of the stiff competition.

Returns in the acquiring business can even turn negative. Consider this: on an earning of 90 paise, the acquirer earns Rs 9 on a spend of Rs 1,000. But this is not all profit. There are other costs too. Rentals on EDC terminals set up by Equifax India (EDC terminals cost Rs 25,000 a piece; HSBC, Citibank and AmEx are the only ones to set up EDCs on their own) are nearly Rs 1,000 per month. The cost to an acquirer on a spending base of Rs 1 lakh over 100 transactions works out to Rs 10 per transaction. And these are only fixed costs. Variable costs to Equifax on paper slips and switching are sundries, and typically total up to Rs 3 per transaction. Add on funding costs, given the fact that the acquirer has to settle with outlets the next day, and the margins can turn negative. There is money in it only if average spends are very high.

As Murali observes: While the discount (commission) rate in our country is the same as abroad, the cost of funds is much higher. Discount rates, fee and interest rates are affected by competition.

HSBC is currently the leader in the card acquiring business. Following HSBC are BoB and Citibank. HSBC’s manager (credit cards) Vivek Kudwa, while attributing the bank’s leadership position in the acquiring business to the excellent relationship it enjoys with merchant establishments, says: The acquiring and issuance businesses are closely interlinked, but they are not the same. Being a big card issuer does not mean that you are going to top it in acquiring. But yes, the interplay between the acquiring and the issuance business decides how merchant establishments are going to grow.

Citibank, with its million strong card-base, is trying to increase the pace of spends and EDC installation in its MasterCard loop by issuing electronic cards that will not work at non-EDC outlets. So merchant establishments who value Citibank’s customers will have two options: they can either upgrade themselves to EDC, or they can give up on high-spending customers (at least Rs 3,000 per month).

The EDC cost aspect is being addressed by Visa too. To facilitate rapid acceleration in this area, Visa has a strategic alliance with Equifax to enhance the growth and development of India’s payment card industry by working with member banks and merchants to deliver efficient processing solutions, says James Murray, executive vice-president of Visa for south-east Asia and greater China.

In the case of Amex TRS, being a proprietary network, it can effectively relate product offerings to the growth in vendor outlets. This is executed by providing marketing support to its merchants by running programmes that drive cardholders to outlets. AmEx TRS’ competitors point out that it cannot catalyse growth in merchant establishments given its relatively high discount rate at 3 per cent and above. One of the reasons for this, sources say, is the aggressive rewards programme that Amex TRS offers and its low interest rates at 1.99 per cent. Merchant establishments obviously balk at the discount rates.

Sanjay Rishi at Amex TRS dismisses this argument. We are a closed-loop network that enables us unlike others to effectively design marketing programmes and benefits for cardmembers in association with the merchants. There are no structural bottlenecks for AmEx TRS to sign up new merchants. In fact, we have been signing up merchants every day, and have the ability to sign up new merchants at will to meet the growing needs of card members.

Amex TRS claims that over the last year-and-a-half, it has doubled its base in terms of merchant outlets signed up. The new merchants are not only in existing categories, but also in new categories such as gas stations and ATM cash access, says Rishi.

Visa’s Murray is of the view that the wider ability of payment cards will be driven by the entry of large financial institutions like ICICI and SBI, enhancing the geographical coverage of payment products and services.

SBI-GE, for one, is currently not in the acquiring business, but is working closely with Visa to go on stream.

The focus of SBI Cards is to increase the reach and penetration of payment cards through SBI’s extensive distribution network, and also increase acceptance at merchant establishments where payment cards can be used through our agreement with Visa. We have set a philosophy in place of an acquiring-led acquisition business to achieve this.

Spend-volumes hold the key to getting more acceptance outlets, and to the related aspect of acquisition. And that leads one to the issue of using credit cards not just as a credit-tool, but also as a payment device.

BoB Cards’ Chopra feels that the scope of credit cards must be expanded to pay everyday expenses like electricity bills. Both Citibank and StanChart are reportedly working out a package.