4 Banks Own 70% of the Credit Cards

Prafull Kumar | Tue 25th Jun, 2024

The credit card business is a high-margin business, so why are others not capitalizing on this? This has a lot to do with how strong a bank's business is.

Imagine a bank's business model like climbing a ladder.

They start at the bottom with safe and reliable investments to build a strong financial foundation. These are low-risk areas that ensure a steady income.

Foundational Stage (Low Risk)

These low-risk investments provide a bank with steady and reliable income, laying down a solid financial base. It's like the foundation of a house—strong and dependable, giving the bank the confidence to take on more challenging businesses.

Interestingly, SBI, HDFC, ICICI & Axis also have the highest number of savings accounts and deposit bases, which solidifies their financial stability.

Once the bank has a solid base, it can move up the ladder to moderately riskier investments.

Growth Stage (Moderate Risk)

In this stage, banks start exploring more profitable opportunities, though they come with slightly more risk. Home loans, auto loans, and insurance products are examples where banks can make more money while still maintaining a balanced risk profile.

These investments help the bank grow its wealth and experience in managing different types of financial products.

After establishing stability in these areas, the bank is ready to tackle high-risk, high-reward opportunities.


Advanced Stage (High Risk)

Credit cards fall into this high-risk category.

They can be very profitable because banks earn money through interest charges and fees. However, they also come with significant risks, such as the possibility that people won't pay back what they owe. There's also the risk of fraud and economic downturns impacting repayment rates.

In a market like India, offering unsecured loans such as credit cards is particularly challenging compared to markets like the US and Europe. The risk of default is higher, and the capability to assess the creditworthiness of potential customers is crucial. Because of these risks, banks usually wait until they have strong financial stability and effective risk management before they offer credit cards. They need to be sure they can handle the potential losses and still remain profitable.

Once these systems are in place, banks can safely introduce credit cards to take advantage of the high profits they offer, even though they come with higher risks. This strategic approach explains why only a few banks dominate the credit card market—they've carefully built their way up the ladder and are now benefiting from the rewards at the top.

Moreover, HDFC, ICICI, SBI, and Axis are among the top corporate banks in India. These banks manage a significant number of salaried accounts, giving them access to valuable customer data. This data allows them to analyze and assess the risk before sanctioning a credit card, reducing the chances of defaults. Their extensive data on customer transactions and financial behavior helps them determine the intent and ability of a customer to repay their credit card debts, giving them an edge over smaller banks.

Their success demonstrates that with patience, careful planning, and effective risk management, other banks can also climb the ladder and achieve similar heights.

Data Source: https://website.rbi.org.in/web/rbi


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