Unravelling SBI Cards IPO: Is it that big a deal?
India, one of the fastest growing economies in the world, has primarily been a debit card market with more than 824 million such cards in the system, as per RBI figures. A majority of the Indian population is aware about debit cards, its features, and its operations, as it has been very successful in the digital transformation of India. UPI and mobile wallets have grabbed the attention of policymakers, but the increase in the number of credit cards has been phenomenal. As per payment industry executives, the 27% growth in the credit card segment has opened up new business opportunities and areas of operations. It has now also become the most preferred mode of payment in the USA. Let’s first analyse the basics of a credit card operation and then delve further into the mega IPO of SBI Cards.
Credit cards are gaining in popularity in large parts because of their improved reward programs which induces people to use the facilities and also the wealthier people are more likely to be in a position to use them. Also, the ever increasing variety in them means that consumers are more likely to find cards tailored to their preferences which is now ever increasing due to market competition and consumerism, and earn larger rewards via higher purchase levels.
Nevertheless, with advantages there are problems which don’t take time to arise if you don’t pay heed to the most important aspect of a credit card: the interest payments. The credit card rate (our interest payment) is expressed in APR or Annual Percentage Rates which again is available in various agreements and vary highly. Furthermore, most credit cards have a Grace Period during which we can pay back our entire balance and avoid paying any interest. Any balance left beyond the grace period will be charged with interest in the form of a finance charge whose calculation varies greatly depending on the terms and conditions which are clearly specified in the contract and should be read clearly.
However, one must be careful with their repayments otherwise it could be harmful where the highly misunderstood concept of Mental Accounting comes into play: People keep costly credit card balances with increasing debt and interest obligations while using the money they have to invest somewhere else. They think that they can gain out of it except unless someone is a world-class investor, investing instead of paying off your credit card balance is a guaranteed loss of money. On the other hand, paying off your credit card debt guarantees you a return, a return of whatever your card charges you, i.e., the saved interest obligations.
Reading this whole set of information excites us to know more about the card industry: who are the major players and how does it function? Essentially, there are four major players in the chain. At the ground level come the credit card holders and the merchants (the outlets that let us use the services of the card). They basically are the sources of revenue in the system. Next come the issuing banks who issue the cards to their customers. Acquiring banks are responsible for making payments to the merchant. They deal with merchants — request them to accept their card and operate to take payments. At the end comes the most important stakeholder of the system: the payment or transaction networks. Networks like Visa, MasterCard serve as the link between acquiring banks and issuing banks. Seems complicated? Let’s get this from a transaction of your own making.
Say you went to the supermarket with your SBI credit card. The sales personnel at the outlet swipes the credit card on the POS machine. Now do keep this in mind that each POS machine is linked to a bank account — the merchant's bank account. So the supermarket's bank gets the transaction information and then forwards it to the issuer of the card — in this case SBI Cards being the issuer — through a payment network operated by Visa or Mastercard. SBI Cards, or the issuer of the card in general, verifies to see if the customer has a valid credit line and they make the payment if everything checks out perfectly. This information is then conveyed to supermarket's bank via the payment network and the money gets eventually credited once every intermediary in this whole process has taken their cut.
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Now, let’s analyse the mega IPO of the SBI Cards. SBI Cards and Payments Services Ltd. — separate entity and not SBI Ltd. — responsible for issuing SBI branded credit cards in India. It pays a royalty fee to SBI though but that's not much relevant since it's largely owned by SBI itself. It's however interesting that the subsidiary has thrived and progressed under the patronage of the state owned lender. For decades, SBI has been the largest bank in India with its ever increasing span in more than 32 nations. It is the brand which has its tagline as the 'banker to every Indian' and has always played at the forefront when it comes to catering to the Indian masses. With its comprehensive marketing strategies such as partnering with companies like Air India, Apollo, Etihad etc., continuous revision of rates, and reducing minimum balances, SBI earned the faith of the masses and became the only banking entity to enter into the Top 10 Famous Brands ranking in India. It is also the most trusted bank when it comes to online banking.
SBI Cards’ total income increased at a CAGR (Compound Annual Growth Rate) of 44.9% and its revenues from operations at a CAGR of 44.6% between FY 2017-18 and FY 2018-19. The net profit grew at a CAGR of 52.1% during the period which is remarkable per se. With a strong track record of growth and profitability, it has been a leading player in the Open Market Customer Acquisitions using physical and digital channels in India. It also has one of the highest "return on assets" in the industry as compared to its peers. But the question that arises is “why is there so much hype in the market when SBI Cards is going public?” SBI Cards and Payments Services Ltd. is the first company, in the credit card business domain, to be listed on the Indian exchange. It is the most profitable subsidiary of SBI, its largest and the only promoter, which reflects their commitment to maintain and excel its growth within the overall industry. Both financially and operationally, the company has always delivered appreciable performance. Hence, the premium asked for this issue seems somewhat justified considering the visible growth opportunity of the industry, and other opportunities and avenues it has to offer in the upcoming days.
SBI Cards & Payments Services Ltd.’s IPO (or Initial Public Offer) gives investors a chance to bet on such a business that could serve as the most sought after catalyst to the high-margin credit card lending which will further revolutionize the Indian business scenario. While most of the other banks offer cards, SBI Cards is the nation’s only pure-play card issuer that focuses in only one domain thereby specializing in it and the second-largest behind HDFC Bank Ltd.
Amidst all the rationalised frenzy of the credit card giant's IPO there are certain concerns which would have to be looked upon when we analyze it from a broader macroeconomic perspective. Although the state of the Indian economy is inappreciable, cash still remains to be the most preferred mode of payment by us Indians. Yet, if we think optimistically, the sector is expected to grow at a lucrative pace. CRISIL Research reports suggest that the digital payments, growing at an annual rate of 20%, will more than double in value by March, 2024. It will be very interesting to see how the SBI Cards’ IPO courses its way forward and how the potential of this industry unfurls in the coming time when India inches towards its goal of becoming a $5 Trillion economy.
So, is it that big a deal as people make out it to be? Well, that's up to oneself. Being preachers of financial literacy, here's a fact: People spend enough on a credit card's interest component and by this first ever IPO from a credit card company, perhaps they got a shot to break even by investing in it.
By Raghav Jhunjhunwala