The
credit card market is about to be disrupted and the tech companies are leading the charge.
Almost all FinTech startups these days are venturing into lending. They use non-conventional data points to extend lines of credit to people who otherwise wouldn’t have had access to them, thereby greatly expanding the pie to whom credit can be made available and grow fast.
Digital credit cards
Digital credit card or a virtual card is fundamentally different from the plastic credit card offered by banks as it doesn’t use Master-Visa Payment rails, but UPI, which has a larger acceptance for both P2P and P2M payments.
Digital credit cards can originate the customers at huge lower costs and with limits as small as Rs 15,000 – can potentially reach a market of 300-500 million Indian customers in addition to the global market.
Also, digital cards are more secure than plastic credit cards as there is no chance of physical card theft. There is no card data on the device and the mobile phone acts as an authentication device.
Even if the mobile phone is stolen the MPIN acts as a safety check while in the case of higher spending, the mobile camera is switched on for face recognition to authenticate payments.
A hacker with a cloned mobile number cannot use the credit card as the OTP and the device information is locked to the physical device.
Buy now, pay later
In the last couple of years, ‘Buy Now, Pay Later’ (BNPL) products are making a big entrance and gaining widespread popularity as an alternative payment method.
Applying for credit cards is a more lengthy process that can often take days, sometimes weeks, to get approved. Moreover, younger generations also often can’t get approved for a credit card because they don’t have a credit history in order to be eligible. Lastly, the BNPL customer user experience via intuitive apps is much better than most credit card interfaces.
The current credit cards cater only to 30 million salaried employees owing to legacy business models, underwriting methods, and expensive costs of operations. On the other hand, there are 900 million debit card users in India and over 450 million PAN card numbers with some credit history, which can be serviced through digital cards.
The business has too many costs, about Rs 4,000 per card issued needs to be paid to cold-callers, call centres need to be maintained, The companies have to deal with billing disputes and frauds, offer reward programmes to run, which makes small-ticket earnings unviable.
Will credit cards become a thing of the past?
It may be a long time for credit cards to vanish. First of all, credit cards do have the advantage of having a significantly higher card acceptance at merchants globally. A BNPL customer is currently unable to pay at places like Woolworths or Coles for their everyday grocery shopping, or secure a rental car overseas. Visa and Mastercard have created a truly global point of sales and online payment ecosystem and their cards are accepted by more than 40 million merchants globally. BNPL providers have contracts with merchants in place that are a fraction of those. In addition, cross border payments with BNPL are not a reality yet.
Also when BNPL customers pay their instalments, the transactions are done via payment rails of existing schemes (VISA, Mastercard) or via a bank account. This means the schemes are not completely taken out of a BNPL transaction.
Also, the payment and unsecured credit providers in the ecosystem will benefit from forming partnerships to leverage each other’s strengths.