Several of the top payment companies have launched virtual and physical credit card products in the last few months in a bid to grab a bigger share of their consumers’ spending. While payment companies are not authorised to lend credit on their balance-sheets, they are slowly entering the credit market with co-branded credit cards and partnerships with banks and non-bank lenders.

Earlier this month, Paytm announced a co-branded credit card partnership with SBI Cards and Payments Services. MobiKwik launched a pre-paid instrument card partnership with American Express which can be used either as a debit or credit card by the customer depending on the funds available in their MobiKwik wallet.

These are only the latest credit card products to be launched by payment companies. Back in 2018, Amazon Pay launched a co-branded credit card with ICICI Bank. According to a company press release, as of October 2020, the bank has issued a total of 1.4 million Amazon Pay ICICI Bank credit cards. Similarly, in August last year, Freecharge launched a co-branded card backed by its parent company Axis Bank.

Razorpay has also entered the corporate credit cards space, for clients on the Razorpay X platform, and has issued around 3,000 cards so far, BloombergQuint reported in October. Google Pay has partnered with Axis Bank to issue credit cards to a limited number of its customers, however this is not a co-branded card and only has the branding the of the bank, but customers using the card can avail cashback benefits on the payment app.

Rationale behind issuing credit cards

In October this year, Paytm, which has a payments bank license, announced that it plans to issue two million cards to customers in the next 12-18 months and wants capture at least 10% of this largely untapped market. The following month the company announced that it would issue two types of credit cards with SBI Cards that could be used to purchase goods and services within the Paytm app to earn cashbacks and other benefits. But this is not the company’s first foray into the co-branded credit card space, as last year, it had launched Paytm First Card in partnership with CitiBank.

A spokesperson for Paytm said that the company wants to completely re-imagine the credit card experience by enabling smart app features and providing superior rewards & benefits for our users. “We aim to empower new to credit individuals with smart one-tap features as well as rewards and savings upon using the card on the Paytm app as well as millions of online and offline stores. We believe our card has an opportunity to capture a large market segment as many first time new to credit users can be underwritten using our available data,” they said.

“The penetration of credit cards in the country is still very low at around 50 million where the number of digital payments users now stands at around 200 million, said Upasana Taku, co-founder and chief operating officer, MobiKwik. “So we believe the form factor for delivering credit is actually going to be digital credit, like the MobiKwik wallet and not a card which is issued by banks and licensed lenders. The cost of user acquisition remains high for issuing credit cards, so our view is that the traditional model that banks use for credit cards does not address middle India who are young consumers that have recently got a smartphone.”

With the American Express virtual card partnership, MobiKwik’s users can use the card to either spend their own-funds that are loaded into the wallet or loans they have received from the apps’ lending partners, she said. The company has disbursed over ₹1,800 crore (US$250 million) worth of loans to 15 million of its 100 million user base through the MobiKwik app in the last two years, through of 6-7 lending partners, Taku said.

Sanjeev Moghe, executive vice president and head of cards and payments, Axis Bank says that the banks can attract a new customer base, reduce the distribution and acquisition costs through co-branded partnerships. “In particular, our card with FreeCharge and Flipkart has done very well and we hope to see good numbers on our co-created card with Google Pay which has just launched. When we issue these cards we are able to address a new target segment, partner learnings, various propensity models to on board customers. We find that, in our modelling, such customers have better risk profiles compared to open market acquisition,” he said.

In an emailed statement Siddharth Mehta, chief executive officer, Freecharge said that reason why we went ahead with this partnership is because payments being the most ubiquitous need of the consumer, is a big use-case and we saw this as an opportunity to reach out to the digital natives and empower them with easy access to credit, that comes with an instant and seamless experience, while also being flexible and secure. “More so, there are many credit cards which focus on lifestyle or shopping, whereas this card, termed as a ‘super power’ for your everyday expenses, is primarily focused on giving benefits on your regular monthly bill payments, transport and shopping and therefore, the rewards and cashback structure is designed around it,” he said.

The spokesperson for Razorpay was not available for comment.

Benefits of a bank-payment company card

Two payments executive told MediaNama that in the co-branded space, while the bank earns a fee on transactions, interest on spends and an annual fee, the payment company, which acts as a distributor for the bank, retains around 150-250 basis points of the revenue earned by the bank.

According to the first payments executives quoted above, payment companies have been providing the Unified Payments Interface (UPI) platform to their customers through which they do not earn any revenue, so they needed to incentivise customers to load money into wallets in return for cashbacks and other benefits, but that has not panned out well. “So naturally they’re issuing credit cards through bank partnerships to increase the number of transactions that take place within the apps and also to improve customer engagements,” this person said on the condition of anonymity.

The second payments executive quoted above said that for the banks, the benefit is two-fold. “On the one hand they can find new customers and on the other, they can issue credit cards directly through an app in case of virtual cards, for example, which reduces the cost of issuance,” this person said on the condition of anonymity.

According to Vivek Iyer, national leader of financial services, Grant Thornton, banks are entering these tie-ups mainly for the customer acquisition angle and not necessarily for the co-branded benefits. “Once they have the data they can push many other services onto the customer and provide upgrades. Fintech companies, on the other hand, are hungry for monetising their customer data which is why they are entering these partnerships to get some revenue from third-party distribution,” he said. Iyer added that the bigger worry is the kind of customers that will get these cards, if the underwriting standards will be maintained, and what kind of monitoring the banks will undertake to safeguard against future defaults.

***Update (November 18, 2020 2:425 pm): Updated with statement from a Spokesperson of Paytm .
***Update (November 18, 2020 1:42 pm): Updated with statement from Siddharth Mehta, CEO Freecharge. Originally published on November 17, 2020 at 7:20 pm.