Pvt banks see no logic in free credit cards

Very few private banks are likely to emulate ICICI Bank's example of offering life-time free credit cards. Of the total 13 million cards in circulation, ICICI Bank tops the list with 3.5 million cards, while Citibank comes second with over 2.85 million cards.

The State Bank of India comes third with over 2 billion cards, while the rest of the market is shared by HSBC, Standard Chartered, HDFC Bank and a few others. Close on the heels of ICICI Bank waiving annual fees for its credit cards, BOB Card, a subsidiary of Bank of Baroda, too waived card fees for its customers.

Revenues from annual fee and renewal charges account for approximately 20 per cent of a bank's source of revenue from the card business. Giving up a part of the current revenue may make a dent in the bank's profit and loss account, said an industry source.

HSBC India's head-personal financial services, Nicholas Winsor explained: "Offering lifetime free credit cards entails loss of loyalty in the minds of the customer for issuing banks. Charging an annual fee, in fact, encourages interaction between the bank and the customer and enforces discipline and continuity in their relationship."

For every free card that a bank issues to its customer, it has to incur costs on providing insurance to the cardholder, on plastic and connectivity and on keeping the card on the online system. Also, it needs to pay charges to the association for every card issued.

Industry sources also feel that a wavier in fee would show up in other areas such as jacking up or revising upwards charges for upward payments and card advances. Waiving some charges brings in element of cross subsidy, they point out.

"Annual fees are a function of the value that the customer expects from the product. Free cards are typically stripped of strong value propositions and have lower usage and loyalty," says T R Ramachandran, business manager-cards, Citibank.

Compared with its global counterparts, India is an underpenetrated market with a lower spend per card. Against this backdrop, credit card companies feel it is too early to adopt such a practice.

However, V Vaidyanathan, senior general manager, ICICI Bank, is confident that the strategy would work. "The prime objective of providing this service was to expand the market. Profitability will come along in the long run," he said.

In developed western markets, the transition towards doing away with annual fees has been gradual and is linked to two important factors "" a much higher spend and usage per card than what is seen in India, and the development of stable credit bureaus, which help drive down loss rates.

The common view is that a typical Indian consumer is value-conscious and is prepared to pay for products, addressing his/her needs. Offering such cards affects the bank's financial viability and both, the customer quality and quality of services offered.