Marketing

Assignment on Segmentation and

Positioning:

Analysis of the Credit

Card Industry in India.
 Submitted
by: Tribhuvan
Singh
(Rollno.149010106)

Date: 07th
July’06.

Credit cards Industry in India:

The total credit card market in the country is now at around 17m cards and is
growing at a rate of 30-35per cent per annum. The size of the Indian credit
cards market is estimated to be around $4bn.
The market is expected to grow by about 30-35% p.a. This would still be a
very low penetration of a potential market of 60 million cardholders. The
credit card business is a low-margin, high volume business. Thus, given the
low income per card and the high initial investments by the bank, large
volumes in terms of cards issued and the transactions financed are required
to make the operations profitable.

Credit cards are gaining ground in India at a rapid pace with increasing
urbanization and awareness of plastic money. Besides the various freebies
and rewards doled out, customers feel it very convenient to carry a plastic
card rather than bundles of currency. The expected growth rate of credit card
business in India is 30-35%. With the advent of globalization and
privatization, the concept of credit cards is gaining popularity. Most of the
bill payments including utility payments can be taken care by credit cards.
Further, in India at least, people perceive the card as a status symbol.

In India, ICICI Bank, Citibank, HDFC Bank, SBI, StanChart and HSBC are
the main players. However, various Indian banks, both public and private,
are entering into Joint Ventures. Recently, BOBCARDS has launched a
credit card, PARAS, in association with the MasterCard International. ICICI
Bank is the largest card issuer in the country with the total of 4 mn cards
issued. As the corporate banking margins are falling, the banks are focusing
more on the retail segment. SBI and ICICI are capturing the market at a very
fast pace.

The main service providers to credit cards issuers are MasterCard and Visa.
They are typically paid 0.025% of the transaction by the issuing bank.

MasterCard – MasterCard is a product of MasterCard International and

along with VISA are distributed by financial institutions around the world.
Cardholders borrow money against a line of credit and pay it back with
interest if the balance is carried over from month to month. Its products are
issued by 23,000 financial institutions in 220 countries and territories. In
1998, it had almost 700 million cards in circulation, whose users spent $650
billion in more than 16.2 million locations.

VISA Card – VISA cards is a product of VISA USA and along with
MasterCard is distributed by financial institutions around the world. A VISA
cardholder borrows money against a credit line and repays the money with
interest if the balance is carried over from month to month in a revolving
line of credit. Nearly 600 million cards carry one of the VISA brands and
more than 14 million locations accept VISA cards. Apart from Master and
Visa there are few more service providers like American Express, Discover
and Diner etc.
Economy driving spends:

A thriving economy, substantial increase in disposable incomes and

consequent rise in consumer expenditure, growing affluence levels and
consumer sophistication have all led to a robust growth in credit cards. There
is no doubt that more and more middle class Indians are letting plastic rule
their day to day lives. Five years ago, there were only 4.3 million credit
cards being used in the country whereas today the market is 17 million and
growing.

An explosive growth in volumes has not dented quality or profitability, and

the Indian card market is at par with the best in the world. Here are some
indicators.
Profitable usage: Credit cards can be used online with a separate security
number to prevent misuse. This has increased profitability. An estimate by
Business Standard in early 2004 reckoned that Citibank's profits on the card
business were over US $ 34 million and StanChart's was around US $ 23-34
million. Among the Indian banks, SBI Cards was estimated to be the most
profitable with over US $ 11.6 million as operating profit. Growing reach:
Indian Railways which runs one of the largest travel booking sites in Asia
and offers door-delivery of train tickets if booked online using credit or debit
cards. Credit cards are now increasingly being used to pay for even school
fees and hospitalization expenses. Safe and sound: Safety standards followed
by players to prevent misuse match the best in the world. For example, any
transaction above a particular sum is automatically referred to the issuing
bank which calls up the cardholder in a matter of seconds on the mobile
phone to confirm the purchase. Feature-driven: Product features too match
the best anywhere in the world. Almost all credit cards come with standard
frills such as free accident insurance, medical insurance at a heavy discount
and much more. The cardholder is offered the option of converting a big
purchase made on credit card into a loan at a lower rate of interest spread
over a long period. Banks now offer details of expenses incurred on credit
cards under different heads – such as food, clothes and jewellery – to enable
easier tracking by the customer. E-mail alerts and mobile alerts on credit
card details are commonplace.

Distribution of market share amongst key players:

The total credit card market in the country is now at around 17m cards and is
growing at a rate of 30-35per cent per annum. The size of the Indian credit
cards market is estimated to be around $4bn.
Four banks have now crossed the 2m card base. A year before economic
reforms kicked off in 1991, Citibank stole a march ahead of it’s competitors
and became the first bank to launch a credit card in India. Fifteen years later,
the pioneer has been upstaged by a homegrown bank, ICICI bank, which has
raced to the top position in less than four years with more than 4 million
cards. Citibank is at a second place with about 2.8 million credit card
holders. HDFC Bank, at third spot, has issued about 2.2 million cards, and
plans to extend its reach to another 25 cities. Close on its heels is domestic
behemoth State bank of India (SBI) which has crossed 2 million cards within
two years of launching the card. Standard Chartered Bank is at fifth place
with 1.7 million cards on its books. However, HSBC is fighting hard to be in
the reckoning with over 1.3 million cards.

ICICI
4
3.5 CitiBank
3
2.5 HDFC
2
SBI
1.5
1 StanChart
0.5
HSBC
0
Cardholders in millions
All Others
Combined
Average APR (annual percentage rate) is 2.95% / month or
35.40% per annum.

All players posted above have posted an enviable annual growth rate more
than 50% over the last two years.
Types of Credit Cards:

Standard Card – It is the most basic card (contains standard frills)

offered by issuers.

Classic Card – Brand name for the standard card issued by VISA.

Gold Card – A credit card that offers a higher line of credit than a
standard card. Income eligibility is also higher. In addition, issuers
provide incentives to cardholders like access to Airport Lounges

Platinum Card – A credit card with a higher limit and additional perks
than a gold card.

Titanium Card – A card with an even higher limit than a platinum

card.

Charge Card – Falls between a debit and credit card. Works like the
latter and you don't have to be an accountholder. Just pay up in full
when the bill arrives with the mail. No outstanding are allowed, in
other words, no revolving credit facility either. American Express and
Diners are providers of Charge card however not very popular in
India.

Rebate Card – This is a card that allows the customer to accumulate

cash, merchandise or services based on card usage. Example 5% cash
back on ICICI Credit card on purchases.

Co-Branded Card – This is a marriage of convenience between two

service providers who want a trade-off with the other's strengths.
Specific facilities are made to members through these tie-ups. So,
Stanchart and Hindustan Lever Limited have a co-branded card to sell
Aviance beauty products. SBI-GE Capital has a co-branded card for
retail loans and likewise American express and Indian Airlines.

An explosive growth in volumes has not dented quality or profitability, and

the Indian card market is at par with the best in the world. Here are some
indicators.
Profitable usage: Credit cards can be used online with a separate security
number to prevent misuse. This has increased profitability. An estimate by
Business Standard in early 2004 reckoned that Citibank's profits on the card
business were over US $ 34 million and StanChart's was around US $ 23-34
million. Among the Indian banks, SBI Cards was estimated to be the most
profitable with over US $ 11.6 million as operating profit. Growing reach:
Indian Railways which runs one of the largest travel booking sites in Asia
and offers door-delivery of train tickets if booked online using credit or debit
cards. Credit cards are now increasingly being used to pay for even school
fees and hospitalization expenses. Safe and sound: Safety standards followed
by players to prevent misuse match the best in the world. For example, any
transaction above a particular sum is automatically referred to the issuing
bank which calls up the cardholder in a matter of seconds on the mobile
phone to confirm the purchase. Feature-driven: Product features too match
the best anywhere in the world. Almost all credit cards come with standard
frills such as free accident insurance, medical insurance at a heavy discount
and much more. The cardholder is offered the option of converting a big
purchase made on credit card into a loan at a lower rate of interest spread
over a long period. Banks now offer details of expenses incurred on credit
cards under different heads – such as food, clothes and jewellery – to enable
easier tracking by the customer. E-mail alerts and mobile alerts on credit
card details are commonplace.

Credit Card holder behavior:

According to Visa Internationals latest data, average Indian cardholder uses
his card 9.3 times, spending about Rs. 14,700 per year. A number of card
owners do not use their cards and almost 20 – 30 % cards are inactive (less
than one usage every quarter).

An important fact that should be observed is that it is only in the past few
years that the Indian customer is beginning to accept ‘Credit’. The Indian
culture doesn’t promote credit, and it is this outlook change which is the
most important development for the credit card industry. ABN Amro, for
instance, backed up their launch of the ‘Freedom Card’ with research that
showed that the Indian middle class views the credit card as a potential debt
trap.
India vs. Other countries:

The most heartening part of the growth is that so much still remains to be
covered. Compared to other Asian markets, Indian credit card market is still
at a nascent stage. Credit cards per bankable population in India is 0.03 per
person against 3 in South Korea, 2.66 in Taiwan, 2 in Hong Kong, 1.1 in
Singapore and 0.4 in Malaysia. In ICICI Bank, an average Indian credit
cardholder spends less than $500 on his card annually, compared to around
$800 in Sri Lanka and over $3,000 in Hong Kong and Singapore.
Outstanding dues on credit card (which are the money spinner for any card
issuing bank), are the lowest in the region. The outstanding balance in India
is at $1.5 billion, compared to $90 billion in Korea, $10 billion in Hong
Kong and US $2.5 billion in Malaysia.

Segmentation of Credit Card Industry:

a) Demographic Customer Segments:

The segmentation of the card industry can be done on the basis of income
and on the basis of motivation towards a common set of needs and wants .
The Indian market reflects considerable diversities in income levels and
lifestyles. A World Bank estimate places average annual household incomes
(in terms of purchasing power) at US $6452. But there are large segments of
people, whose income levels are significantly higher, growing faster and
spurring a consumer revolution, a case in point being the rise of software
and IT enabled services. It is difficult to obtain correct estimates of this
group, as there is a very small percentage of India’s ‘rich’ who pay income
tax and their income levels are correctly reported.

The segments which have been identified are as follows: (Source: NCAER)

Segments Income Group (Rs.)

Rich 2,15,000 +
Consuming Class 45,000-2,15,000
Climbers 22,000-45,000
Aspirants 16,000-22,000
Destitute Less than 16,000

According to NCAER reports:

• · The Rich (annual income over Rs 215,000) will increase to 6.2

million households by 2006-7.

• · The Consuming Class (annual income of Rs 45,000-215,000) will

grow to 90.9 million households by 2006-7.

• · The number of households in the Aspirants (Rs 16,000-22,000/year)

and Destitute (less than Rs 16,000/year) groups will decrease
significantly.

Segments with high unrealized potential:

• Mid-Size cities in India have low credit card penetration. The

residents of such cities are affluent and they are good markets
for Credit cards. This low penetration is due to
comparatively low acceptance of credit cards.

• Rich farmers who live in the rural belt but also spend quite
some time in the nearby towns can be tapped.

• The growing number of netizens represents a segment with

high-unrealized potential.
b) Segmentation according to perceived utility of credit cards:

Preliminary qualitative research by NCAER has identified certain motivators

differentiated on the basis of the income segments.

Segments Motivations:
Rich Convenience and acceptability, level of service, Credit
limit.
Consuming Prestige, convenience, charges, service level.
Class
Climbers Prestige, charges

Charges include all commissions, interest rate, annual fees, which are to be
paid to the bank. The motivational factor has been derived from the credit
card holder behavior and income levels. This shows differentiation as we
move along the various segments. Fee charges are not at all important for the
‘Rich’ but they assume a fair degree of importance as we move down the
segments. In case of ‘Climbers’, Level of service has very little motivation
to offer. This segment primarily has either the non-premium cards or cards
issued by the nationalized banks. In both the scenarios, level of service is not
very high. The other segments have not been considered since they do not
fall into the potential customer category. However, with the introduction of
‘Kisan’ Cards (The major issuing banks are: Dena Bank, Punjab National
Bank, State Bank of Indore, Vijaya Bank), these segments are also being
brought into purview of credit card users (assumption: 65% of low-income
households are associated with agriculture).

Positioning Strategy:

The positioning may be done so as to give an image that the cards can be
acquired by people from not only the upper class, but also the middle
income categories and project it as a need and a smart way to manage
finances rather than being a debt trapper. In other words, it should give a
mass appeal to the cards while reinforcing the dependable and trusting image
of the issuing bank at the same time.
The positioning should be such as to imply that the issuing bank’s credit
cards are a part of the customer’s everyday life. This in turn, shall lead to
more card usage as the card would be handy for the customer to use
whenever he wants to. Linking benefits to frequent use will help generate
volume and will motivate consumers to use card even in circumstances they
would not use it.

Positioning on quality of service: After convenience and acceptability of

credit cards, the most important thing for customers is quality of service.
This can be defined as prompt response in issuing the card, 24 hour
customer service and quick complaint and grievance redressal. A positioning
based on superior quality of service would create a favorable image in the
mind of the consumer leading him to not only buy the card but also use also
use it more often.

Positioning based on benefits: Such a positioning has not been

recommended as differentiation among credit cards fails to provide
sustainable competitive advantage, as benefits offered on cards are easy to
copy. However, we must also test this, while giving weight to the above.
However networking with big retailer, airliners, hotels etc will certainly
sustain competitive advantage if not increase it.

Positioning as a low cost card: This has previously been disregarded as an

option as the costs involved are higher and one cannot gain by competing on
price and advantages can be gained only on the basis of service and
innovative product features. Their is a limitation on the APR (annual
percentage rate) being reduced beyond a certain point.

Positioning on use: Credit cards in India are most often used while making
expensive purchases, traveling, online shopping and utility payments. This
can be the main positioning plank because it would increase the credit card
usage in each of the segments and hence exclusive cards can be introduced
for the purpose the customers wants to or would benefit from using the card.
Example: Co branded cards like 15% discount on airfare (on ICICI-
Kingfisher co-branded card) for people who frequently travel, or Citibank-
Shopper Stop card for discount and loyalty points on store purchases, ICICI-
HPCL co branded card for waiver on fuel surcharge etc.

Positioning on acceptability: Acceptability is the most important factor in

the minds of the consumer and so positioning will help in retaining and
acquiring more users. This can be achieved through zero liability policy on
fraudulent transactions, ethical collections policy, complete and accurate
disclosure of fee, interest rate and all other hidden charges during the
application stage itself so as to build a trustworthy brand and loyalty
amongst card users.

Positioning on security: Positioning as a card for transactions on the net:

With the impending boom in e-commerce in India, credit card issuers could
position themselves as the best and safest medium for payment purposes by
projecting them as users of advanced encryption technology especially in
case of online transactions using secured socket layer technology and
multiple security features for online use and otherwise which should be
conveyed to the users in laymen terms.

Summary of Credit Card Industry:

Banks have not only raised the bar in quality and services but they have also
devised aggressive growth strategies to notch up higher spends on cards.
ICICI Bank, for example, launched 5% cash back on all purchases and
special balance transfer offers. The growth in spending has so far been
spearheaded by the burgeoning middle class in major cities, where consumer
spending is concentrated on lifestyle and luxury goods. Over the last four
years, the bank has also built up the most extensive network of sales, service
infrastructure and collection mechanism for credit cards across 107 cities
including smaller towns. Not that competition has been staying quiet. As
soon as ICICI Bank came out with the cash back scheme, Citibank decided
to introduce a new cash back card on the lines of its popular Citibank
dividend card in the US. Other players too have already announced their
plans to take on the top two. Growing beyond metros. The growth in
spending has so far been spearheaded by the burgeoning middle class in
major cities, where consumer spending is concentrated on lifestyle and
luxury goods. Spending in rural areas has been mainly in cash. This has
begun to change. By issuing credit cards at 107 cities, ICICI Bank has
established the largest reach. SBI, the largest bank in the country with over
9,000 branches, has fanned out its credit card business in 45 cities. Citibank,
which operates in 40 cities, is planning to scale it up to the 94 cities in which
group company Citifinancial operates. When the plastic revolution spreads,
many farmers could be using credit cards to buy seeds and fertilizers. That
would, in fact, put an end to the reign of unscrupulous money lenders in
rural hinterland. Huge market remains untapped. In other words, the credit
card market in India could continue to register the current blistering growth
in the medium to long term. That should be music to the ears of banks
looking for a slice of an increasingly affluent Indian consumer.

“Whereas only 2.4% of the working population in India

owned a credit card in 2004, McKinsey predicts that 35
million credit cards will be issued by 2010 with an
outstanding balance of over $7 billion.”

References:

India Brand Equity Foundation (www.ibef.org), Outlook

Money, www.indiainfoline.com, Marketing management by
Philip Kotler (12 e)