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Plastic Purity

Credit card users stare at a sparer future

Plastic Purity
Narendra Bisht
Plastic Purity
It's the morning after for credit card users. After over five years of being wooed by freebies, customers are being reacquainted with a host of stricter rules and charges. Thanks to lower spends and interest income, besides higher delinquencies, the card industry is choking for breath. So, big players are now seriously contemplating reintroducing annual fees. This comes after curtailing credit card limits, and taking away the ability to withdraw cash on credit cards. Why, some banks are even offering differential interest rates—where customers pay a lower rate if he/she has a good credit history.

Officially, banks say they have no plans to introduce annual fees on cards—but industry officials maintain there are few choices left. Particularly as, in July last year, the Reserve Bank asked card issuers to ensure that rates and fees charged are reasonable. "There are two ways to earn from credit cards: fee and interest income. If spends are down, interest income is less and limits are cut, banks have no choice but to look at other avenues for revenue. We are likely to see annual fees make a comeback for both existing and new customers," says a senior banker.

Reflecting tough times, delinquencies on cards in India have more or less doubled over the last year. A recent survey for the Indian Cards Council (ICC) showed the revenue generated per card (only for Mastercard) was lower compared to other markets like the UK and Australia. This is probably due, the survey adds, to the lack of annual fee income and volume of transactions. Remember, India has probably the lowest customer acquisition costs in the card industry—and many customers own multiple cards, leading to a high number of "inactive cards" (almost 44 per cent). This, experts warn, is dangerous because customers can activate cards at any point, leading to the ballooning of unwanted debt.

Since last year, banks had already started curbing new card issuance—it's down to half for big players like ICICI Bank and Citibank India. Value-added cards (which carry an annual fee because of services offered) are the new mantra at Citibank, which recently launched a couple of such cards. "There are other areas that can become avenues for earning, like insurance and fraud protection, which are also beneficial to the customer," avers Sandeep Bhalla, business manager (cards), Citibank. Other banks are continuing with the practice of charging fees for specific products. Typically, this means premium or loyalty cards bear the annual fee tag. According to a bank official, ICICI Bank will continue to have a mix of fee and free credit cards.

All these changes come at a time when credit cards have come under the scanner the world over. The US is looking at sweeping changes in credit card legislation following huge defaults. For instance, banks there have to wait for 60 days for a customer to make the minimum payment before levying the penalty interest rate. The legislation also tackles issues like seeking customer permission in case of allowing higher credit limits and the charges that go along, as well as adequate time to pay the bill. The rbi has tackled some of these issues last year.

Clearly, banks will revert to more traditional ways to earn revenues from cards. What does this mean for consumers? It's time to open the wallet and look at how much plastic you're carrying. Get ready to snip off the excess.

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