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How Banks Built Moat for Credit Card Business in India?

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resh:
80% of the Credit Card Industry in India is controlled by just Top 5 Players. A strong inherent customer base (HDFC, SBI, ICICI, Axis, Kotak); b) dominance in merchant acquiring (HDFC, SBI, Citi, ICICI, Axis); and c) strong analytics &partnership capabilities (essentially foreign and private banks). Inherent customer base (low acquisition cost, ~50% of external sourcing), better merchant acquisition infrastructure (enable better throughput, customer retention through reward points & cash backs) and strong analytics (better
know-how of customer transactions) impart private banks an edge.

A vital part, which is often overlooked, is the development of merchant acquisition infrastructure (essentially POS) and the associated cost. This, while underappreciated, is important as: a) it enables better throughput, customer retention through reward points & cash backs b) entire dynamic of fee structure changes if the issuing & acquiring bank is the same; and c) strong analytics (better know-how of customer transactions).

The Card POS infrastructure dynamics will essentially play in favour of larger banks giving the man impregnable moat (atleast in the near to medium term). Moreover, fee dynamics change significantly when the issuer and acquiring bank are the same.

This imparts a strong competitive advantage to incumbents who have developed scale to mask the associated cost (given scale of operations) and is challenging for a player new into the game.

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