Hello everyone,  

Welcome to the 102nd edition of The Pattern, a weekly newsletter where we dive into the latest from the world of economy, finance and technology. Let’s get started.  

A little over a month ago I wrote about how the Reserve Bank of India has taken it upon itself to tame digital lending – in recent times, it has cracked down on one of the country’s largest FinTechs, issued a draft framework for FinTech self-regulatory bodies, and doubled down on regular inspections.

And the regulator is nowhere near done. It now has its eye on the latest aspirational credit product -- co-branded cards. Just last week, it ordered Federal Bank and South Indian Bank to stop issuing such cards.

Bear in mind, this comes less than a year after reports claimed that 1 in 3 of all cards issued in India were of the co-branded kind.

It’s not hard to see why these saw such a massive surge in popularity. For banks, these cards offered access to a captive user base of millions, drastically bringing down customer acquisition costs (banks typically spend anywhere from INR 2-4000 to acquire just one credit card customer). Merchants can leverage these cards to influence buyer behavior, improve customer stickiness, and boost brand loyalty.

Just take these numbers as proof– the Amazon Pay-ICICI card brought the bank 2 million new customers, and 75% of those who signed up for the Flipkart-Axis card were new to Axis Bank.

For the end-customer, co-branded cards offer exclusive benefits, rewards, and cashbacks, and often a smoother user experience. They’re also a great gateway to credit for customers who are looking to make small yet frequent spends, and are not yet eligible for more premium cards.

Looks like a win-win for everyone involved – so why exactly is RBI playing spoilsport?

It all comes down to data. On March 7, the RBI made several amendments to its 2022 ‘Master Direction - Credit Card and Debit Card – Issuance and Conduct Directions, including the following:

‘The co-branding partner (CBP) shall not have access to information relating to transactions undertaken through the co-branded card. Post issuance of the card, the CBP shall not be involved in any of the processes or the controls relating to the co-branded card except for being the initial point of contact in case of grievances. However, for the purpose of cardholder’s convenience, card transaction related data may be drawn directly from the card-issuer’s system in an encrypted form and displayed in the CBP platform with robust security. The information displayed through the CBP’s platform shall be visible only to the cardholder and shall neither be accessed nor be stored by the CBP.’

While the RBI hasn't quite clarified what it means by ‘transaction-related data’, one can safely assume that it could cover any information relating to any activity on the card post-issuance. So, the CBP can’t directly access data around spends to offer rewards, chargebacks, loyalty schemes or incentives. They’re essentially meant to act only as marketers/distributors.

This move could considerably shift partnership dynamics, relegating CPBs to serve a limited function – sourcing. With no access to transaction data, CBPs will have limited room to build customer stickiness post card-issuance - whether it is via loyalty programs or spend analytics. Additionally, it could also erode their competitive advantage in running targeted cross-selling and upselling campaigns. One thing is clear, RBI is not pleased with the idea of lenders outsourcing their core functions. While this embargo on transaction data is justified from the point of view of data protection and privacy, it unravels a tightly woven bond between card issuers and co-branded partners, leaving their collaboration threadbare.

That’s all from me this week. Leaving you with some interesting reads and numbers!

• Between the digits

• USD 250 million: DBS Bank India’s  lending commitment to support new-age start-ups

• 20.10 million: The number of HDFC Bank credit cards in circulation as of Jan ‘24

Reading recommendations

How a credit card pandemic is gripping India

India can sustain 8% GDP growth: RBI bulletin

India’s Regulators Are Acting Tough to Restore Credibility

RBI steps up scrutiny of retail lending, targets top-up home loans

Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on Twitter  here  and follow  FinBox on LinkedIn  to always get all updates.

Cheers,

Mayank

All opinions expressed are my own and do not necessarily reflect the views of FinBox or its promoters.