We have all encountered news regarding credit cards being devalued, or perhaps even experienced this firsthand when one of our credit cards underwent devaluation. Such an experience can leave a negative impression. You may find yourself wondering the reasons behind this and what steps to take if it happens to you. This post aims to explore the business aspects of card devaluation and provide insights on how to mitigate its impact.
- How does economics of credit card works?
- Reasons for Devaluation
- How the devaluations are done?
- What to do if your card gets devalued?
How does economics of credit card works?
To understand why credit card devaluation happens we need to understand why banks offer a credit card with multiple benefits and that too at a reasonable fee or no fee at all in case of Lifetime free cards. We are all familiar with and have likely utilized credit cards, and we are aware of the various advantages they provide like
- A 50 days interest free period to use the credit
- Fuel surcharge fee waiver
- Discount or Cashback offers on online shopping
- Complimentary Airport Lounge visits
- Free Movie tickets, Golf games and so on..
All of the above benefits come at a price which is paid by the bank. The banks in turn recover this cost from various avenues like Card fee, Merchant discount rate , Interest fee, Late payment fee, Forex Transaction fee etc. which I have explained in few words below-
- Card Fee – This is the fee you pay for getting and keeping the card (a.k.a Joining & Renewal fee)
- Merchant Discount Rate – Fee charged (1% – 3%) to merchants to process card transactions
- Forex Transaction Fee – For using the card overseas, a transaction conversion fee is applied.
- Late Payment Fee – This fee is applied in case card bill payment is not paid by the due date
- Interest Fee – In case card bill payment is done beyond due date, an interest is also charged on the outstanding amount from the date of the transaction.
There are several other fees & charges as well like Cash withdrawal fee, Overlimit fee, Card replacement fee and so on. It is quite obvious that all the revenue that bank generates from various fees and charges should cover the cost of providing the benefits with the credit cards and tech. infrastructure to support all the operations. On top of this, banks should want to make some profit to build a sustainable business.
Higher the income of the bank from all the fees & charges, higher would be the budget they can allocate to continue the benefits of a credit card.
Reasons for Devaluation
Now that we understand how the economics of a credit card works, we can look into the reason for card devaluation in detail which are multi-fold.
Building Sustainable Business
Banks need to be considerate of business challenges like improving margins, adjusting to competition, and countering inflation while meeting their customers’ expectations. All this needs to be done for building a business with sustainable and profitable growth. Share of digital payments has been increasing rapidly in India, with 93 million credit cards in circulation today with an average credit card spend of around Rs 5000. As India becomes more credit-mature and millions of Indians become eligible for their first line of credit, credit card companies will need to reevaluate their rewards programs to ensure sustainability.
Given the high-interest rate and high demand, credit card rewards are being rationalised with a view to improve margins and counter inflation.
Revolver Rate
One of the contributing factors to these changes is the decline in the revolver rate. It is observed that more individuals are choosing personal loans as a means to settle their outstanding credit card balances. This has resulted in reduced profitability and has led to the devaluation of credit cards.
For instance, for SBI, a prominent player with approximately 20% market share in the credit card segment has experienced a decline in the revolver rate, dropping from 34% in the Q2FY21 period to 24% in Q2FY24. Prior to the COVID-19 pandemic, the revolver rate was at 38%.
Credit card customers can be categorized into three primary groups: Transactors, Revolvers, and those who convert revolving credit into EMIs to minimize interest costs. Transactors are individuals who make purchases using their cards and promptly pay off their entire balances before the due date. Revolvers, on the other hand, choose not to settle their dues immediately, thus accumulating interest on their outstanding amounts. Among these categories, revolvers typically prove to be more lucrative for credit card issuers compared to those who opt for EMI conversions.
Rebalancing Cards Portfolio
Banks employ various strategies to differentiate their offerings and remain competitive while aligning the benefits with their target customer base. One effective approach is restricting high-value benefits to individuals who meet specific spending criteria. This strategic measure enables banks to manage costs efficiently and allocate resources judiciously.
By reserving exclusive benefits for high spenders, such as those associated with premium credit cards, banks can significantly enhance the perceived value of these cards. This, in turn, acts as an incentive for customers to use their premium cards more frequently and maintain their memberships, ultimately contributing to the bank’s overall revenue.
Savvy Customers
Due to proliferation of information about best credit cards and ways to extract max. value out of these credit cards, a lot more customers are able to use the benefits of the card to the full extent and thus adding extra burden on bank in terms of cost.
Busy Airport Lounges
Consider the situation at airport lounges these days 🙂 During the peak hours you might get to see a line at the reception desk & overcrowded lounges where you may have to struggle to get a seat. All of this is because we as customers have become more prudent and frequently avail lounge access perk on our cards. Providing free lounge access is costly for banks as they typically pay fees to airport lounge networks like DreamFolks or Priority Pass.
Points Redemption for Travel
Credit card customers are also becoming more adept with ways to redeem the reward points for travel and stay experiences and extracting max. value for points.
How the devaluations are done?
Usually, most credit cards go through several changes to their terms and conditions, rewards program, structure, introductory offers, annual fees, eligibility criteria, and more throughout their life cycle. You can read about a few examples of card devaluation that has happened in recent times below.
Restructuring Lounge Access Program
The extent of lounge benefits varies based on the premium level of the credit card. With a premium card, you may get more complimentary lounge visits, better lounge access network, international lounge coverage as well.
HDFC Bank has recently introduced a new eligibility requirement for enjoying the lounge benefits associated with its Regalia credit card. Effective from 1st Dec 2023, cardholders will be required to spend a min. of Rs. 1 lakh in a calendar quarter in order to enjoy complimentary lounge access. This change signifies a significant departure from the previous policy as it now connects the access to airport lounges with the amount spent using the credit card.
Diluting Milestone or Reward program
Axis Bank has revised the terms of its Magnus Credit Card, effective from September 1, 2023. In addition to losing its 25,000 points monthly milestone benefit, the annual fee increased from Rs. 10000 + GST to Rs. 12500 + GST.
Similarly, Amex MR credit card users need to do 4 transaction of min. Rs. 1500 instead of Rs. 1000 to get 1000 bonus points as part of the monthly milestone benefit.
Limiting Reward/Cashback
Many credit cards are launched/introduced with features like unlimited cashback or reward points on eligible spends but as the cards reach a certain threshold in terms of customers, banks introduce capping on the max. cashback or reward points that you can earn.
One such example is SBI Cashback credit card which gives 5% cashback on online spends. Recently, the capping on the cashback for 5% spend category was reduced from Rs. 10000 to Rs. 5000 per statement cycle.
What to do if your card gets devalued?
By now we have understood that devaluation of cards is inevitable (like Thanos :P). What we need to do is be prepared for such eventuality. A few ways to counter such situation are –
- Restructure your spends – Use a combination of cards for getting max. cashback or points
- Upgrade your card – Apply for a card upgrade with same bank as per your req.
- Apply for a different credit card – Opt for a card from different bank with similar or better benefits
- Shift your spends to another card – If you have another card with higher reward rate for your spends, use that instead.
Stay informed regarding any changes that may negatively affect the benefits of your credit card, such as modifications to the rewards program, milestone benefits, or annual fees.
If your card experiences a significant devaluation, it is crucial to assess how this will impact your advantages, taking into account your spending patterns. In the case of a substantial devaluation with notable repercussions, your best course of action is to explore alternative credit cards, either among those you already possess or by applying for a new one. While doing so, make sure that the alternative option aligns with your spending habits and offers a considerably higher overall value than the devalued card.
What are your thoughts about the Credit Card devaluation? Feel free to share your views in the comment section below.
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