Why RBI is wary of co-branded credit cards

What are co-branded credit cards?

These are hybrid credit cards issued by a bank through a tie-up with a brand. There are of two types: one is issued in partnership with retail merchants and the other is issued in partnership with fintech companies. These cards offer customers benefits in the form of rewards or loyalty points. Travel, fuel and e-commerce are the three major sectors under which co-branded credit cards are issued—for instance, ICICI Bank-Amazon Pay card or HDFC Bank-Swiggy card. Typically, co-branded cards have the logos of the partners. However, the co-branded partners must abide by RBI regulations.

What’s in it for banks and their partners?

Banks can tap the co-branding partners’ customer-base to issue cards and acquire new customers. The co-branding partner can support the bank with marketing initiatives like loyalty, rewards and branding. These partners will oversee the marketing and distribution of these cards, while the banks will undertake the credit risk and underwriting for the customers. Banks can also partner with fintech firms, under which fintechs take care of credit card issuance and operations. As per RBI rules, the co-branding partner cannot have access to information relating to transactions undertaken through these cards.

How big is the co-branded credit card market in India?

As of January 2024, the number of credit cards in circulation was 99 million, up from 97.9 million in December 2023. According to industry estimates, co-branded credit cards constitute 10-15% of all cards. Four large banks make up around 60% of the market share. Axis Bank has 14 co-branded credit cards, ICICI Bank has 11, HDFC has 17 and SBI Card has over 20.

What’s behind the RBI stricture?

RBI found that the risk rating for the onboarding of credit card customers and their underwriting was not in full alignment with its own processes, market experts said. Typically, the co-branded partner is responsible for getting the leads while banks are supposed to onboard customers. However, in some cases, RBI found that banks had shared the scoring system, which is based on risk, with their partners, increasing the risk of customer data being leaked. Scoring systems should be done by the banks, in-house.

What explains the scrutiny?

RBI wants to check the unbridled growth in credit cards and prevent the backdoor entry of firms into the industry. In February, RBI asked Visa to stop card-based B2B payments through third party fintechs. Some fintechs were facilitating payments to entities that may not be registered merchants, which is not allowed in the know your customer (KYC) regime. This led RBI to ask issuers to set up a system that can ascertain the end-use of funds—keep a check on fintechs trying to stretch regulatory boundaries.