Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities
Mobile payments continue to gain incremental market share at a furious pace, constituting ~52% of retail digital P2M payments during 11MFY22. While the overall payments pool continues to grow at a strong pace, the rising share of UPI is driving the overall payments fee yields lower. Credit card spends continue to grow at a healthy clip, driven by gradual ramp-up in acquisitions, although portfolio re-leveraging has been slower. ICICI Bank continues to catch up with the market leader in terms of spends market share and emerges as a superior payments franchise on our proprietary P2M framework. BNPL volumes have continued to surge astronomically, with a few players beginning to clock meaningful scale in GMV. However, the waning market sentiment for listed FinTechs could drive consolidation, as IPO-ready companies chase economies of scale and profitability avenues. As showcased in our BNPL Playbook, the credit cards industry stands to benefit from this BNPL push for profitability, and we reiterate our BUY rating on SBI Cards (TP: INR1,100).
UPI surge continues; dwindling fee pools for banks: Mobile payments continued to record an astronomical surge in volumes, with ~52% market share in P2M payments. As outlined in our P2M Payments thematic, mobile payments are likely to constitute a significant share (56%) of P2M payments by CY25, overtaking card spends. This is driving spends-based fee yields lower, although the overall P2M payments fee pool has been growing.
Unit card spends cross pre-COVID level; leverage yet to normalise: Credit card spends rebounded strongly and are almost at pre-COVID levels, with resumption in physical mobility, ramp-up in card issuances, and increase in commercial card spends. While unit spends crossed pre-COVID levels, unit receivables, particularly revolving loans, are subdued, resulting in lower NII and profitability. ICICIBC sustained its market share gains and has emerged as the second-largest player in card spends. ICICIBC also maintains its edge as a superior payments franchise on our proprietary P2M framework.
Adequate levers to offset potential capping of merchant fees: While we see limited possibility of the RBI capping MDR on credit cards, our analysis suggests that issuers have adequate set-offs to maintain and restore profitability. For instance, a reduction of 5 days in the average interest-free period would completely offset a 10bps reduction in interchange fees.
Surging BNPL volumes but no sight of profitability: As highlighted in our thematic, BNPL volumes continued to record exponential growth in FY22, with enhanced adoption by customers and increasing use cases. While the industry remains in a high-growth phase, the path to profitability is still a long way off, thanks to limited revenue streams, high credit costs, and high marketing spends. Recent evidence of global peers (Klarna, AfterPay, and Affirm) reaffirms our belief that credit cards are indeed the most profitable way of completing the BNPL suite to drive revenues and profitability.
Consolidation in play; regulatory framework in sight: Globally, the listed BNPL firms have witnessed a merciless pounding in their stock prices, which is likely to trigger consolidation as players look for economies of scale. While a few have announced tie-ups and mergers such as Zip-Sezzle, PayPal-Paidy, etc., several more could be in the works as the private equity dry powder begins to evaporate. Following the release of its discussion paper on digital lending apps, the RBI seems to be readying a broad framework that encompasses BNPL credit. While this may appear to be negative for near-term growth, we believe this adds to the industry's stability and longevity.