Feature Review: Payment Protection Insurance

Most Credit Card Issuing Banks offer an Insurance feature on their Credit Cards which may be Life Insurance, General Insurance or in some cases may be a specialized form of Life Insurance which is called as “Payment Protection Insurance”

What is Payment Protection Insurance also known as Credit Shield Plus Insurance?

This insurance ensures that if you die while holding your Credit Card, then the entire Credit Card outstanding whatever it might be at that time will be paid by your Insurance Company and will not have to be borne by your family / dependants / legal heirs.

In 99% of the cases I do not recommend this product as it is useless and I have observed that most banks (at lease the credit card issuers I have worked for) do not follow up with the family of the deceased card holder and just write off the out-standing. The fact that if you die, the bank will chase your family is untrue, at least to my knowledge. While they are legally empowered to do it, they do not do it as far as I am aware.

In addition to this, it may happen that at the time of your death that you do not have any Credit Card outstanding at all and hence the entire premium that you have paid has got wasted. I would recommend this card only if you are a perpetual revolver and your Credit Card outstanding at any given point of time is more than your monthly take home salary, then you can think of going in for this product.

The premium amount is usually less than 0.1% of your Monthly Outstanding and gets billed in your Credit Card statement every month. If you have an outstanding of Rs.30000 every month you will have to pay a Premium of approx Rs.30 every month. While this may look like a small amount, this is an expense you can avoid and donate this money to “needy children” which would be putting it to better use.

If you do apply for this product, you will open yourself to complaints such as incorrect premium billed, changes in the premium rates, non receipt of policy documents and in most cases your family will not even be aware that you have this insurance policy.

You need to keep it in mind that the bank will keep calling you and keep saying that “after taking this insurance you can live in peace knowing that your family is secure etc.” but that is all crap. Remember from the Rs.30 that you pay every month, the bank will get Rs.10 from the Insurance company and hence you give your Bank Rs.100 per year. If they manage to sell this product to 100,000 customers, they will get Rs.1,00,00,000 which is waster money going to the bank coffers.

This is a totally useless feature of most Credit Cards, so please stay away from it.

If you have any queries or suggestions, you can write to me at Ask.Pranav@Gmail.Com and I will write back to you as soon as possible. Thanks.

Market Outlook: Future of Credit Cards in India

In the current scenario, almost all banks which issue Credit Cards are bleeding financially and are not able to sustain themselves. A simple generic model of the Profit & Loss Account of the

Credit Cards Business is given below.

For every Rs.100 lent to customers by the Bank the following are the income and expenses

Revenue Streams

(1) Rs.20 is the Interest Income earned by the Bank on an annual basis (average across portfolio)
(2) Rs.2 is the other income earned through transaction & merchandising revenue

Costs

(1) Rs.9 is the Cost of Funds
(2) Rs.5 is the Acquisition Cost of sourcing the Card
(3) Rs.3 is the Operational Cost
(4) Rs.3 is the Bad Debts (Customers not paying back money and going delinquent)

So if you calculate for every Rs.100 lent out you have revenue of Rs.22 and a cost of Rs.20, which gives you marginal profit of Rs.2 for every Rs.100 lent out. However this was the case about 3 years back when the Bad Debts were restricted to 3%.

Last year the bad debts have soared to as much as 12% which is Rs.12 for every Rs.100 which have been spent and hence the costs go to Rs.29 which the revenue still remains at Rs.22, so as a result the banks make a loss of Rs.7 for every rs.100 lent out. This loss cannot be sustained and as a result the banks have taken the following steps

(1) Cards issued to customers who have a flawless Credit History and who will definitely pay back on time and hence reduce the percentage bad debts and make the business more profitable
(2) Tighten Credit Policy to issue Cards to reduce Bad Debts. Not to issue cards to customers who do not have a proven Credit Record

The way I see it, the Credit Cards Business in India will be profitable in India only under the following scenarios. If these scenarios are not met then I do not see the sense in banks issuing Credit Cards at all – a view which is echoed by many in the Financial Services space and is disputed by an equal number of people as well

(1) The Acquisition Cost has to come down from Rs.5 to Rs.2. This will happen when the banks move away from the current model of DSA Agent Based sourcing and move to Internet Sourcing with no face to face visit with the customers. However there are Technical and Regulatory hurdles preventing this from happening right now
(2) The Bad Debts should not exceed 2% to 3%. This needs to be managed through effective Credit Policy which ensures only those customers get Cards who have an ability to pay back. This restricts the number of Cards issued by the bank as most customers who can afford to pay back have already got a Credit Card. New entrants will get all the sub-prime customers where if you issue cards, the losses will also rise
(3) Banks need to increase revenue by cross sell effectively on the Credit Cards base. This means that they will need to start doing merchandising activity on the Credit Cards Base and use the Credit Cards Base to sell Loan products, Bank Accounts, Investments and Insurance to beef up the Non Interest Income and increase the same from rs.2 to Rs.5

Until the banks develop a strategy on the above mentioned lines, it will be very difficult for the Credit Cards Business to be profitable at all. The financial model used above as an example is indicative and does not represent any specific bank profit and loss account.

If you have any queries or suggestions, you can write to me at Ask.Pranav@Gmail.Com and I will try to write back to you as soon as possible.