Corporate Cards: The Opportunity Illusion (#70)

Complex underwriting, low margins, and limited infrastructure underline Indian corporate cards

Welcome to the 70th issue of Unit Economics. In this article, I opine on the oft-discussed corporate card opportunity in the Indian context, drawing insights from talking to hundreds of business owners, as well as bankers and startups in the domain over the last few months. Dive in!

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My explorations around corporate cards began late last year on reflections of previously working at startups, where inter-city travel for bank or agency meetings was frequent, costly, and filled with a manual and painful reimbursement process. The pain suggested a need to access corporate cards, but the poor experiences with existing fintech providers and the SBM embargo meant that the problem persisted. This gap pointed to an opportunity. 

Now, the opportunity to provide corporate cards to startups for travel or other business expenses has been well-discussed in the industry, with the likes of Kodo, Karbon, Razorpay, EnKash, Happay, and a few others already deep in the domain. Yet, it is curious how none have replicated, even remotely, the success of similar operating models in the west from Ramp, Brex, or a Divvy (now, Bill), each of which delivers over $100Mn in annual recurring revenue from corporate card-led models. 

On paper, it is easy, still, to be drawn to the Indian opportunity, especially when you zoom out of startups and notice that there is only a ~5% corporate card penetration amongst more than 63Mn micro, small, and medium-sized businesses in India. More compellingly, these businesses combine to do over $6Tn in business spending today, with a large proportion of these spends non-discretionary and recurring. 

Even if a single-digit and almost insignificant portion could be migrated to corporate cards, you would imagine a large business opportunity. Think more, and one could be certain in taking a ten-year bet on there being higher MSME digitisation and credit penetration in the sector to justify how corporate cards deserve more focus, and it would be irrational to refute any of it. 

Yet, the reality is a little stark. Before I venture into the details, let me add more nuance by detailing how corporate cards are structured in the industry today. For the sake of the discourse, the discussion will be limited to credit rather than prepaid corporate cards.   

A brief primer

There are broadly three types of corporate cards in the industry today. Business, Travel & Entertainment (T&E), and Purchase cards, each with differing target groups, use cases, limits, and charges. 

Business cards 

These cards are issued, often, only to small-sized businesses, and predominantly to individual directors or sole proprietors, which form a substantial 70%+ share of the MSME segment. 

Consequently, and unfortunately, the limits on business cards are smaller, with the majority approved for sub-10 lakhs (in INR). This also restricts the use cases for such cards, with the larger-ticket vendor or salary payments often infeasible, and with limited functionality for T&E-related expenses. 

T&E cards

T&E cards are more jazzy, popular versions of corporate cards, mainly issued to employees and Travel or IT admins of companies for the purpose of business travel, subscriptions, or marketing spends. These are what most of us think of when we imagine corporate cards and such cards would often carry rewards, forex benefits, or subscription management functions.

However, apart from certain service-led or e-commerce organisations, most businesses see not more than 2-5% of corporate expenses on T&E, limiting the card usage and their importance to an organisation’s accounts payable or finance function significantly. The limits issued are often, accordingly, low, allowing banks to lower their provisions and balance-sheet risk. 

Purchase cards (or P-cards)

Purchase cards, often structured as charge cards, are issued for big-ticket business expenses, including for vendor, salary, and tax payments, which make up >80% of all business expenses for most organisations.  

Due to the nature of vendor or similar transactions, which are recurring, large, and need cash-in-hand to service, the limits on p-cards are larger than for business or T&E cards, ranging in INR crores for medium-to-large sized businesses. 

Naturally, these cards draw the most interest from businesses, due to them potentially resolving cash-flow needs, and for issuers, who realise larger volumes and revenues due to the bigger ticket sizes. 

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Note: Apart from the above three, many issuers also offer “purpose-driven” virtual cards, for instance for only meal, fuel, digital marketing, and such-focused spends, but this forms a rather limited, small use case.

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With the above context, it would be quite obvious to narrow the focus to purchase cards, particularly for MSMEs, as the large untapped opportunity. 

Yet, the banks and even co-brand issuers, have struggled to scale them. For instance, the top five corporate card issuing banks in the country, which cumulatively account for >90% of the market do not carry more than ₹8,000 crores (<$1Bn) in corporate card outstandings today, which is less than 4% of the personal credit cards market. 

What explains the poor scale? 

Conversations with bankers and business owners give three insights into the why.   

Complex, conservative underwriting

Underwriting a business comes with ten times more complexity than underwriting a salaried individual. 

To accurately profile a business, banks take from anywhere between three days to three months, accessing and assessing financial statements, director details, business vintage, address, and other business details. This is made more difficult for smaller businesses, who submit unaudited statements, and may report inaccurate or fraudulent information - unfortunately a common practice in the domain. 

The relationship managers handle the operational task of collecting and vetting the information, which can be costly and thus, justifies to banks their focus on acquiring larger businesses, usually with a turnover of ₹100 crores or more. 

Additionally, the gating criteria for underwriting approvals is incredibly stringent, requiring businesses to be profitable, growing, with established vintage, and from an eligible low-risk industry. This can be infuriating, but the lower predictability of cash flows and higher mortality, especially for smaller businesses, ties the hands of banks. 

The risks are enhanced for startups, where a 5% or more mortality, poor business economics, and lower volumes are common features, which will help explain the low unsecured corporate card penetration amongst start-ups, despite the banking current account relationships. 

No MDR, and poor margins

Credit cards have forever operated on a merchant-subvention model, with the merchant being charged a 0.5% to 3% MDR when accepting payment and the fee helping sustain a large part of the ecosystem, from the issuers, and networks, to the switch and acquirers. 

However, unlike P2M payments on consumer cards and even on T&E via corporate cards, the vendor, salary, or tax payments from businesses do not have any established merchant-based agreements. It is intuitive that a vendor, employee, or the government instead accept direct payment via any of the fund transfer systems, rather than being charged a merchant-discount fee. A small portion of vendors do accept discount rates, but only on the premise of receiving payments early, i.e. to help them manage their cash flows better (see: Converj, for reference). However, the majority of business payments would come with no MDR.

This pushes the issuers to instead charge the payer a surcharge for allowing credit on business payments via the corporate card. 

The surcharges, however, are low, often 1% or lower for the 45-day credit period. This is because a rational businessman would compare the annualised cost of a surcharge versus the rate of interest they can avail alternatively through an overdraft line or business loan. The medium to large-sized, stable businesses can get bank credit often between the 8-10% annualised rate today, which further pushes down the surcharges on corporate cards - making the margins as thin as 0.7% for 45 days (or an annualised rate of ~6%) for the issuer. 

Add the costs of acquisition, operations, and defaults and the net take rate is hardly 5 to 20 basis points for issuers on corporate cards. The poor margins make it even more challenging to justify servicing smaller, riskier SMBs, despite the higher surcharges that may be applicable for them. 

Limited acceptance infrastructure

Another limiting factor, despite a lot of card-network and bank efforts, has been the poor acceptance infrastructure among vendors to accept card payments. 

The POS-machine push for B2C payments long-resolved this gap for consumer cards, but the lack of vendor-acquiring efforts limit the addressable market for card-based payments significantly. The inertia for vendors to accept cards also draws from their being little-to-no incentives for them to allow any discount rates or to use the card form factor (no status signalling too), given that the alternative of bank fund transfers fulfils their needs sufficiently. 

On the other hand, tax payments are being slowly allowed via credit cards on the accepted payment gateways, although the government approvals to all locations may take time here, given the malpractices on similar payments surfaced by the RBI.  

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Note: The above challenges are not unsurmountable, and also come with a caveat that the business of corporate cards, with the exception of the HDFC bank, is a nascent business line for most private banks, which may mature into more scalable models eventually. Although the changes will be paced and may take years. 

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Mountain of challenges for Fintech

For a fintech, the challenges surrounding corporate cards grow thicker as you go deeper into the domain. A few notes to capture some of these below:

• A limited number of potential bank partners exist in the ecosystem, given the nascence and low volumes of corporate cards for most banks. The partnership challenge has only grown tougher recently, with the otherwise-friendly SBM and RBL bank on the regulatory rearguards. 

• Poor data availability, low approval rates, and high costs of business correspondence services for data collection make acquisition costs high and challenging to sustain. Finding an established distribution channel becomes more crucial as a result. One such model that appears to be working is to act as a TSP for a large bank, which has been scaled by the likes of EnKash, Converj, and PayMate. Direct acquisitions, which a Kodo or a Karbon seem to be preferring, are unlikely to be as efficient. However, the TSP-led model is likely out of reach for a lot of less-networked founders or early teams. 

• The low margins and high-risk weights on corporate credit cards also force the banks to seek surcharge and credit-risk sharing from the fintech partners, forcing high capital requirements and exceptionally thin margins for a fintech. 

• Lastly, given the smaller limits and often limited share of spending on cards by businesses, the sales pitch to a CFO or the finance function of a business for corporate cards is not straightforward and comes with long conversion cycles. As a result, the issuers have found it tough to scale sales targets in the industry. 

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Regardless of whatever has been said above, certain sound arguments can still be made for the corporate card opportunity, with the thesis that a fintech would use corporate cards to enter exclusive arrangements and build relationships with thousands of businesses, before expanding into other areas. Yet, to imagine a standalone, large-scale corporate card driven business, the underwriting, distribution, and unit economics challenges would need stronger answers. 

While I would not be actively building in the space, I hope the learnings captured above would help folks understand and evaluate the domain better. Until next time!

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If you have any views or want to casually chat on the topic, drop me a message here.

In case you feel your friends or family would be interested in reading about payments and lending, feel free to share the blog with them as well. Back again in a few weeks!