Payments – Credit Cards Largest TAM + Pick & Showel to Digital Payments/ECom

Why Payments / Credit Cards : Is it an idea worth the time…!

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Industry Selection Template To chop a tree, 80% of time is sharpening the

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Global Template /External Factors ▪ History / Evidence of wealth creation globally

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▪ Demonstrated evidence of healthy industry structure, high entry barriers, economies of scale & long runway

▪ Current valuations at scale / at maturity, being healthy, indicating high terminal value, sustained economics

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▪ High probability growth outcomes (regulatory + purchasing power + picks & showel / frequency of use tailwind) ▪ ▪ Seek favourable industry structure ( Pricing power, Top 4 - 85%)

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▪ Global business templates economically sound and of track record ▪ Is it solving a large problem, thus large TAM

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India Template / Internal Factors

▪ Demographic Alignment (Consumer Disc. Spend / Surplus to rise ; Volume / Value to increase) ▪ Clear leader (Prefer Leader or challenger)

BFSI Profit Pool (Structural growth & amongst the most fertile grounds for stock picking) Rhetoric ! Which service or product segments can have : - Sustained high growth for long periods

- Sustained High RoE - Remains consolidated industry, thus pricing power and entry barriers - High terminal value

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Which segments of Banking / Capital market / Insurance cos will get democratized, commoditized vs remain highly profitable !!

Technology Shifts around the Industry BFSI undergoing major transformation to de-frictionize & improve Customer experience / engagement

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What are the key trends probable ahead !! ▪ Privatization of Asset side to accelerate when credit growth rebounds ; Acceleration of liability side value migration to Pvt Banks / NBFC ▪ Major Technology shifts, creating further distance within the private players ▪ Democratization of access, data and analytics

▪ Platform’ization of several layers of BFSI ▪ Volume increase, RoE compression in several product stacks

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Technology Shifts in India : De-bundling / De-layering of BFSI layers

How will they impact growth & RoE

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Moving from mere Customer Acquisition –to- Engagement & Experience

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Technology Improvements driving scale efficiencies

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Lending –to- LAAS (Lending as a service)

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Customer segments vs Data availability : Volume Increase / Sache’ization FMCG adoption way

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UPI : An Eg. Of Unbundling of payments layer, drives exponential growth

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OCEN to democratize sourcing > create market place for services / pricing

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Platform’ization of LSP – Customer sourcing Extension of likes of paisabazaar, lead mgmt system

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Largescale Unbundling of : Analytics, Products & Distribution to reinvent

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If ONDC Succeeds,

Its gonna be a an explosion of digital payments # Next NN Project

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A whole Ecosystem of Fintech / Platform / Services to evolve – emerge Rhetoric : Which segments / Who will actually scale, make money !

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The future BFSI stack…I

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The future BFSI stack…II

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Key points to ponder, Our Endeavour to answer ○ ○ ○ ○ ○ ○

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What are the key regulatory & technology changes within BFSI ! How will it and which product segments will it impact how ! Who will it impact, to what extent How will it affect the distance between the incumbents vs emerging, the leaders vs laggards ! How will it affect economics of the product or whole franchisee Which products will have tailwinds vs headwinds & who are the product leaders in each

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e s e Global Perspective on Payments Industry R t s e u Q e u l a V

Payments Infra. & Services Segments Where are the profit pools, sustainable economic model !! ▪ Hyper competition or inferior / unproven economics in several areas ▪ Network Cos or Issuers (VISA/Mastercard/AMEX/UnionPay) = Clear Dominance, unchallenged & great economics ; ▪ RuPay early days out of India

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Perspective on US Payments $8trn spend pool Network spend distribution :: Credit 53% + Debit/PP/EFT balance Distribution of Revenue from spend : 40% Card Issuer (~130bps) + 11% Visa/Mastercard Network (~26bps) + 13% AMEX (Issuer + Network owner)

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US Spend Pattern : Even at this scale growing 8% CAGR, 20-22% of GDP

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Market share distribution : $22trn plastic spend US 40-42% of total global plastic spends Of total US plastic spends, 50% is Credit Cards

US Credit share : 50% Visa + 23% MC + 18% AMEX Visa 72% share in US Debit card spends Beyond US, Credit Card share Visa 52% + MC 41% + Amex 7%

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Source : Bloomberg BI

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Credit Card Spend Patterns across Country Growth : US 8% CAGR vs China ~20% vs India ~25% CC/ GDP : US : Increased from 13-14% to 20-22% China : Increased from 3% to 8% India : Increased from Lower credit card rewards / promotions > higher BNPL adoption

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Korea : MDR declining trends

Decline in MDRs > Lower credit card rewards / promotions > higher BNPL adoption

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US utilization rates stable and predictable 20-25% of limits

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Long term Sustainable RoA & Behavioural Operating leverage

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PRICING POWER US Interest rates vs Cost of Funds, Uncorrelated # Similar trends in India

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Historical US Credit Card Delinquencies 30days+ : Since 2002 Sharp & structural decline post Q2’2009 ( Peaks : Q3’2002 5%, Q1’2009 6% ) Currently 0.85%

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Credit Card Operating Model – 7yr Average of SBI Cards Numbers calculated based on base of Average Assets Total Income

Net Interest Income

(20%)

Fee Income

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Fixed (5%)

(19%)

(15%)

Revolving Loans yield (42% )

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EMI Yield (15-18%)

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Operating Cost

(34%)

Employee Expenses MDR (16%)

Admin/Other Expenses

Others (3%)

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Variable (15%)

Acquisition Cost

Collection & Recovery Reward Points

PPOP (14%)

India Credit Card Payment Ecosystem

VISA receives INR 98.2 from Issuer and pay 98 to acquirer Visa Assessment Fee – INR 0.2 (0.2%)

Switch (VISA)

Issuer Bank Issuer receives INR 100 from consumer and pay 98.2 to VISA MDR Fee – INR 1.8 (1.8%)

Note: Assumed transaction is of INR 100

Acquirer Bank

Merchant receives 97.76 from acquirer “Merchant Discount Fee - INR 2.24 (2.24%)

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Consumer

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Acquirer receives INR 98 from VISA and pay 97.76 to merchant Acquirer earns INR 0.24 (0.24%)

Merchant

India Credit Card Illustration A Transactor

B Revolver

Monthly Spend 10K

Monthly Spend 10K

Fully Paid

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Revolving – 0% • •

Interchange Fee (1.5% 1.8%) Interest Income (0%)

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5K Paid

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Interchange Fee (1.5% 1.8%) Interest Income on 5K (36%-42%)

➢ Transactor means person who pays all payments on time ➢ Revolver means person who pays only minimum payment due. ➢ Loan means person who convert his due amount into EMI

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Monthly Spend 10K

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5k Rolled over

Revolving Rate – 50%

•

C EMI/Loan

5K Paid

5k Rolled over

Converted into EMI/loan – 50% • •

Interchange Fee (1.5% 1.8%) Interest Income on 5K (14% 22%)

American Express India Pvt Ltd Even at sub-scale, Amex very healthy nos

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India Credit Card Industry

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7cr credit stock in India as of now With a long tail of lower limit & utilization of cards

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Credit card Industry Credit Card loans

Credit Card Spendings 10,00,000

CAGR (%) 1Yr 49% 5Yr 23% 10Yr 26%

9,00,000 8,00,000 7,00,000 6,00,000

1,40,000

9,38,033 7,32,290

1,00,000

60,000

3,28,382

4,00,000 3,00,000 2,00,000

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5,00,000

1,22,100

CAGR (%) 1Yr 5% 5Yr 19% 10Yr 20%

1,20,000

1,08,000

52,100

40,000

20,400

96,613

20,000

1,00,000

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FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

Total Spending (crore)

Loan Spend Ratio (%) 25% 21% 20%

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16% 15%

10%

FY21

FY22A

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15%

Source: RBI Website

FY19

FY21

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22A

Credit Card loans (crore)

➢ In last 1 year – Credit card loans has not grown in proportion of credit spending. ➢ It will result into reduction in Interest yields which will offset by MDR fee on higher spendings.

0% FY15

FY12

13%

5%

FY12

-

FY22A

Increase in POS terminals : Lead indicator of Credit Card Usage / Penetration

Number of POS Terminals (no. in lakhs)

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60

CAGR 3Yr 15% 5Yr 17% 9Yr 23%

50

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30

20

10

8

11

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47

44

37

31

25

14

11

FY13

Source: RBI Website

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22 A

Indian Bank credit growth

Source: RBI Website

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Increasing proportion of 18-25 years age group of credit customers Card sourcing by age of borrowers (%)

Outstanding Balances by Age (%) 50%

60% 51%

50%

48%

50% 40%

40% 35%

36% 32%

30%

30%

25%

30%

20% 20% 12%

15%

14%

11%

9%

7%

10%

10% 5%

2%

0%

0% FY16

FY18 18-25

26-35

36-50

45,000

>50

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40,000 34,038

35,000 30,000 25,000 20,000

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Outstanding Balances by Age of borrowers

90%

25%

20%

23%

23%

21%

19%

15%

14%

50

26-35

36-50 1CC

2CC

3CC

>50 >3CC

Total

Company wise – No of cards

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Currently top 4 Indian banks gaining market share from others & has total market share of 72%. HDFC Bank market share impacted due embargo levied on Dec 20. SBI and ICICI have seen a rise in incremental market share.

Source: RBI Website

Company wise – Spending

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In Spending top 4 market share is even higher & total market share is 75%. HDFC Bank market share embargo levied on Dec 20.

impacted

due

Citi continuously loosing market share. With acquisition of Citi By Axis, top 4 players market players will increase to 80%.

Source: RBI Website

Company wise – Ticket Size & Spending/Card

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Average Ticket Size has seen a spike over the past few months for most players; if this is a sustainable trend, ATS should see a further increase as travel related and corporate spends revert Gradual unlock has resulted in return of offline spends such as travel and dining. Habits of e-commerce and online transactions continue to remain – driving ticket sizes higher ICICI Bank and SBI Cards had ramped up issuances during HDFC Bank’s embargo – the customers that have been issued cards last year would have reached maturity in terms of spends

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ICICI Bank Credit card key takeaways

➢ ICICI Bank & Amazon partnership to increase flow of NTB customers

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➢ Gives access to a low-risk, qualified customer base (Amazon also does some pre-screening of customers before passing on the lead)

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➢ Activation rates on Amazon are better and engagement is huge

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➢ Opens cross-sell opportunity for the Bank to monetize the customer (holistic approach by offering a range of banking services) – other co-branded cards with MMT and Manchester United are to achieve the same goal of increasing suitable NTB

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➢ Only Amazon prime customer gets 5% cash back (weighted average reward costs are much lower) Others Using Fastag as an acquisition engine – with 34% market share of Fastag, ICICI bank gathers data (on recharge, issuance) once data comes in, after a credit check, offers are flashed to NTB customers

Company wise – Penetration CC/DC ratio – HDFC Bank has the highest share, but has declined due to the embargo ICICI Bank and Axis Bank are seeing increased penetration of ETB (Existing to Bank) customer

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Adds up to be the data, evidence, conclusion we’re drawing

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Historical Valuation Bands Visa & MasterCard : Payments Network Infra Cos Clear Co-relation of multiples between the 2 cos

P/E Ratio : Range 25x-50x (Visa clear premium over MC last 2yrs vs history, higher growth / market share) P/S : 13x –20x EV/Ebitda : 20x-35x

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Global Fintech Indices Historical Valuation bands Sharp rise in multiples post Mar’20 Sharp decline post Nov’21

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Global Digital Payment Infra. Cos

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Global Digital Payment Infra. Cos

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India BFSI Estimates for Context

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India BFSI Growth vs Valuations context

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Context of FMCG How many Consumer Cos +/-2000crs Profit : 6-7 ; PEG 2.5-3.5x

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To Summarize Key Givens - Clear history / evidence of healthy industry economics, sustainable operating model, few dominant leaders - Even DM Credit Card growing at ~8%, 2.5x GDP - India growing credit card spend ~25%cagr even amidst slower GDP growth - Distinct 4 clear leaders = 82% market share

Key Monitorable / Risk

- Sources of S-Curve growth : Higher Ecom / Increase use of Credit cards * Increase in No. of cards * Frequency of use * Higher ticket size per tx * Higher spends as purchasing power increases - Currently 10lac crs/~$135bn CC Spend i.e 4.8% CC/GDP ($2.8trn GDP) (SBI 1.8lac cr spend share) - At 7% Nominal GDP growth (~$3.5trn) * 8% CC Payments Penetration = $280bn * 18% share SBIC = $50bn * 0.9% = ~3375crs PAT

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- How does SBI Cards mine SBI Bank customers

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(HDFCB 28%, ICICI & SBI ~19-20%, Axis + Citi)

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- How will market share shifts happen within players - Risk Mgmt of credit costs thru cycles (Out of SBI Customers) • SBI owns 69.5% in SBIC. SBIC has a non-exclusive and nontransferable right to use the logo and certain trademarks for its business operations. SBI can terminate the agreement for various specified factors which includes the bank’s stake in the company falling