India Unwraps Its Commercial Card Opportunity

Despite its demonetization policy, a thriving eCommerce climate, and continued growth in electronic and mobile payments, card penetration remains especially low in India, hovering at about 2 percent to 3 percent. Compare that to the U.S., where penetration is upwards of 80 percent.

Yet in only the last few months — and even weeks — India’s FinTech startup community has seen a proliferation of commercial card innovation. It’s an interesting phenomenon, especially considering the path to corporate card adoption elsewhere.

For instance, in the U.S., despite a high prevalence of credit cards, corporate cards still make up only a small fraction of B2B payments volume. Yet in India, innovators appear to be banking on corporates to drive card adoption, despite consumers’ low use of the payment tool.

One of those innovators is Karbon Card, which recently announced new funding for its commercial card designed specifically for startups. In a recent conversation with PYMNTS, Karbon Card CEO and Co-founder Pei-fu Hsieh said there are a few factors behind India’s recent surge in commercial card interest.

“A lot of startups in India see similar innovations in the U.S. or elsewhere, and come back to India and look for something similar,” he said. “The startup ecosystem in India is quite close-knit, and when a few start using a [corporate card], their peers will start using it.”

India’s highly fragmented banking ecosystem also presents an opportunity for newer, more agile financial service providers to wield the corporate card as a competitive edge, he added, pointing to older financial institutions (FIs) that have kept barriers to corporate card adoption particularly high for startups.

The Personal Guarantee — And Beyond

The need for banks to obtain a personal guarantee from a small business or startup owner in order to issue a corporate credit card is one of the biggest hurdles SMBs face in both India and around the world.

But it’s only the start of the barriers that India’s startup community faces when in search of a card product. Hsieh highlighted India banks’ requirement of a fixed deposit guarantee as well, mitigating the risk against default. As a result, the corporate cards that startups are able to obtain rarely operate as a credit instrument.

“For instance, if you want a $1,000 credit line, you would have to deposit $1,100 in the bank,” he explained. “Essentially, it’s not credit per se, but more of a debit card in nature. Banks don’t want to run any risk — they want to make money if you default.”

Finally, the third biggest barrier for startups is the need to submit a high volume of paperwork, with each bank requiring unique sets of information, often requiring boards of directors to sign off at the time of application.

With all of these hurdles combined, Hsieh said most startup founders simply end up relying on their personal credit cards to operate their companies.

The Shift From Personal To Corporate

There are obvious drawbacks to relying on personal payment tools for professional expenses, with one of the largest being a lack of clear distinction of the purpose of transactions when businesses close the books at the end of each month. The knock-on impacts are vast, from a lack of transparency into spending patterns to derailed cash flow forecasting.

The benefits of separating personal from professional spend are immediate as well, with Hsieh pointing to the wasted time and resources spent manually identifying which purchases were made for a company, or doling out expense reimbursements for employees.

This is especially important for startups, which are often strapped for cash yet have some critical purchases to make.

According to Hsieh, there are four key categories of purchases for which startups need a commercial card: software, marketing, cloud infrastructure and travel.

“All of these expenses require a credit card,” he said. “Startups can’t pay for, say, Facebook through a wire transfer — Facebook doesn’t accept that.”

Even as India works to expand access to capital for startups and small businesses through policy initiatives and elevated competition from alternative and non-bank lenders, the commercial card’s nature as both a line of credit and a payment vehicle makes it immensely valuable for startups that not only need working capital, but also need to be able to easily make payments for the necessities.

A Different Trajectory to Adoption

Considering India’s current financial services climate, the country could see a very different path to commercial card adoption than what’s seen in the U.S., where corporate card use is largely driven by a desire for businesses to pay via cards the same way they do as consumers.

Market fragmentation and a high population of underbanked people mean consumers in India are instead flocking to mobile wallets rather than credit cards, which Hsieh said are largely reserved for wealthier individuals.

And with India’s FinTech scene among the world’s most active, Hsieh said it’s time for corporate cards to take hold as more banks are eager to collaborate with FinTechs to compete.

“India’s banking industry is a highly fragmented market. Younger, smaller banks have to find a way to compete against larger established incumbents,” he said. “One way to do that is to work with FinTechs like us.”