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Next wave of Growth for Banks – Retailer Credit Card

October 11, 2010 Leave a comment

Farmers in India are offered Kisan Credit Cards to provide adequate and timely support from the banking system to the farmers for their short-term credit needs. The banking industry can take a clue from this and introduce a retailer credit card for exclusive use by small-time retailers to pay to their suppliers. 
The idea: 
  1. Banks to offer small retailers a Retailer Credit Card with a minimum credit limit of 10000 INR. 
  2. This offer will also come with the credit card swiping machine which the retailer has to use in his retail counter. The rent will be waived off if the retailer does a minimum of “x” number of swipes in a month.
  3. The credit limit of the retailer goes up by a % of the total transactions done via the credit card swipe machine. For example, if the retailer has swiped for INR 100000 in a month, his credit limit on his card goes up by (for example) 1.5% of INR 100000, i.e., 1500 INR. 
  4. The retailer can use the credit card to pay his suppliers. The suppliers will only be charged rent for the machine and the transaction costs will be waived off (may be for the 1st year to induce usage).  
What’s in it for the bank: 
  1. Currently, the number of retailers who accept credit cards are limited. The bank can increase this number by a large margin. 
  2. The profit for the banks will come from the transaction fees. By combining the credit limit for the retailer to the value of transactions, the bank can incentivize the retailer to increase the transaction via credit cards thereby leading to higher profits. 
  3. There is also the possibility for the end consumers to make part payments towards their credit card spending, thereby generating very high interest fees for the bank. 
  4. This has the potential to increase the total spend via credit cards twice or even more than the current usage.  
What’s in it for the retailer: 
  1. Currently, one of the big pain points that the retailers have to grow their business is to be able to procure more goods to sell in their shops. One of the limiting reasons is the limitation of working capital. Most of these retailers are unbanked and can not get access to working capital loans on offer due to variety of reasons. This credit card provides them an easy way to get short-term working capital. The fee that they pay is much less than the other options they have (local money lenders). 
  2. By accepting credit card payments, they have the opportunity to increase their sales as they loose some sales to organized retail due to the ease of paying with a credit card that the organized players provide. 
My personal opinion is that this can provide the banks a lot of growth in the next few years.
What do you all think? Pls let me know. 

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Business Model Innovation: Learning from the peers

October 1, 2010 Leave a comment

CISCO has been talking about Smart + Connected Communities which have a single intelligent common network backbone on which multiple services can be built and provided thereby increasing efficiencies and effectiveness of the services. 
They have been promoting this service for a reasonably long time now with some moderate success. When you think of the different challenges that CISCO has with regards to S+CC is very similar to the challenges that Sun Edison faced a few years ago. 
A little about Sun Edison:
They were an organization in the business of installing and maintenance of solar power systems for large organizations. They had considerable expertise in installing and maintaining these solar systems. They had customers who were interested in these systems as well due to different reasons like green energy, low long term costs, etc. But these installations were huge requiring very high capital expenditures upfront and their customers were not willing to commit to such high capital expenditures.
They solved this challenge in a very unique way. They did the following:
1.  Find customers (Example: Wal-Mart) who are willing to pay for the usage of the solar power once it is made available to them. They signed long-term power purchasing agreements (PPA’s) with this customer.
2.  Find investors who want reasonable long term returns on investments (For example Pension funds). They sold the PPA’s to these long term investors who were then willing to invest in the upfront capital expense and considered this as the investment on which they get stable returns.
3.    They also signed up with these investors for the maintenance of these installations.
4.    Majority of their profits came from these maintenance contracts.
CISCO can also benefit from a similar strategy with some modification/adaption to overcome the challenge of high upfront capital expenditure for their customers.
Sun Edison was acquired by MEMC in November 2009. Here are some links from Sun Edison site which explains their business model: 
This again goes to show that there can be solutions to our challenges around us and it pays to research well whenever we face some very stiff challenge.