HDFC's Diners Black is a super premium credit card that stands out on the back of its 10x reward points, effectively giving you 33% off on purchases from Amazon, Flipkart, and other partners. These points can be redeemed for flight tickets, and with a reward policy this generous, the points are sufficient to cover most regular travel. The card also comes with free lounge access to all of the airports you visit. While on first glance this may look like a marketing gimmick or a clever customer acquisition strategy, the card seems to have a good business model in place.
In today's post, we look into Diner's business model, explore where its profitability stands, and look at what's ahead for this heaven-sent card.
Does Diners really spend 33% given its 10x reward policy?
The first thing that stands out when we look at the card's offers is the 10x reward points, translating to a 33% discount it offers on purchases. Such deep discounting would render most business models obsolete very quickly. Some quick back of the envelope calculations, however, show that the number isn't as scary as it seems.
Before we start, a short disclaimer. While best efforts have been made to arrive at the assumptions used in the calculations, they may differ materially from actual numbers. Please take these numbers for what they stand, reasonable assumptions to arrive explain a business model, and exercise due caution while using them for any other purpose.
The first major drop comes from the fact that not all of the transactions happen at the 10x partner outlets, leaving out around 50% of the transactions which receive cash back at 3.3%. The cards rules around 5 points for Rs 150 spent, and a cap on the reward points you can get a month, eat into the points you can accumulate further. And then the final cherries on the cake for the firm, around 31% of the people who never redeem the reward points, and nearly half of the customers who let some points expire. The combination of these factors brings the sky-high 33% to a manageable ~4.7%. With that established, lets now move on to understanding how the firm makes money.
How does Diners Black make money?
For purposes of convenience, we will be looking at percentages of total spend. On the expense side of things, other than the ~4.7% that goes towards reward point redemption, the firm also spends 1% each on credit fee, lounge access and operating expense and a further and minor amounts on the insurance and golf add-ons, bringing the total expense to around 8%.
As we discussed in our post on credit cards in India, merchant discount rates, interest charges, and membership fees contribute to a bulk of the revenue. For premium cards, the rate is higher at around 3%-4% of the transaction amount with membership fees and interest charges bringing in another 2% each. Other fees including late fee penalties and forex charges contribute around 1% more to this.
While these percentages are approximations, they are in the right ballpark and point to how a business that on the face of it looks extremely unsustainable with its 33%+ charges, actually stands on fairly firm ground.
How could the Diners black model change?
Diner’s Club is a relatively new entrant in India and is trying to increase both its customer and merchant base. While most of the major online portals accept Diners Club, its acceptance among POS machines is low but growing. The card uniquely benefits from a symbiotic relationship with HDFC Bank. While the bank gets ready access to premium customers to cross-sell them products, the card reduces customer acquisition cost substantially.
The card has also been gradually dialing back on its reward points in an attempt to enhance profitability. From reward points on all transactions, they have now stopped offering points on fuel, EMI, and wallet loading, and have capped points on insurance transactions to 2000. With this, it moves its business model further in the green. Another great example of how a business model that appears flashy on the outside can be disciplined and well thought out in reality!
Disclaimer: This post is an attempt to understand an interesting business model and is neither a recommendation to buy/sell/hold any security nor an endorsement to buy a product. While best efforts have been made to arrive at the assumptions used in the calculations, they may differ materially from actual numbers.