If you observe closely, banks today are extremely aggressive in pushing EMI offers — whether it is No Cost EMI, low-interest EMI, or longer tenure plans. This is not just because customers like EMI. There is a strong commercial reason behind it.
From a bank’s perspective, a full swipe transaction and an EMI transaction are not the same. One gives very limited earning, while the other opens multiple earning opportunities and keeps the customer active for a longer period.
Why Full Swipe Transactions Are Not Very Attractive for Banks
When a customer swipes their credit card or pays through UPI/debit card for the full amount, the bank’s earning is usually limited. In most cases, the bank earns only interchange fee (which is a small percentage). There is no interest income, no float benefit over a long period, and limited opportunity to engage the customer further.
More importantly, once the transaction is done, the customer may not return to the bank’s ecosystem for a long time. This is what banks call a “dormant” or low-engagement customer. Banks do not like customers who transact once and then disappear for months.
Why EMI is Much More Valuable for Banks
EMI changes the game completely for banks. Unlike a full swipe, an EMI transaction gives banks multiple levers to earn money and keep the customer engaged over a longer period.
Multiple Earning Levers in EMI
When a customer buys on EMI, a bank can potentially earn from several sources:
- Interest Income: In interest-bearing EMI, the bank earns interest over the tenure.
- Interchange on Higher Ticket Size: EMI allows customers to buy bigger-ticket products, which increases the overall transaction value.
- Float Income: The bank gets to hold the money for a longer period before it is fully repaid.
- Customer Stickiness: The customer remains linked to the bank’s ecosystem for the entire EMI tenure (usually 3 to 24 months).
- Cross-sell Opportunity: While the customer is paying EMI, the bank gets multiple opportunities to offer other products like personal loans, insurance, or credit cards.
Example:
A customer buys a ₹80,000 TV on 9-month EMI. Even if the bank earns only a small interest margin or interchange, the customer stays active with the bank for 9 months. During this period, the bank can try to sell other products. In a full swipe of ₹80,000, this long-term engagement is missing.
Why Banks Want Customers to Keep Rolling
One of the biggest problems for banks is **customer dormancy**. A customer who transacts once and then becomes inactive is of low value to the bank.
EMI helps solve this problem. When a customer is paying EMI every month, they remain engaged with the bank. Their account or card stays active. This is what banks call “rolling” customers.
Rolling customers are valuable because:
- They have a higher lifetime value.
- They are more likely to take new loans or credit products.
- They generate consistent interchange and fee income.
- They are less likely to switch to another bank.
How Banks Measure Efficiency of EMI Offers
Banks spend money in the form of discount or subvention to run EMI offers. They want to ensure that this spend is generating good business for them. This is measured through Efficiency.
Efficiency shows how much discount the bank is giving to generate every rupee of spend through the offer.
Correct Efficiency Formula
Example: Calculating Efficiency
Suppose a bank runs an EMI offer with a brand:
- Total sales generated = ₹1,00,00,000 (1 crore)
- Total discount/subvention given = ₹8,00,000
- Bank’s share of discount = ₹5,00,000
Calculation:
Efficiency = (₹5,00,000 ÷ ₹1,00,00,000) × 100 = 5%
In simple terms: The bank is giving ₹5 as discount to generate every ₹100 of spend. Lower the efficiency percentage, the better it is for the bank (because they are spending less discount to generate business).
How Banks Protect Themselves Using Caps
Banks are smart. They don’t run open-ended offers. They usually put two types of conditions while designing offers with brands:
1. Efficiency Cap
The bank may say: “We want efficiency to be below 6%.” This means the bank is not willing to give more than ₹6 discount for every ₹100 of business generated.
2. Discount Cap
The bank may also put a maximum limit on the discount percentage they are ready to offer (for example, not more than 5% or 7% discount).
By putting both these caps, banks try to control their cost while ensuring they get meaningful incremental business.
Why IRR Also Matters in EMI Offers
Apart from efficiency, banks also evaluate offers based on IRR (Internal Rate of Return). IRR helps the bank understand what kind of return they are earning on the credit they are giving through EMI. Different NBFC partners offer different IRRs because their cost of funds and risk profile are different. This is one reason why the same EMI offer can look financially better with one partner compared to another.
Key Takeaway
Banks prefer EMI over full swipe transactions because full swipe gives limited earning and low customer engagement. EMI, on the other hand, offers multiple earning levers (interest, interchange, float, and cross-sell) and keeps the customer active for a longer period. Banks measure the effectiveness of EMI offers through Efficiency, which is calculated as (Bank’s Share of Discount ÷ Total Spends) × 100. They also use Efficiency Caps and Discount Caps to control costs while driving meaningful business.
Note: In the next lesson, we will understand the economics of Zero DP and No Cost EMI, and how subvention is actually shared between banks, brands, and NBFCs.
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