In a recent circular, the Reserve Bank of India (RBI) seems to have fired a shot in India’s war on international card networks. The country is slowly pushing back against international card networks such as Mastercard and Visa which dominate the card sector. RuPay, India’s homegrown card network which was started in 2012, has gathered momentum in recent years. The RBI’s circular on cards might propel it further.
Reliance on international payments networks makes a country vulnerable in today’s geopolitical landscape. India’s efforts to become self-reliant in payments systems and networks predate the Russia-Ukraine war, but the conflict has highlighted how a country can be economically damaged if it is cut off from international payment networks.
The RBI’s new circular on debit and credit cards can go a long way in loosening the grip of international card networks on India.
What the RBI has proposed
The RBI has proposed that banks and card network providers such as Mastercard, Visa and American Express cannot get into exclusive arrangements. It says such arrangements curb competition and put the consumer at a disadvantage.
Networks of Mastercard, Visa, American Express, Diners Club International, and homegrown RuPay provide services to customers in India, but the provider is usually predetermined by the bank depending on the card issued.
What will change?
Card issuer banks will henceforth have to issue cards from more than one network provider and will have to provide an option to customers to choose any one among the multiple card networks. The RBI has called for public comments by August 4 and set October 1 as the date to implement the circular.
When the new rule comes into force, customers can choose their card provider either at the time of issue or any other subsequent time. All new card agreements will compulsorily have to be rejigged when this circular is implemented. Existing card agreements will also have to be amended at the time of renewal.
While the main objective of the new rule is to offer choice to the customer, it can go a long way in making India self-reliant in payments.
The rise of the RuPay
The new rule will level the field for the government’s RuPay card, which can now compete with big international players such as Visa and Mastercard. The new rule will promote affordability while discouraging the current dominance of a few companies which happen to be global players.
The home-grown RuPay cards are set to gain from the new rule. The government and RBI have so far not allowed any merchant discount rates (MDR) charges on the NPCI-promoted RuPay debit card despite protests by some banks and foreign card issuers who argue that it leaves merchants and issuers with no incentives to invest in deepening the card network. MDR is charged to a merchant for the payment processing of debit and credit card transactions. At present, there is zero MDR for transactions through the RuPay debit card. ET reported nearly two months ago that India’s high-street banks had reached out to the government seeking an MDR on RuPay debit cards on the grounds that it will provide them with the much-needed funds to enhance payment network security and develop innovative payment solutions.
Now with the customers getting a choice, RuPay cards, both debit and credit, will find space to grow which was otherwise in the stranglehold of big global players while banks saw no incentive in promoting RuPay debit cards. The RBI had in a discussion paper last year raised the issue of levying MDR on RuPay debit cards.
India has been promoting RuPay so aggressively in recent years that a worried Visa Inc. had complained to the US government about the lack of an even playing field in India, Reuters reported.
RuPay credit cards
Adoption of RuPay credit cards, which is likely to get a boost with the new RBI rule and might ultimately break the dominance of global majors, is significant not just for payments self-reliance, but also for domestic financial expansion.
The National Payments Corporation of India (NPCI), which launched and manages RuPay, has been looking to aggressively push the usage of RuPay credit cards in the market, for which it has tried bank tie-ups. Currently, RuPay credit cards account for just 1% of the overall credit card spend in the country. “RuPay has hardly moved the needle in its credit card business, but the recent regulatory nod for RuPay credit cards on UPI transactions is opening up fresh use cases,” a banking executive told in May.
The NPCI is also working closely with a clutch of major banks to find out ways to push the usage of these credit cards and has set an internal target of cornering around 10% of the overall credit card spends in the next year.
Last month, the RBI allowed linking of RuPay credit cards to the UPI network, a move that experts say has the potential to expand the market for credit by nearly five times. While the current estimate for those availing instant loans is around 50 million, allowing credit card transactions through UPI interface is set to provide almost all the 250 million users of UPI access to such credit.
A challenge for RuPay is its relatively low international penetration. In increasing cases, customers choose cards with wide international acceptance.
Internationalisation of the Indian payments system is a priority for the RBI, it said in its annual report. For the global outreach of RuPay cards, arrangements have been made with Bhutan, Singapore, Nepal, and the UAE to accept RuPay cards without co-branding with other international card schemes. Issuance of RuPay cards in other countries is also being examined.
Currently, RuPay cards are accepted at the points-of-sale machines powered by Discover of the US, Diners Club, JCB of Japan, Pulse and Union Pay of China. NPCI is trying to grow RuPay’s international acceptance by seeking more tie-ups so that users of RuPay cards are at par with those using Visa or Mastercard.
The RBI has also decided to allow issuance of RuPay prepaid forex cards by banks in India for use at ATMs, PoS machines and online merchants overseas. Additionally, RuPay debit, credit and prepaid cards will be allowed to be issued in foreign countries and used globally, including in India. These actions will increase RuPay cards’ accessibility and acceptance throughout the world.