The fast changing digital payments ecosystem in India

FM Nirmala Sitharaman hard-push for RuPay – for obvious reasons - has put Visa & MasterCard on the guard. As the pioneers in developing the digital ecosystem in India, they fear losing out their high-end customers to RuPay in the card-sector.

Hyderabad:Finance minister Nirmala Sitharaman has asked all banks operating in India to promote RuPay cards. “RuPay is becoming global & operating in 12 foreign countries including USA, UK & UAE. Hence, there is no reason for Indians to be given any other card first. Indian banks must offer RuPay as the first option,” she said during the meeting of Indian Banks’ Association last month.

Launched by National Payments Corporation of India (NPCI) in March 2012, RuPay seeks to fulfil RBI vision of a domestic system for multilateral payments through debit, credit and prepaid cards.

Out of the total 87.20 crore credit & debit cards in India, RuPay has 60 crore cards i.e. nearly 69 %. Its share was a meagre 0.3% in 2013 when USA-headquartered Visa & Mastercard dominated the card sector.

PM Jan Dhan Yojana is one major reason behind the exponential rise in the number of RuPay cards. The 41.36 crore savings-accounts opened thus far under PMJDY includes the issuance of RuPay cards.

Another factor helping RuPay is RBI’s hard-push for storing the financial-transaction data in India. Towards 2016-end i.e. soon after demonetization, NPCI began broadening its infrastructure. By now, NPCI has almost monopolised mobile-phone enabled payment through its Unified Payments Interface (UPI).

UPI is an instant real-time payment system which facilitates inter-bank transactions on mobile phones. RuPay operates on UPI platform.

RuPay is slowly making inroads also in the credit card space; though Visa & MasterCard remain the Big Daddies in the 5 crore credit cards in India.

FM Nirmala Sitharaman hard-push for RuPay – for obvious reasons - has put Visa & MasterCard on the guard. As the pioneers in developing the digital ecosystem in India, they fear losing out their high-end customers to RuPay in the card-sector.

Legally, these foreign players cannot accuse the finance ministry of denying them a level-playing field. This is because the FM nowhere said that other cards cannot be issued. She merely exhorted the banks to offer RuPay as the first preference. So, her words - at best - can be considered as a promotional exercise, which cannot be challenged in the Competition Commission of India.

But then, the private Indian banks like ICICI, HDFC Bank et al face a dilemma of a different kind. Being private, they are not legally bound to listen to the govt on who they chose as their payment partner. Usually, the private banks decide to advance the Cards for different segments of their customers. Much before FM’s advisory, many of them have already signed contracts with Visa & MasterCard for issuing a certain number of cards to their customers. They cannot dishonour such contracts abruptly.

But at the same time, they also cannot overlook the country’s finance minister advisory for promoting RuPay. This is why they are also worried over what happens to their customers if the finance ministry later asks them to stop issuing Visa & MasterCard.

Nevertheless, insiders reveal that govt will not ban the issuance of Visa & MasterCard by the Indian banks. “Time and again the govt has clarified that Atma-nirbhar (self-reliant) India campaign does NOT mean barring the entry of foreign players (except the Chinese ones). Instead, it means promoting the indigenous players to the level so that they can stand the competition from foreign players in the Indian market; and foreign players do not risk India through the financial transactions of their Indian customers.”

Significantly, there is still a lot of space for foreign players in the sphere of digital transaction. Digital transaction through cards is used mostly for items & services in the personal consumption category. The personal consumption expenditure (PCE) accounts for roughly 60 % of India’s Rs 207,08,800 crore economy. Yet, digital payments constitute only 17.8 % of PCE. There is a huge prospect - particularly in semi-urban & rural India - to spread the use of plastic cards.

Apparently, this is why Mastercard & Visa are keen to survive in Indian market despite govt of India promoting RuPay. For it, they are making huge investments in their India operations and introducing innovation & choice to the customers.

Visa has partnered with Razorpay (an India-based fintech company) to launch RazorpayX Corporate Cards. These bank-issued cards will help the financial operations of severely impacted business owners. The company aims to net 50,000 budding entrepreneurs by March 2021.

On its part, Mastercard has recently announced to invest nearly Rs 7,380 crore in India over the next 5 years. The upcoming investments will be on top of the Rs 7,000 crore that Mastercard had already invested in India in the past 5 years.

Mastercard is prioritizing the contactless plastic-cards wherein the image of the card in the smart-phone facilitates the transaction. There has been a high rise in the use of contactless card payments during the pandemic. Taking note of it, RBI on 4 Dec raised the limit of contactless card transaction from Rs 2,000 to Rs 5,000.

Mentionable, it was Visa which launched contactless cards in India in 2015. Only an image of the card in the smart-phone enables the customer to do the transaction. Contactless plastic cards operate through SoftPoS, which the merchant can download through an app.

But then, while foreign plastic cards are promoting the use of SoftPoS among the shopkeepers, their real challenge is NPCI’s UPI. UPI enables the payments directly from bank-account to bank-account, totally eliminating the need for owning a credit card: either physical or soft. UPI is fast becoming the preferred platform for the transaction even from e-wallets like PayTM, PhonePe, Mobikwik et al.

As per the latest available figure, the card market fell by 10% in 2019 compared to 2018. In contrast, UPI transactions saw a 9 times growth in the same period. In September 2019, UPI surpassed cards as the most preferred mode of payment and continues to do so. In January 2020, there were over 130 crore UPI transactions.

With the proliferation of UPI and its smoothest operation on RuPay, govt’s (latent) message to foreign plastic cards is clear: The only way to survive in India’s digital payments space is to make UPI the one & the only platform for their financial transactions.

A clear hint to this effect was evident when the Joint Parliamentary Committee (which is scrutinizing the Personal Data Protection Bill-2019) summoned representatives of Visa & MasterCard, and questioned them on their measures for localisation of the data related to the financial transaction of their Indian customers.

The PDP Bill-2019 requires all companies – including foreign ones - to keep a copy of all personal data of Indian users in India. The Bill – when enacted - will serve as a key legal basis for the right to privacy in India.

Alike representatives of other foreign companies like google, amazon, PayPal et al;Visa & Mastercard representatives vehemently opposed the data localisation provisions of the Bill in the JPC hearing. Wanting to continue taking such data for processing in servers outside India, they commonly argued: “Stopping cross-border transfer of user data would raise the cost, thereby adversely affecting our business prospects in India.”

When asked to comment on such reservations, Meenakshi Lekhi – BJP MP who heads the JPC on PDP Bill – countered: “Swedish company Truecaller is already localising data in India. Truecaller representatives informed us that the procedure of processing data is faster & more efficient when the server is in India than when the servers outside India. When Truecaller can do so, why cannot others?”

The message inherent in JPC chairperson’s response is unambiguous: “Either Visa & Mastercard relocate their server for Indian transactions in India; or make UPI the platform for the financial transactions of their Indian customers.”

If they relocate their servers (meant for their Indian customers) from the USA to India, the servers would naturally come under the regulatory oversight of NPCI (which operates UPI). Making UPI the one & the only platform for transactions by their Indian customers is an easier option.