In today’s Finshots, we discuss how RBI’s new card network rule for banks may sway in favour of RuPay.

The Story

In 2014 India got its very own card payment network ― RuPay, thanks to the NPCI (National Payments Corporation of India). If you don’t know what a card payment network is, that’s okay. Think of it as an elaborate system that enables banks and businesses to communicate with each other while processing transactions.

For instance, if you have an ICICI Bank credit card with a Visa logo on it, then ICICI bank is the issuer and Visa is your payment network. And if you swipe your card at a physical store, the machine connects to the card’s payment network. The payment network then decides if it should accept or deny the transaction after communicating with the bank and checking to see if you have the balance (and a few other things). And while every full fledge bank can issue a credit card, we only have a few card networks.

There’s Visa, MasterCard, Rupay, American Express and Diners Club. Now, Visa and MasterCard together command 70–80% of the Indian credit card space. RuPay on the other hand takes up less than 3% of it. But flip to debit cards and you’ll see that it dominates 65% of the market.

As you can imagine, there’s a gulf between RuPay’s dominance in the debit card space and its absence in the credit card space. And there’s actually a reason for this. When RuPay was born, the government made sure to tell every PSB (public sector bank) that our domestic network was all they’d promote. So when a financial inclusion scheme like PM Jan Dhan Yojana was introduced, PSUs were only issuing RuPay debit cards to account holders by default. And that was one of the reasons RuPay took off and came to dominate the debit card market.

But here’s something we didn’t tell you. You see, RuPay was created to compete with international card payment networks. So its debit card came with a zero MDR (Merchant Discount Rate). Meaning when you swiped your card at your next-door grocer, the grocer paid nothing to the bank for processing this transaction.

Normally, all card networks charge a fee ranging between 1–3%. So the grocer only gets to keep what’s left after the fee is deducted. And the card network doesn’t keep all the money to itself either. It distributes this money between the card-issuing bank, grocer’s bank and leaves a little bit for itself. The problem with RuPay is that if it charged nothing, then banks made no money. Despite pushing these cards, they were throwing away their own lunch.

But they did have an ace up their sleeve. While they couldn’t do much about RuPay debit cards, the credit cards were a whole different ballgame. They had the option to choose the network that benefitted them. They didn’t have the pressure to promote RuPay cards here. So they’d have exclusive tie-ups with just a couple of dominant networks like Visa and MasterCard. And RuPay wasn’t getting the attention the government hoped for.

So what did it do?

You remember how the RBI now allows you to link credit cards to UPI? Yeah, if you didn’t know this already, you can do it. But you can only do it if you have a RuPay credit card since the RBI decided to pilot this initiative with the homegrown payment network. And suddenly both banks and customers were paying attention.

But the thing is.. They’re not stopping at that. In another move that could affect the uptake of RuPay credit cards, the RBI put forward a new draft rule that tells banks that they must let customers choose their own card payment networks.

And this could be a bit of a game-changer. Because earlier you only picked the credit card on the basis of the kind of rewards they offered. So if Axis Bank offered a really cool credit card, you’d go with them. You didn’t really have a choice to decide if you wanted Visa, Mastercard or RuPay as your payment network. But if the RBI implements this new rule, then banks have to give all card payment networks a level playing field. They can’t pick and choose between partners. The customer will have to make a choice.

What’s stopping customers from picking RuPay? Maybe support for international transactions? Maybe failure rates? But even then, you can bet that some people will feel like supporting RuPay over their foreign counterparts.

Besides, banks may also benefit from new incentive schemes. The kind that the government rolled out for FY23. This scheme was worth ₹2,600 crores and incentivised banks to promote Point-of-Sale (PoS) and e-commerce transactions using RuPay Debit Cards. What's stopping the government from doing something similar for RuPay credit cards too huh?

And that’s not the only thing. There’s also the regulatory bit. See, when the RBI comes up with new rules RuPay usually complies pretty easily because it’s a local card network. Global networks however may be at a disadvantage here like they were back in 2021 when the RBI temporarily barred Mastercard, American Express and Diners Club from issuing new cards because they didn’t comply with the local data storage rules. RuPay meanwhile has been immune to all this.

The only caveat is that all of this may not happen overnight. For now, the RBI has asked interested stakeholders to send in their comments by August. And if that bodes well this could become a mandate from October.

What happens then? Well, we will just have to wait and see.

Until then…

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