A couple of days ago, Reuters reported that Visa had filed a complaint with the U.S. government accusing India of giving undue preference to its homegrown payment network RuPay. And in today’s Finshots we explain why Visa has ants in its pants.
Before we begin, a short note on how card transactions work.
Let’s say you go to a store and buy a packet of biscuits. You don’t have cash on you. So you decide to whip out your debit/credit card to pay for it. You swipe the card on a PoS machine and all of a sudden a magical dance begins. Your bank starts talking to the store owner’s bank in an attempt to move money. The store owner’s bank charges a small fee for being a willing participant and calls it the merchant discount rate. But it can’t keep everything to itself. It has to share a part of these spoils with another intermediary, that helps process this payment. That intermediary happens to be Visa or Mastercard. And since the store owner has benefited from a sale, they now have to pay the bank the merchant discount rate — usually tallying up to about 1–3% of the transaction. And this, in turn, helps payment networks like Visa and Mastercard thrive in a very uncertain world.
They get to keep a part of the spoils too remember?
But this duopoly now faces a real existential threat as countries continue to build their own payment network alternatives.
Take India for instance. In 2016, it built the Unified Payments Interface (UPI) to facilitate instant payments. Anyone could scan a Quick Response (QR) code and move money from one bank account to another instantaneously. And what’s even more impressive? It was free. Merchants loved it because they didn’t have to pay the extra charge. And in a high-growth market like India, Visa and Mastercard began losing a lot of money. Some estimates peg this at about Rs 6,000 crores.
And immediately the duo made their displeasure known. They made appeals to the government asking them to protect their interests. But officials didn’t seem to care too much.
“We are not in the process of protecting the revenue of private players,” said a senior Niti Aayog official. “The government will continue to provide alternate and cheaper options to end-users to enable them to board our digital payment drive.”
And the likes of Visa and Mastercard couldn’t do much because UPI isn’t another card. It’s a whole new thing. However, they do have a direct rival in India’s homegrown RuPay and that’s who they are targeting right now.
As of 2017, RuPay accounted for 15% of all credit and debit cards in the country. As of November 2020, however, 63% of India’s 952 million debit and credit cards had the RuPay stamp.
How did RuPay become so dominant, you ask?
Well, every time somebody opens a bank account under India’s financial inclusion scheme — the Pradhan Mantri Jan-Dhan Yojana (PMJDY), they get a RuPay card. In fact, nearly 50% of RuPay cards are linked to this program alone. And the other 50% are driven by a few subtle and not-so-subtle government nudges. For instance, when Prime Minister Narendra Modi plays the “nationalism” card — urging his fellow countrymen to adopt local cards and contribute to nation-building. Or when Finance Minister Nirmala Sitharaman directs banks to issue RuPay cards alone.
And Visa believes this is a perfect example of the government promoting one brand over the other. It’s not a level playing field anymore and they’ve made their displeasure known by filing an official complaint with the US. Even Mastercard filed a similar complaint in the U.S. back in 2018.
However, India is not alone in promoting its homegrown payment networks. Russia has Mir — set up in 2015 and it’s completely dominating Visa and Mastercard. Even the European Union is building out the European Payments Initiative (EPI) to ween off some of these dependencies.
So at this point, Visa’s tantrums should seem baseless, even juvenile, perhaps. After all, countries will want to promote homegrown alternatives when such alternatives are available. It’s only natural for Indian policymakers to nudge people to consider RuPay debit cards, no?
But Visa does have an ace up its sleeve. It knows that complaining isn’t entirely an exercise in futility.
India carries a trade surplus with the US. That means we ship more goods and services to the US than they ship back home. Now, by all accounts, this is a good thing for Indian businesses and entrepreneurs. They get ready access to a very important market in the US and they make a lot of money out of it. However, American politicians have routinely accused India of not reciprocating in kind. They’ve argued that we limit access to our market by imposing duties and tariffs — making it more difficult for American companies to do business in India. And if this complaint hits the right chords with US politicians, they could retaliate rather harshly, forcing India to reconsider its position.
So while the complaint may have very little merit to it, Visa knows that it can actually get the US to intervene on its behalf. And so, we will have to wait and see if the US does respond.