Battle Of The Cards: Can India's Latest Move Give RuPay A Leg Up?

What's stamped across your debit or credit card? If you are an urban, big-spending consumer, chances are that your card reads Mastercard, Visa or American Express. You're more likely to see a RuPay card in rural or semi urban India.

RuPay, introduced in March 2012, has aided financial inclusion in India but its acceptability among the broader consumer base has remained modest. It didn't help that starting Jan. 1, 2020, the government decided to do away with the merchant discount rate on RuPay cards, making them less attractive for banks to issue.

Merchant discount rate is charged to a merchant by a bank, for providing debit and credit card services.

In a partial reversal of its stance, the government, on Dec. 16, said it's setting aside Rs 1,300 crore for 2022-23 to reimburse banks for low-value transactions upto Rs 2,000 made to merchants via RuPay debit cards and Unified Payments Interface transactions. The idea here is to incentivise banks to use Rupay and UPI by ensuring they earn something on it.

Will it work?

"The industry has had its share of problems since the announcement of zero MDR but they will greatly benefit from this initiative of reimbursement of transaction charges," said Vishwas Patel, chairman, Payments Council of India.

"The Rs 1,300-crore figure is insignificant when we consider the volume at which transactions are happening," added Ravi Battula, head of Wibmo, a digital payments solution firm. "However, it's important to note that the announcement means there is a scope for improvement."

The RuPay card has played a dual role in the Indian economy.

On the one hand, the fact that it is low-cost and, since 2020, low fee, has made it an ideal tool for financial inclusion. A number of low-value and no-frill bank accounts are seeded with RuPay cards.

According to data available in the Reserve Bank of India's annual booklet on payment systems in India, between 2010-11 and 2019-20, the number of debit cards issued in India increased from 22.78 crore to 82.86 crore, of which RuPay comprises around 30 crore debit cards issued to no-frill account holders.

On the flip side, the lack of MDR on the card has made it less attractive for banks to push. Limitations such as low acceptability internationally has also stacked the deck against RuPay cards.

The payment service providers can't make any money if the MDR is zero, and this can lead to insufficient infrastructure, an industry consultant said on the condition of anonymity. While RuPay and UPI have zero MDR, other payment channels such as Mastercard and Visa are untouched and accrue charges, this person explained. State-run banks have so far led the issuance of RuPay cards but this trend is gradually changing, this person said.

The segments where the RuPay card is common, the average transaction size on these cards is also low. "According to our internal assessment, 85-90% of all transactions by number have an average ticket size of less than Rs 2,000," said Nidhi Tiwari, partner with consultancy firms Kearney.

As a result, while RuPay's share in the number of cards issued was over 60% as of Nov. 30, 2020, according to RBI data, its share in volume and value of payments is low.

It's share in volumes of card transactions, which was at 18.2% in FY19, had risen to 23.8% in FY21. Share of value of transactions has gone from 9.8% in FY19 to 16.2% in FY21, based on data available from the National Payments Corporation of India and the RBI.

Some of this appears to be changing and the decision to reimburse MDR payments on RuPay cards may help give the indigenous network a leg up.

On Nov. 28, Reuters reported that Visa has complained to the U.S. government saying that India’s “informal and formal” promotion of local rival RuPay is hurting company in a key market, suggesting that it sees growing acceptance of the local card network.

In addition, a recent stricture by the RBI on Mastercard, Diners and American Express, restricting them from issuing new cards till they meet data localisation rules, helped give RuPay a fighting chance against the other networks in capturing the lucrative end of the market.

With Mastercard barred from issuing new cards for a substantial period, banks and other service providers had only limited options to choose from —Visa and RuPay, the consultant cited earlier said on the condition of anonymity. Banks have started offering new variants that offer conveniences like airport lounge access and partner discounts even on RuPay cards. The government's plan to refund the losses will help incentivise the issuance of RuPay cards, creating a level-playing field, this person added.

Tiwari of Kearney said that banks prefer to maintain a balance between card networks. "Before a decision is made, the customers are segmented to understand which product offers a better proposition for various use-cases." To attract the premium end of customers, RuPay has amped up its offerings by releasing new tiers like RuPay Platinum, Tiwari said.

A lot, though, depends on the government's plan to refund MDR working smoothly. Some are sceptical.

As Ankit Bhatnagar, head of product for Mswipe, which makes point-of-sale machines, explained, the government was reimbursing the MDR before the 2020 diktat. "But all the payments are done to the acquiring banks. So, the payment service provider depended on the bank to disburse it further," he said. "The entire process is slow and opaque because we don't know when the government has released the payment. A lot of back and forth is involved and delays are perennial."