RuPay: A Tale of Ruling Payments and A Duopoly
In the previous few years, you've probably read a lot of remarks about monopolies in the IT industry (say, Google, Amazon) and ideas for breaking them up because the power they possess is unhealthy for society. However, they are not the only ones who actually need help, nor are they the most critical cases. No, there are two more threats to the internet, businesses, and society that are significantly more threatening right now. Specifically, payment processors such as Visa and MasterCard. These corporations process billions of credit and debit card transactions every day and wield power that Google can only dream of.
This means that a significant portion of the payment system is in the control of private parties with no interest in fairness and authority beyond that of the government. And that isn't the only problem they have. No, because they have complete control over the system, disruptions are extremely dangerous. Visa and MasterCard, for example, utilized their authority to strangle Wikileaks, a website that distributes hacked data online, in July 2012, by banning the website from receiving donations using their payment systems. Because everything depends on the smooth operation of these two networks, even a small technical failure in one of them might bring entire economies to a halt.
Although, the root of the problem here is the hefty price that these companies demand to handle transactions. The Merchant Discount Rate is a percentage of the sales amount that Visa and MasterCard charge to the merchant (MDR). The technological world has progressed to the point where it is now possible to manage payment processing networks for pennies on the dollar. Thus Visa and MasterCard have no justification to demand such high fees; they are simply skimming the market.
Until 2013, the Indian payment ecosystem, like the worldwide payments processing sector, was mostly dominated by the duopoly of these two American giants. MasterCard and Visa had a large number of users and merchants, so they were in a good position to take advantage of the market. This may prompt the question of how, in an era of global competition, a market segment can be entirely dominated by only two competitors.
Well, we've got an answer for you. Visa and MasterCard had a head start over other companies since debit and credit cards were first issued in America and these companies were created by a union of American banks, which is the best possible use of the first-mover advantage. Second, they have been utilizing restrictive contracts to their advantage for a long time, barring banks from issuing cards associated with other networks in order to prevent the network of competitors from extending further.
Finally, it's important to realize that the payments processing business is a chicken-and-egg scenario. This means that if a given type of card is accepted by more retailers, more people will want to use it. On the other hand, if a certain type of card is used by a large number of people, retailers will be forced to accept it. However, it is unclear what needs to happen first.
Less than a decade ago, in the early 2010s, only a third of the country's population had a bank account, with the nation itself accounting for one out of every six human beings on the planet. The depositary requirements are the primary cause for this. A bank account holder was required to maintain a "minimum balance" of 3,000 to 5,000 rupees in his account at all times. As a result, for decades after the country's independence, the majority of account holders were salaried professionals in organized sectors, government officials, businessmen, and so on, while the unorganized sector's working class, which accounted for the majority of the adult population, was left behind.
The present administration has taken several attempts to address this, the most notable of which being the 2014 inauguration of the "Pradhan Mantri Jan Dhan Yojana" (PMJDY). For the country's marginalized communities, this financial inclusion strategy required banks (with state-owned banks at the forefront) to provide zero balance accounts with overdraft facilities and deposit insurance.
This is where RuPay enters the picture. The great majority of cards issued for the PMJDY Yojana's bank accounts were linked to RuPay, an indigenous payment network that had only been founded a year before the Yojana. The network is run on a "not-for-profit" basis by the RBI-owned National Payments Corporation of India (NPCI), which means there is no profit margin built into the costs of maintaining the network.
The endeavour set a new record: 18.1 million new accounts were opened in less than a week. This number had risen to 416.5 million by January 2021, with women in rural regions accounting for more than half of the total. The entire estimated balance in these accounts was expected to be Rs. 137,195.93 crores ($18 billion).
As a result, RuPay has been a total market disruptor, affecting a wide range of parties and stakeholders, including many citizens from the poorer sections of society, banks, the government, and, of course, competitive credit card firms.
The biggest achievement of RuPay is helping in better financial inclusion. Between 2010-11 and 2019-20 alone, the number of Debit cards issued ballooned from 227 million to 828 million of which over 300 million cards were RuPay. The even more impressive fact is that most of these cards were issued to the accounts opened under the Jan Dhan Yojana, meaning the majority of the people who use the cards come from marginalized sections. Of the 416 million accounts opened under the Jan Dhan Yojana, 300 million have gotten access to RuPay Cards.
All these may just look like abstract numbers to you, so let’s take a report published by NABARD considering the RuPay cards being used in Bihar and Uttar Pradesh, states which are primarily agricultural and which have had a large population from marginalized sections. In both Bihar and Uttar Pradesh around 60% of the cards are being used frequently, at least once per month. Nearly half the cards being used in both states are by women, and 40% of the cards held were by uneducated people. These numbers are a clear indicator that RuPay is helping spread financial literacy to all parts of the population, even the marginalized sections of the society.
This is not all though. RuPay has been an absolute disruptor for its competitors too. RuPay basically has a monopoly of cards issued under the Jan Dhan Yojana. Meaning for economically weaker sections and the sections being unbanked who have only recently opened their accounts, VISA and Mastercard aren’t even in the picture. Additionally, for public sector banks, RuPay is the only card that they are allowed to promote. This means that VISA and Mastercard can not even access a huge part of the population.
To add to their troubles, both have been in a huge spot of bother in recent times. Mastercard has been banned in India as it hasn’t complied with the data storage rules. VISA too has been under a lot of pressure. With the government intent on promoting RuPay, Visa has felt that the playing field hasn’t been level, to the point where they have had to complain about the Indian Government clearly favouring RuPay to the US government. This just shows the impact RuPay has had on the entire Indian landscape.
It's not all sunshine and rainbows for RuPay though, as there are a lot of negative aspects which haven’t been discussed often. Making the merchant discount rates zero seems amazing on paper, as it saves a lot of costs to both the customer and the small vendors who do not have to pay money to avail of the digitization services. But this means that banks have had to bear a lot of the brunt.
No MDR means that the banks get no money from the card transactions from RuPay cards which means that they have no incentive to actually promote digitization in India. The cost alone for banks and fintech firms to maintain the infrastructure to accept digital payments is around ₹ 5000 crore. Union Budget's package to help them cover losses arising out of 0 MDR is a mere sum of Rs. 1300 crores, which is clearly nowhere near enough money to help compensate for their losses.
This is a massive threat to digitization in general in India, and especially RuPay. With banks not being keen on investing in UPI and RuPay debit cards, the number of cards being issued is slowly starting to dwindle. Additionally, the absolute statistics which are often associated with RuPay can be misleading. Even though RuPay leads in the sheer number of Debit cards issued, the number and volume of transactions tell another story. Considering that RuPay is mainly targeted towards the weaker sections of the society, the transactions are less frequent and not that high in the transactional amount. Visa on the other hand targets the more affluent sections of the society, meaning that the volume of transactions that takes place through Visa is still a lot more.
So what does the future hold for RuPay?
First and foremost, MasterCard getting banned is a huge lifeline and RuPay is predicted to benefit the most from it. Its proof lies in the fact that when American Express cards were banned just prior to Mastercard, RuPay had seen the most lucrative jump, with most Amex users flocking to RuPay.
The government is still keen on continuing to expand RuPay and make it on par with companies like VISA. The interest in making more of a mark in credit cards is proof of this, as credit cards see the most transaction volume in India. The accessibility of RuPay cards is still its biggest advantage, as for an economically weaker individual getting a RuPay card is much easier.
All in all, RuPay has definitely revolutionized the financial sector in India. It has taken financial inclusion to a whole other level and given global giants like VISA a run for their money.
Is it perfect? Absolutely not. There are still massive holes in the way they function. The zero MDR has arguably done more harm than good and maybe has a detrimental effect on digitization in India. However, it is still early days for it. If its problems can be slowly negated, it may be the one true solution to making each and every person in India a part of it.
Individual and business payment processing is not a competitive market. It isn't an 'optional' item that the world can function without. It is an important component of a large number of enterprises around the world. It is essential for the internet to function, and living in modern society is impossible without it. As a result, the solution isn't simply increased competition. It is to control the entire industry like a utility, or even to transform it into a neutral, global infrastructure.
Authors: Aditi Jain and Soumil De
Illustration by: Shubham Kandoi