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Playing the Swadeshi Card – Banking and Finance News
In October, the country’s largest credit card issuers are expected to allow customers a choice of card networks. The customer can decide whether to opt for a Mastercard or Visa or any other network. Additionally, the rules, experts say, could prevent issuers — particularly banks — from establishing exclusive deals with a card network. And without it, users may no longer enjoy many of the rewards and benefits they currently enjoy.
Ranadurjay Talukdar, partner at EY, points out that it would be difficult for card issuers if there was no exclusivity. “Exclusive contracts allow issuers to obtain issuance incentives and spending commitments, and these incentives help enrich customer loyalty programs and card value propositions,” he says.
As Anand Dama, who follows this space at Emkay Research, says, it would be interesting to see how card players react and whether they are “forced to offer a specific card across all networks with almost the same reward or incentive structure or not.” The biggest losers would be the card networks. They are the ones who provide incentives to banks that are then passed on to customers. In exchange, they ask for a guaranteed portion of the emissions, a minimum amount of expenses and also a minimum amount of foreign exchange transactions. “This is at the core of our business,” says a card company executive. “Without exclusivity, cash backs, loyalty programs and other rewards, which are why customers take out credit cards, disappear,” he adds.
The biggest beneficiary of these new guidelines is the RuPay card. In fact, the industry is convinced that the rules were designed to favor the RuPay card. “Reserve Bank of India (RBI) introduced rules to boost the RuPay card because otherwise it simply cannot compete with foreign card networks,” says an industry insider.
Experts say the National Payments Corporation India (NPCI) – the RuPay card network – will likely not be able to match the benefits facilitated by the likes of VISA or Mastercard, such as access to airport salons. As Dama de Emkay says, RuPay’s partnerships with global card networks like Discover, Diners, JCB and UniPay have lower merchant coverage compared to giants like Visa and Master Card, which needs to be addressed.
Furthermore, as Soumya Mohanty, MD, South Asia, Insights Division, Kantar, says, it is highly unlikely that customers using credit cards in the affluent and premium categories will want to use a RuPay card. “Credit cards signify a certain status, so branding is very important,” says Mohanty. Other brand experts opine that it would be difficult for NPCI to match the promotional spend of global card networks.
The prospects of the RuPay card have increased since UPI (Unified Payments Interface) payments were enabled on it a few years ago. As an expert points out, if users can get credit on their payments for 50 days and save interest, they would be encouraged to use the RuPay card for UPI payments.
According to Abhishek Murarka, HSBC Securities & Capital Markets, the massive Rs 50 trillion UPI P2M (person-to-merchant) spending pool seen in FY24 offers a huge opportunity for issuers. “With the right push, a significant portion of this spending could theoretically migrate to RuPay-based credit cards,” believes Murarka. “About 300 million Indians use UPI today and a subset of these would be eligible for credit cards,” says a banker.
O Marketplace The participation of the RuPay card currently, in terms of issuances – physical and digital – is estimated at around 10% of total cards and 25% of new issuances. In terms of share of spending, it is estimated to be 10% of POS + eCommerce via debit and credit cards. A good number of cards have been issued in tier 2 and tier 3 cities and towns. However, the lower spend per card makes the overall unit economics of the RuPay card relatively less attractive. As Talkukdar says, since no MDR (Merchant Discount Fee) is charged for transactions below Rs 2,000 (which constitute the majority of UPI transactions on RuPay cards), it will not be easy for banks to maintain profitability on RuPay cards as they do not earn exchange on these transactions.
Banks, in turn, expect there to be a reasonable number of revolvers on which they can earn interest. “Banks are issuing RuPay credit cards in the hope of transferring UPI transactions to cards, accumulating expenses and then earning interest if the customer moves balances,” says EY’s Talukdar. In fact, many of the small merchants and kirana stores are unhappy about accepting RuPay card transactions. Vivek Iyer, partner at Grant Thornton Bharat, recently said that the main challenge for a credit card on UPI is merchants being charged for transactions above a certain limit.
“Because credit cards are used for high-value transactions, MDR limits merchant adoption and therefore customer adoption,” he said. Talukdar adds that there continues to be a challenge in accepting credit cards by merchants on UPI, especially for smaller QR merchants, who have never paid any MDR. “Not all merchants are willing to accept RuPay card payments thanks to MDR for transactions exceeding Rs 2,000,” he says. Dama de Emkay says that recently some merchants “were pressured” to accept RuPay cards as well if they accepted other cards. It is not yet known how well this works.