Daybreak - RBI's policy shift will crush Visa-Mastercard's rule. But will Rupay take advantage?

Episode Date: April 19, 2024

Last month, the Reserve Bank of India directed credit card issuers or banks to not sign exclusive contracts with card networks, like Visa and Mastercard, that restrict them from using other networks. The RBI did this because it said consumers deserve to have the freedom of choice. This new rule will be effective from early September and it will change the credit card game as we know it.For starters, the American card network giants Visa and Mastercard who together have been dominating 90% of the market for forty years now will no longer be sitting easy. The directive is also bad news for co-branded credit cards, one of the most popular products in the financial-services market.But for home-grown Rupay, this is great news. It's almost like the government has created a fast lane for it. But will Rupay take it and win?Tune in.Daybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the Sita Ramancahans, my colleague. secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they managed to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into.

to the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production. Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get an alert, as soon as we release our first episode, please follow Intermission on Spotify and Apple Podcast. or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode.

You know your credit card wouldn't work without a card network, right? Like Visa, Mastercard or Ruppay? A card network is basically like a sort of a middleman that connects your bank, merchants and you to make your purchases possible in a safe, smooth and efficient way. There's the ones that work behind the scenes. Now, here's a question for you. When you got your credit card from your bank, did you ever go like,

actually, I want a visa and not a master card? Or a diners club card? I doubt it. Actually, the Ken went around asking people, and we spoke to 15 credit card holders of all age groups from different parts of the country, and as expected, most of them didn't care about what their card network was. And let's say, even if you don't,

did want to take your pick, it wasn't really an option for you. It was all up to your bank. Up until last month, when the Reserve Bank of India or RBI directed card issuers or banks to not sign exclusive contracts with card networks that restrict them from using other networks. The RBI did this because it said that consumers deserve to have the freedom of choice. Now, this new rule will be effective from early September. and it will change the credit card game as we know it. For starters, the American Card Network giants like Visa and MasterCard, who together have been dominating 90% of the Indian market for 40 years now,

will no longer be sitting easy and enjoying their doably. They'll have to start learning how to sell their product like any other FMCG company. And let's not forget co-branded credit cards, one of the most popular products in the financial services market right now. The RBI directive is bad news for them as well. But there is someone for whom this is great news. It's almost like the government has created a fast lane for it. It is an Indian product, of course. I'm talking about rupe, the National Payment Corporation of India's 10-year-old baby. Welcome to Debray, a business podcast from the Ken. I'm your host, Nick Das Sharma, and I'm a host, Nekda Sharma, and I'm a

I don't chase the new cycle. Instead, twice a week on Mondays, Wednesdays and Fridays, I will come to you with one business story and worth your time. And by the way, from this week onwards,

daybreak will also be dropping on Tuesdays featuring my new co-host, Rahal Philopos. Today is Friday, the 19th of April. Let's quickly go over how card networks work. Authorized card networks like Ruppé, American Express,

and Dinos Club, connect the card issue to the merchants and the users in making secure transactions. And to do this, for every transaction, they charge anything between 2 to 3.5% as interchange fee. Now, normally the card issuers, which are usually banks, choose the network based on the reward and cashback system of the credit card. These two have been partners for a long time.

I mean the banks and the card networks. And how they build this partnership is quite simple. The network with the most discount gets the exclusive deal. But this discount does not directly affect the interchange fee for banks. The thing is, banks generally have a very tight marketing budget for their products, which in this case are the credit cards. So what happens is whenever a bank launches a new card, the networks bid for it and offer incentive arrangements.

A former visa executive explained it to my colleague, the Ken reporter Rona Kumar-Gunzel. They said that the network companies evaluate what they're likely to earn over the next five to seven years. And then they pay a part of that to the bank for product promotion. The network with higher investments

takes the exclusive deal. Let us take the co-branded ICICI Amazon card, for example. ICICI made an exclusive deal with Visa. Another such example is the Flipcott Access Bank Credit Card. It was launched exclusively on the Mastercard Network, but it had to be moved to Visa after the RBI's ban on MasterCard. A former MasterCard executive also explained the other way that this whole thing works.

It is when networks directly partner with brands and then look for a lender or a bank that gives them an exclusive deal. For example, the partnership between the now defunct jet airways and Visa. They allied first and then they went to a bank. ICICI-CI-I-Bank. This was in 2016. Now, let us move on to how the RBI directive is going to disrupt this existing system. Stay tuned. I'm sure many of you already know this, but the first six digits of every card are collectively called the bank identification number or bin, BIN. For instance, the bin of any card globally, starting with a four means it's a visa card. If it starts with a three, It is an American Express card.

And the remaining digits help the network company to identify the issuer bank while making sure that a transaction goes through. So earlier, let's say if ICA Bank wanted to launch a card with Visa, its tech team would ask the network company to issue a bin for the card. But with this new rule of the RBI, you can tell the bank that you want a mastercard or a rupee instead. Now, the bank will have to take bins from all the card networks and add them on their system, which means the bank's tech team will have to upload transaction files to all card networks and do all the reconciliations with them. But the thing is, banks usually have very

small tech teams. But again, I think this is probably something that the bank should be looking at any way in this age of digital payments. But again, I think this is something that banks should be probably looking at any way in this age of digital payments. Nevertheless, now, if you bring co-branded credit cards into this mix, like the ICICI-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-A-com-com-com-branded card in the first two years of its launch were new to the bank, which means the Amazon partnership was what brought them to ICSIA. But like I told you earlier, there is one card network for whom this is great news. Because the Visa MasterCard duopoly may soon become a thing of the past.

Unless, of course, that they go back to the drawing board and learn the art of selling their services like any other product in the market. Stay tuned for more. You see, even after more. than a decade of its launch, Rupé, the NPCI's brainchild, is still not being able to make a mark in the credit card market. And there are three reasons for this. Number one, it is not widely accepted outside the country, which is an important factor for well-off customers. And number two, because of its association with the government's Jandhan Yojina for financial

inclusion, it is not very appealing to the premium customers. And the third reason is, and the third reason, The reason is the existing agreements between banks and card networks. Rupee, though, on its part, is trying to work on all of this. It is starting to collaborate with private banks. And the RBI's move to allow credit on UPI, which is exclusively available on rupee, may actually be a game changer. But again, in order to make the most of this advantage, it first needs to fix its high transaction failure rate,

which may discourage users from adopting it. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters and podcast extras. To subscribe, head to the Ken.com and click on the red subscribe button on top of the Ken website.

Today's episode was hosted by Snigda Sharma and edited by Rajiv CNN.