The launch of RuPay in India and plans for a Russian payment network indicate a resurgence in domestic schemes, but at what cost to the international players?
While Europe’s banks and regulators are still mulling over the possibility of a third debit scheme in Europe to rival Visa and MasterCard, India and Russia are getting down to business, albeit for differing reasons, while China’s China UnionPay brand is already well on the way to challenging the incumbents.
In May 2014, India’s RuPay national debit card payment network was officially launched with the expressed aim of challenging global players like Visa and MasterCard. Developed by the National Payments Corporation of India (NPCI), a not-for-profit company envisioned by the Reserve Bank of India (RBI) and created by the banking industry, RuPay EMV-enabled cards are accepted at all ATMs, more than 90% of POS terminals and more than 10,000 e-commerce merchants across the country. RuPay has been established to fulfil the RBI’s desire to have a domestic, open-loop and multilateral system of payments in India – and to promote financial inclusion amongst India’s unbanked population.
RuPay promoting financial inclusion
To date, all public sector banks and 200 cooperative banks and regional rural banks (RRBs) in the country have issued RuPay ATM cards (which were first issued in March 2012). The total number of cards issued is 17 million and is growing at a rate of about three million per month, according to the NPCI. There are around 145,270 ATMs and more than 875,000 POS terminals in India under the RuPay platform. RuPay cards are also accepted online on 10,000 e-commerce websites.
The RuPay scheme also allows issuers to issue special purpose cards like Kisan cards, milk procurement cards, grain procurement cards and financial inclusion cards. A variant of the Kisan card is now being issued by all public sector banks in addition to the mainstream RuPay debit card. In order to promote global acceptance, NPCI has also forged an alliance with Discover Financial of the US.
But there is one significant gap in the RuPay scheme – as of June 2014 no private commercial banks in the country had issued RuPay cards. According to AP Hota, managing director and CEO of NPCI, this is because commercial banks have yet to make necessary changes in their processing systems to handle RuPay and are more focused on issuing internationally-branded cards due to long-term contracts with Visa and MasterCard. In other words, servicing RuPay cards is not as profitable for commercial banks as servicing globally-accepted and recognised cards, which tend to be held by more affluent customers. Quite a stumbling block for a domestic card scheme.
However, Hota noted that some banks acknowledge that issuing RuPay would also save them money as the cost of issuing RuPay cards is a third compared to internationally-branded cards.
Rumbles in Russia
Meanwhile, over in Russia, the spat between the Russian government and Visa and MasterCard has eased somewhat, much to the relief of the payment networks.
In March 2014, some Russian banks faced disruptions to bank card payments with Visa and MasterCard after the US enforced sanctions in response to Russia’s annexation of Crimea. In an effort to avoid further disruption to card payment operations, Russia’s parliament passed a law that would force the Visa and MasterCard to keep hundreds of millions of dollars at the Russian central bank as collateral against any future freeze. The law envisages that Moscow could confiscate 25% of the companies’ average daily turnover in Russia in the past quarter if their services are suspended again. The law also stipulates that all the card operations in Russia should be cleared within its borders through a national payment system.
In July 2014 it was announced that Visa and MasterCard had reached a compromise agreement with Russian officials, allowing them to continue operating in the country. Russia’s finance minister, Anton Siluanov, said both Visa and MasterCard are ready to create their own Russia-based payment operators, which will take around a year and half. Until then, the two companies have agreed to cooperate with Russia’s existing payment systems, Siluanov said.
A Russian finance ministry official stated that Russia hopes to reach an agreement with Visa and MasterCard that will result in the creation of a payment system akin to existing systems in France and Turkey. In these two countries global card providers work together with their local peers, processing transactions together. When asked if Moscow would agree to a Belarus model, the official said this option is less desirable but is acceptable. Belarus issues international banking cards and processes all the domestic transactions on its own but allows the global majors to take over processing when the card is used outside the country.
Russian banks have tried several times to create a local payment system, but none of them was widely successful as customers preferred globally recognised Visa and MasterCard. However, now the national payment system has the support of the Kremlin and may be created soon.
Cost benefits of domestic schemes
Developments in India and Russia may be spurred by different reasons, but there is no doubt that cost is a key factor in the establishment of domestic schemes. According to a 2013 report from research firm Timetric, rising competition from domestic payment card networks is set to significantly alter the current operational model of international card networks.
The ability to provide transaction facilities for up to 40% cheaper than international networks is expected to be the key growth driver for domestic networks, especially in emerging markets. The growth of domestic networks, especially in countries like China and India, has led international networks to reexamine their business models.
The international giants such as Visa and MasterCard may already own the majority of the market, but they should not be complacent; they have lagged behind in exploiting business opportunities in micro-payments, social benefit programmes, and the rural populations of small financial institutions. These relatively unexplored markets are becoming the primary focus of domestic card networks to expand their businesses and increase revenues, as is the case with RuPay.
Over the next five years, Timetric predicts that domestic networks will concentrate on small enterprises that do not currently accept card payments. This move will be aided by the availability of technologies such as mPOS solutions, which will make acceptance of card payments feasible for smaller, more remote merchants.
The success of China’s UnionPay and India’s RuPay are expected to fuel the trend. The emergence of government-backed networks is expected to play a crucial role in the redistribution of market share; they are predicted to lower the cost of transactions and help card services reach a larger market through increased competition.
According to the report, international networks are expected to look for options to reduce their cost structure to compete with the domestic cards, but the domestic cards are already spreading internationally. Domestic Chinese provider UnionPay has taken the initiative to make agreements with businesses in areas Chinese tourists visit for their convenience and to reach more merchants.
In June 2014, another report from Anthemis Group reinforced the cost savings of domestic schemes. According to the report “National Payments Schemes: Drivers of Economic and Social Benefits?”, domestic card schemes run at approximately 45% of the costs of the international card schemes on average, giving them the ability to lower costs for participating banks. Banks in turn can better respond to pressures for low-cost payments. Domestic schemes operate at lower costs not only due to their streamlined business models but also because the international schemes spend considerable sums on marketing and work with high profit margins as demanded by the stock market.
Remain neutral
The research argues that although most regulators have a remit to remain neutral between market players, they need to step up efforts to ensure fair competition. Recommendations include banning exclusivity deals between banks and a single scheme provider as well as banning up-front incentive payments by card schemes which distort the decision-making process of banks. The research also suggests that closer links should be forged between competition and payments regulation.
John Chaplin, co-author of the research, comments: “Payments are about much more than the movement of money. An efficient payments industry can put more money in people’s back pockets, alleviate poverty and drive numerous economic and social benefits. In 2014 the role of national payment schemes is more important than ever. Regulatory changes pose a particular challenge for domestic schemes in Europe which may cause them to redefine their role and business models. Payments are now a geopolitical issue, as evidenced by MasterCard and Visa closing down the programmes of some Russian banks in the wake of the Ukraine crisis.
“Our research demonstrates that national payments schemes have the potential to thrive and benefit their local markets in spite of increasing pressure from the international schemes. However, they must up their game by acting more commercially and potentially by changing their ownership models. Sharing technology with one another is one way of reducing costs, a benefit which can be passed on to end users. Schemes must also make sure to innovate and invest in new functionality. Multibanco in Portugal and Quickteller in Nigeria are two examples of domestic schemes offering additional services above and beyond basic payments.”
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