PAYMENT NETWORK WARS

INTRODUCTION

A payment system helps in the settlement of financial transactions through the transfer of a value in monetary terms. The word electronic payment which is very prevalent now involves a direct payment made from one bank account to another through electronic means and gadgets with no direct intervention from banks and thus saving the cost of making a visit to the bank which earlier was considered as the opportunity cost of making a transfer. There had been many reports around the corner about Visa filing a complaint with the U.S. government, alleging India using unfair means to promote its homegrown payment network RuPay.

DUOPOLY OF MASTERCARD AND VISA

The Duopoly of both the US Based Companies may be better understood by the subsequent features-

•Formed by Unions – it’s important to appreciate that companies like MasterCard were formed by a union of Yankee banks. Visa was owned by Bank of America before being spun off into a unique entity. All the banks mentioned above constituted the whole American banking market. Hence every card issued within the American market was issued by either of the 2 entities. Since debit cards and credit cards were first issued in America, by default Visa and MasterCard had a vantage over other companies

•Contract Restrictions- The banks and merchants were forced to accommodate these companies since there have been no viable options. to forestall the network of competitors from spreading any longer, Visa and MasterCard were preventing banks from issuing the cards associated with other networks. They were also preventing merchants from accepting these cards.

•Network Analysis- it must be understood that the payments processing market could be a chicken and egg story. this implies that if more merchants accept a specific sort of card, more users want to use it. On the opposite hand, if more users use a specific form of a card, merchants are going to be forced to just accept it. However, what has to happen first isn’t clearly known.

DUOPOLY V/S RUPAY

To begin, let’s start by understanding the mechanism behind these transactions. Suppose you visit a supermarket store to shop for a packet of chips. Unfortunately, you forgot to bring some cash with you. So you choose to whip out your debit/credit card to acquire it. As you swipe the cardboard on a PoS machine, suddenly a magical dance begins. Your bank immediately moves money to the shop owner’s bank. the shop owner’s bank charges a tiny low fee and calls it the merchant discount rate. But it can’t keep the complete fee with itself. it’s to share an element of this with another intermediary, that helps to process this payment. That intermediary happens to be Visa or Mastercard. And since the shop owner has earned a margin from a procurement, they now must pay the bank the merchant discount rate usually accounting for up to about 1–3% of the transaction. And this is often how payment network flourishes in an unknown world. The dominance of Visa and Mastercard has been referred to as a duopoly within the payments network market. newer this duopoly has been facing a true threat as countries have started developing their own payment network alternatives. India as an example, in 2016, built the Unified Payments Interface (UPI) to facilitate instant payments. Anyone could scan a fast Response (QR) code and transfer money from one financial organization to a different instantly. And most significantly it came up with no cost. Merchants loved it because they didn’t should pay the additional charge. And in a very high potential market like India, Visa and Mastercard started losing lots of cash. The approximation pegs around Rs. 6000 crores. And this came as displeasure to the prevailing duos. They made numerous appeals to the govt. asking them to shield their interests.

IMPACT OF RUPAY EXPLAINED

The numbers never lie. And to prove this, here are a few financial facts, which prove that the monopoly of Visa and Mastercard is at severe threat from RuPay.

*Total Volume of Cashless Transactions and RuPay cards issued by banks

Along with UPI, a digital payment platform from NPCI, RuPay has witnessed an enormous rise in usage and has been welcomed throughout the nation. Till August, a total of $51 billion has been transacted using the cashless mode, out of which RuPay processed Rs 8,430 crore ($1.16 billion) of transactions, and UPI processed Rs 59,800 crore ($8.26 billion) of transactions. Post demonetization, the share of RuPay was mere Rs 1100 crore, and in UPI was just Rs 50 crore. But this year, RuPay processed cashless payments of Rs 16,600 crore, which is a 180% increase since 2017, while Rs 5,934 crore worth of transactions was processed by RuPay. The sudden shift within the trend, with increased usage of RuPay and UPI by Indians, shows that Visa and Mastercard are losing their comparative advantage in India, and their market share is eroding rapidly.

*Usage Of RuPay Cards at PoS

Before RuPay, only Visa, Mastercard or AMEX were accepted at Point of Sales extreme by merchants. But now, RuPay has changed the complete equation. In 2020-21, RuPay stamped debit cards were used across 459 million transactions at PoS extremes, pan-India. this certainly is 135% more compared to 2016-17, when RuPay cards processed only 195 million transactions. This 135% increase clearly indicates a loss for Visa, Mastercard, and AMEX.

*Usage Of RuPay at Ecommerce Portals

Online shopping too like offline shopping has embraced the usage of RuPay cards with full season 2020, e-commerce portal witnessed 208 million transactions, using RuPay powered cards. this is often a rise of 137% compared to 2017 when the amount was only 87.5 million Thus, RuPay has conquered both the online and offline markets in promoting Digital India. No wonder that as a last resort, they had to ‘complain’ to US Govt. According to NPCI, RuPay is on the verge of overtaking Visa or Mastercard to become 2nd player during this niche, and very soon, it’ll be a No.1 player.

IMPACT ON INDIAN ECONOMY

The Payment network has a very huge impact on the Indian economy following the motive of a cashless economy initiated by the central government. Both the companies, Mastercard and Visa, have a high number of users as well as merchants in India. Being well established U.S based companies, they charge high processing fees to all their foreign users and merchants. Contributing a large portion of tax revenue to the government by charging 5% GST per month. With respect to card issuance, during the past 5 years, the number of credit cards issued increased from 211 lakh to over 550 lakh. The same period also witnessed a steep increase in debit cards from 5535 lakh to over 8000 lakhs. This was supported by the 2960 lakh Rupay debit cards issued to BSBD account holders. This increase in the issuance of cards made by local companies like Rupay is boosting online and physical POS. Thus, fulfilling the government objective of Digital India.

Credits:

Content: Tanmeet, Sahil, Naman

Infographic: Aanchal, Charvi