How RUPAY WILL DESTROY VISA & MASTERCARD

On the 15th of August 2014, the government of India made a revolutionary announcement about the Pradhan Mantri Jan Dhan Yojana (PMJDY) and this gave rise to an iconic venture by the national payment corporation of India this venture

I'm talking about is none other than India's card network that we all know today as RUPAY and RUPAY has taken such big strides in the Indian payment industry that in 2013 rupay accounted for only 0.6% of all cards but in just four years by 2017 RUPAY had already surpassed VISA as India's largest payment card with 375 million transactions and by 2020 it already commanded a market share of 60% in India's card market and this put VISA under such big threat that it approached the US government to help them stand against RUPAY

So the question is in just six years how did RUPAY kill the billion-dollar Duo Polly of VISA and MASTERCARD in India

What is the government's strategy and intent behind this revolutionary initiative and most importantly as citizens of India what is it that we need to know about RUPAY as to how is it going to affect the lives of the people of India

The first thing you need to understand is how does the payment ecosystem operate in order to carry out our transactions

So let's try to understand this with very simple

Let's say I have an HDFC VISA card with a one lakh rupees of credit limit and alan poly is this clothing merchant with her account in ICICI BANK this makes HDFC the issuing bank and ICICI the acquiring and this is how the transaction between us gets executed in the backend when I enter my HDFC card details to make a 10000 rupees payment my card details get entered into the payment gateway of the website which in this case let's say is here the value out of RAZOR PAY is that it will help the merchant receive payments from different sources like a CREDIT CARD, DEBIT CARD, UPI, etc

Now since I am making a credit card transaction razor pay will collect my card information and the transaction amount and then it will pass it on to the merchant's bank which in this case is from then onwards ICICI will capture the transaction and forward the information to my credit card network which in this transaction to my bank which is HDFC and requests for approval so basically VISA is asking HDFC system whether i have enough funds and what is the status of my account

So let's say my card is blocked then this transaction will be declined
If i do not have enough credit limit then this transaction will be declined

similarly in the case of a DEBIT CARD

If I do not have enough balance then my card will be declined and 

if everything is all right the transaction will be approved
and if i have the required credit limit then the transaction is authorized this approval process is known as authorization

after that HDFC sends the response back to VISA wherein HDFC says everything is perfect and assigns and transmits an authorization code along with its response this way 10000 rupees is put on hold from my HDFC account then VISA sends this approval to the merchant's payment processor which in this case is RAZOR PAY

RAZOR PAY then sends the approval to the acquiring bank that is ICICI

ICICI then routes the approval code to the merchant's terminal and depending on the merchant or the transaction type the merchant's terminal will print a receipt for the customer to so
If it's a website you will see a digital receipt if it's a swipe machine you will get the receipt printed

This is how the transaction is processed

Now we come to the business part of this process to carry out this transaction the ISSUING BANK or the CUSTOMER'S BANK and the CREDIT CARD network charged their fees which together accounts for 3% which is 300 rupees this percentage could range anywhere between 1% to 3%, in this case, considering three percent fees on 10000 rupees
300 RUPEES is reducted and 9700 rupees is transferred to the merchant's account

Now this transaction fee of 300 rupees is known as MDR or MERCHANT DISCOUNT RATE

Apart from that RAZOR PAY will levy a charge of 0.5% percent which will eventually give the merchant 9650 rupees

This is how the payment ecosystem works together to process our day-to-day transaction

It's just that for debit cards there are two simple differences instead of the credit limit

The amount gets deducted directly from the bank account so the repayment process is eliminated and
Secondly, the MDR for credit cards is way more than the debit cards so while debit card MDR is capped at 0.9% percent for credit cards the MDR is typically 1% to 3%

Now this MDR rate majorly includes two variables
the first variable is something called the INTERCHANGE FEE and
the second is something called the SWITCHING FEE

The INTERCHANGE FEE is the fee that the ISSUING BANK charges the ACQUIRING BANK as in the customer's bank charges the merchant's bank which in this case HDFC is charging ICICI bank and then the switching fee is charged by the CARD network to the issuing bank, in this case, it's VISA charging the customers bank and

                               

Up until 2014 VISA and MASTERCARD together were two of the most powerful players who had established almost a duo Polly in the CARD network market of India

But this is where something crazy this is where the GOVERNMENT OF INDIA came up with a disruption using its VERY OWN CARD NETWORK which is known as RUPAY on 15th AUGUST 2014 the PRADHAN MANTRI JANDAN YOJNA was announced

And this INITIATIVE MANDATED BANKS to ENABLE ZERO BALANCE ACCOUNTS with DEPOSIT INSURANCE and OVERDRAFT FACILITY for the unbanked population of INDIA

So from 2014 onwards millions of bank accounts started opening up all across the country by JANUARY 2015 this number grew to 125 million and by JANUARY 2021 this number stood at 416.5 million bank accounts with women in rural areas accounting for more than half of this number and

This is where RUPAY came inaccessible to the lowest economic start of INDIA instead of living a percentage charge like VISA and MASTERCARD for RUPAY charge a fixed MDR of just 90 paise was charged which was 60 PAISE to the ISSUER BANK and 30 PAISE to the ACQUIRING BANK and

According to the CHIEF EXECUTIVE and MANAGING DIRECTOR of NCPI MR AP HOTA, " This was a key differentiating factor that led to the enormous success of RUPAY " and

What followed next was nothing short of revolutionary all Indian companies with an annual turnover exceeding 50 crores were required to offer RUPAY payment options to their customers and ACCORDING TO A DATA by the DEPARTMENT OF FINANCIAL SERVICES under the MINISTRY OF FINANCE 31.74 crore RUPAY debit cards have been ALLOTTED and
In just 6 to 7 years the market share of RUPAY shot up to 34.5 percent out of the 90 crore debit cards issued in INDIA

But you know what then came to another big announcement by the government of India where it was eventually declared that there will be ZERO MERCHANT DISCOUNT RATE for RUPAY DEBIT CARDS and this put VISA in such deep trouble that now it is seeking the help of the US government itself

                              

Now the question over here is how and why did the business war between VISA and RUPAY come in and why did the government of India introduce the concept of ZERO MDR

Well the answer to this lies in the fundamental problems existing in the Indian banking ecosystem and here are the most important ones that prompted the government of India

If you go 11 years back in 2011 back then close to 557 million people which is close to 50 percent of INDIA'S population did not even have a bank account this was majorly because the banks demanded a MINIMUM BALANCE of 3 to 5 thousand rupees from their customers now this may seem relatively fair to us but for people like daily wage labor, the contract labors or our mates this sum of money is their rental cost in the grocery budget for an entire month, therefore, most people in the unorganized sector like chai wala and bheburiwaras they refrain from opening
557 million people were bereft of any financial support and facilities and even if the government wanted to provide support

If fifty percent of your population that to the bottom of the pyramid is excluded from the banking system then it is nothing short of a disaster

This is a reason why the government of India introduced the PRADHAN MANTRI JANDAN YOJNA and made sure that every citizen in India can be banked WITHOUT HAVING A MINIMUM BALANCE BARRIER and

What was mind-blowing to most analysts was that the total estimated balance held in these accounts was 195.93 crore rupees which is equivalent to $18 billion

But this is where the government discovered a critical challenge

You see when we open a new bank account we get a checkbook and a debit card as a part of the account opening process this debit card is crucial because it facilitates withdrawals from ATM and enables us to transaction and because of this there was a dire need to have VISA and MASTERCARD like

But this is where the government discovered three critical challenges

1. Back then MASTERCARD and VISA had their offerings only with 55 banks out of the 500 plus banks that existed in India and they were predominantly catering to the private sector banks so there was a dire need for a CARD network that could serve the rest of the 500 banks in India

2. Offering debit and credit to the unbanked required customizations like giving credit lines to farmers or helping them procure grains and these facilities did not come under the ambit of players like and

3. The processing cost of these international players was very very high so while big merchants like ZARA or MCDONALD'S have the luxury of having a 40% - 50% sometimes even 90% profit margins when it comes to small scale vendors like a grocery store or an electrical store their profit margins are ranging between 10% to 30% percent
and in that case, if you charge an MDR of one to three percent it goes very heavy on their profits

This is the reason why ZERO MDR was introduced through RUPAY

But now the question over here is are the banks incurring losses because now that MDR is zero both interchange fee and switching fee has to be zero right

So the question is how is this even well for starters for the losses incurred due to the charges like the interchange fee wherein the acquiring bank pays the issuing bank

To compensate for these types of fees the government has set aside 1300 crores to make sure that the STAKEHOLDERS in the ecosystem are compensated for their losses this is how the government is on a cash drain to make sure that the bottom of the pyramid of India is included in the banking systems of India

                                   

Now the question is what is the benefit of spending 1300 crores into making a payment service free isn't that a reckless use of the tax base money

So the question is why is the government spending so much money after all for a card network and how can it change the lives of the ordinary people of India

1. This the move has done is lay the foundation for financial inclusion such that it gives the government a pipeline to distribute schemes and services to the people of India

2. India can and is providing facilities to those segments of the population which will otherwise never be catered to by a company like a VISA or MASTERCARD and

RUPAY has already started doing that by the way with its five types of cards 

these card types include

1. A PMJDY DEBIT CARD   

 

which comes with the added personal accident death and total disability coverage up to 2 

lakh rupees

2. THE MUDRA CARD 

which can be used to make multiple withdrawals and avail credits to manage the working capital limit efficiently and productively 

3. THE PUNGRAIN CARD

that can be used to avail automatic grain procurement facilities at the pun grain mandies 

4. THE KISAN CREDIT CARD 

the scheme which was implemented to provide need-based timely credit to support farmers for their cultivation needs as well as for their non-farming activities in a cost-efficient manner 

lastly, we have

5. CLASSIC CARD

This can help India take financial inclusion to the next level and can empower the common people of India if executed with persistence and consistency 

lastly just like visa and MasterCard being foreign entities became dominating forces in the rupay and UPI both are now venturing into the foreign soil with the vision to revolutionize payment industry, not just INDIA but World itself

now what remains to be seen is how do we build up from here because in the case of BSNL and Air India both we saw that it's quite evident being the best and having the garments back alone cannot help you if you succumb to the challenges of capitalism

There are three things that I want you to think and read about to understand the government strategy with both rupay and UPI number

1. check out the website of RUPAY and see how is it operating and leveraged for financial inclusion in India and

2. more importantly study the importance of financial inclusion and its impact on a country's economy

Do study how this move could go wrong

On my site, it could play out in two ways

1. If this initiative is not executed properly then that 1300 crore number which is only going to keep meaningless drain of cash

2. Since there are many stakeholders involved in the payment ecosystem until a certain point subsidizing makes sense but if it starts eating into the profits of the players like the payment gateways and the banks then the incentive that these entities have to spread digital payments will fade away and this will be nothing short of a socialistic nightmare