Mastercard In The Dock. For Everything Else, There's...?
On the evening of July 14, as the Reserve Bank of India stopped Mastercard from issuing new cards in the Indian market for its inability to meet the country's data localisation rules, executives at RBL Bank Ltd. had to sit up and take note. The bank's growing credit card portfolio was entirely dependent on Mastercard. Negotiations with Visa to issue cards on their network had been initiated earlier in the year but the deal was still in the works.
After a round of urgent meetings, the deal with Visa was closed overnight, on terms similar to the ones the bank had with Mastercard, a person with direct knowledge of the matter said. Before the markets opened for trading the next morning, RBL Bank informed shareholders about the arrangement.
Still, RBL Bank acknowledged that the run rate of issuing 1 lakh credit cards every month could be impacted in the short term, as it completes the technology integration with Visa over an 8-10-week period.
RBL Bank's predicament may be faced by other Indian lenders after the RBI put a complete stop on the issue of new Mastercards.
With India's growing card market controlled, for now, by just two entities—Visa and local peer RuPay—terms of engagement may tilt in favour of the card networks, particularly Visa. Additionally, the ability to issue new cards will suffer.
Visa didn't respond to queries mailed on Friday.
How Quickly Can Visa, Rupay Add Cards
As of 2020, Mastercard accounted for nearly a third of the card market in India, as compared with Visa's 45% and RuPay's 20% market share. This includes both debit and credit cards issued by banks and non-banks.
The average monthly addition to credit cards over the last 12 months stood at 4.2 lakh, while 4.65 lakh debit cards were added on average every month of this period.
Assuming that Mastercard's share in new cards being issued was also close to a third, that leaves a pool of 3 lakh debit and credit cards up for grabs each month.
The longest wait will be for the handful of lenders who weren't issuing cards on the Visa network at all.
According to the retail lending head of a large private bank, who spoke on condition of anonymity, these banks have to ensure that their technology is ready for a transfer to the Visa network.
International card networks, such as Visa, do weeks of testing to ensure that a bank's systems are secure and stable, the banker said. This process could take anywhere between three-to-four months to complete.
Those who were issuing cards on both networks will have it slightly easier. These issuers will need to ensure that Visa and RuPay have the bandwidth to take on the gap left by Mastercard.
Here, too, there are constraints on how much and how quickly Visa or RuPay can take on capacity.
With Mastercard out of the market, the two remaining competitors will have to ramp up production of chips and plastic to cover the gap, a card industry expert said. Typically card networks have a clear schedule of deliverables when they tie up with issuers and any change in such a schedule could take up to a month to normalise, this person said.
Lenders who had co-branded cards in partnership with Mastercard have an additional complexity to overcome. Since Mastercard would have a party to some of these agreements, new issues of cards under such schemes will require separate agreements to hammered out with Visa.
According to Nomura, a number of banks have such co-branded cards in partnership with Mastercard. "Among credit card issuers including co-brand partners, RBL Bank, Yes Bank and Bajaj Finserv lending are most impacted, in our view, as their entire card schemes are allied with Mastercard," Nomura analysts wrote in a note dated July 15.
Theoretically, RuPay, too, can jump in to capture the market vacated by Mastercard. However, the card currently has limited acceptance, particularly in the credit card segment.
In a report last week, ICICI Securities noted that only SBI Cards & Payments Services and HDFC Bank have a tie-up with RuPay for issuing credit cards. Moreover, RuPay has a limited international network. In May, RuPay tied up with Network International, a Middle Eastern digital payments provider, to accept RuPay credit cards in the United Arab Emirates.
With a near monopoly on new cards, will Visa be able to extract more favorable terms and conditions from lenders?
Vijay Jasuja, former chief executive officer of SBI Cards And Payment Services Ltd., explained banks tend to choose their card partners based on the incentives paid to them, since both Mastercard and Visa are comparable on the other fronts.
"Typically a card network will set milestones on the amount of spends on the card and link them to incentives. So if a bank's customer base cumulatively spends a certain amount using their cards, the bank stands to get a share of the revenue, about 10-15%, from the card network, " Jasuja explained. "Card networks bid on this incentive before they tie-up with issuers,"
These incentives are over and above the merchant discount rate share which card issuers get on each credit card transactions.
Typically, credit cards charge a 2% MDR on each transaction to the merchants. A large chunk of this MDR is paid to the card issuer with the rest split between the card networks and the merchant's bank which accepts the transaction, Jasuja said.
In a competitive market, banks would have at least two options to choose from and would pick the network offering the best incentives. But in a near monopoly, these incentives are likely to get squeezed as only one card network is dictating terms for the time being, the card industry expert cited earlier said.
Mastercard: Down But Not Out?
To be sure, Mastercard can begin reissuing cards when the RBI lifts its temporary ban and in the interim, it can try and push volume of transaction on existing cards.
According to Jasuja, over the past couple of years, Mastercard has doubled its efforts to gain share of the market. While it has come close to Visa in the low yielding debit card segment, it lags in credit cards.
Mastercard will need to continue to serve the existing customer base which it has built, said Jasuja. This includes providing fresh cards on expiry or destruction of the current cards, as well as managing the rewards programmes on the cards.
"We want to clarify that there is no impact to our current operations in India from the RBI’s July 14 communication," Mastercard said in response to queries from BloombergQuint. "Mastercard is fully committed to our legal and regulatory obligations in the markets we operate in."
The company didn't provide a timeline for meeting the data localisation norms but the process may not be easy.
"The certification process for data localisation sets a very high bar on companies," said Sandeep Srivasa, founder, RedCarpet, a credit card issuer. "It requires that not only should the company seeking certification be compliant with the RBI norms, but also all the vendors it works with."
In the meanwhile, Mastercard can choose to focus on growing its non-card businesses.
"If this bar continues for a long time, Mastercard may be forced to look at other sources of revenue such as processing buy-now-pay-later products for lenders," said Sharat Chandra, blockchain and emerging tech evangelist.
In February, Mastercard collaborated with Razorpay to provide digital payment services to micro, small and medium enterprises. In January 2020, Mastercard invested in Pine Labs to push buy-now-pay-later products at physical and online stores. Globally, the card network also deals in consulting, marketing, technology assistance and risk management products as ancillary services.