Starting October 1, 2023, you may be able to port your credit Card just like your mobile number. No, you won’t be able to port your ICICI Bank Credit Card to HDFC Bank or vice versa. But you can choose the card network for your credit card.
What Are Card Networks?
If you look at your credit card closely, you will find names such as Visa, Mastercard, Rupay, American Express, and Diner’s club mentioned. These are the card networks. The card networks ensure that your payments are processed quickly and reliably.
Currently, the network for your debit/credit card is decided by your bank. Not you. The Reserve Bank wants to change that and offer this choice to the customers.
What does the RBI circular say? What are RBI’s intentions? How does this affect customers like you and me? In this post, let’s find out.
Note: Nothing is final yet. The Reserve Bank has invited comments on the draft circular.
How Does This Payment Engine Work?
There are 4 broad participants here.
- The issuing bank (Your bank)
- Card network
- Merchant/retailer (The merchant bears the cost of transaction in the form of MDR)
- Merchant’s bank
When you use your credit card, the merchant does not get the full amount. A commission of 1-3% is deducted from the payment depending on the type of card (credit/debit) and the arrangement between the bank and the merchant or the card network. This commission is also called Merchant discount rate (MDR). The issuing bank keeps the lion’s share of the MDR, and the rest is split between the card network and the merchant’s bank.
The customer gets interest-free credit in case of credit cards (or convenience in case of debit cards). The issuing bank makes money. The card network makes money. The merchant’s bank makes money. And the merchant gets the sale.
Hence, everyone is happy. And this is what makes for a good ecosystem.
What Does the RBI Draft Circular Say?
Since the circular is short, I am reproducing the entire circular below.
- The authorized card networks tie-up with banks / non-banks for issuance of debit / credit / prepaid cards. The choice of affiliated network for a card issued to a customer is decided by the card issuer and is linked to the arrangements that the card issuers have with card networks in terms of their bilateral agreements.
- On a review, it is observed that arrangements existing between card networks and card issuers (banks and non-banks) are not conducive to the availability of choice for customers.
- In exercise of the powers conferred under Section 18 read with Section 10(2) of the Payment and Settlement Systems Act, 2007 (Act 51 of 2007), the RBI being satisfied that it is necessary and expedient, in the interest of payment system and public interest, to do so, hereby, directs as under:
- Card issuers shall not enter into any arrangement or agreement with card networks that restrain them from availing the services of other card networks.
- Card issuers shall issue cards across more than one card network.
- Card issuers shall provide an option to their eligible customers to choose any one among the multiple card networks. This option may be exercised by customers either at the time of issue or at any subsequent time.
- Card issuers and card networks shall ensure to adhere to the above requirements in:
- existing agreements at the time of amendment or renewal thereof, and
- fresh agreements executed from the date of this circular.
What Does RBI Want?
- Yes, offer more choice to the customers. But do the customers really care about this?
- Reduce costs by increasing competition among card networks.
- Break the duopoly of Visa and Mastercard in the credit cards space and rightly so. These hold 80-90% share in Indian credit card market). Over-reliance on foreign card networks can be a problem. It could be used as a foreign policy weapon, as happened against Russia when Visa and Mastercard suspended operations in Russia after the onset of Russia-Ukraine war. I am not pro-war, but such actions do highlight the risk.
- Promote Rupay credit cards. Rupay is a home-grown system. If you want to break the duopoly of Visa and Mastercard, there must be a player to pick up the space vacated by the two global giants. That player is Rupay network. It is managed by NPCI, that also operates immensely successful UPI. While Rupay has issued over 600 million cards, most of those are debit cards (that too pushed by the Government through public sector banks). The banks have not been too keen to issue Rupay debit cards on their own because of 0% MDR on such cards. It is possible that the reluctance on the debit card front has also translated to Rupay credit cards too. Additionally, with the Government increasingly viewing UPI and Rupay as a public good, there is always a sword (of capping MDR in case of credit cards) dangling over the card issuers’ head.
All valid reasons but does the customer care enough to choose the network?
How Does This Affect the Customers like You and Me?
Not in a big way. Why? Because the credit/debit card customers do not pay for the transactions. You pay the same amount to the merchant irrespective of the underlying card network. The merchant bears the cost of the transaction. So, why do you care?
However, recently, RBI permitted linkage of Rupay credit cards to UPI. While it is planned to extend this feature to other card networks (including Visa and Mastercard), we will have to see how that plays out. There could be commercial or technological challenges.
Now, let us say you have a Visa credit card issued by HDFC Bank, but you want to make payment from the same credit card using UPI. You cannot do that. Why? Because UPI linkage is currently available only for Rupay credit cards.
Hence, if you love UPI and want to use UPI even for credit card payments, you will have to get yourself another credit card. In other words, say a Rupay Credit card from the same HDFC Bank or another bank.
However, once this RBI circular comes into force, you can ask your bank to change the card network on the same card. I do not know how this will be operationalized or what are the operational/technical challenges involved.
The RBI circular mentions that the customers can choose the card network (Visa, Mastercard, Amex, or Rupay) at the time of issue OR at any subsequent time. So, if you have an ICICI Bank Visa Credit Card and want to shift to a Rupay credit (because of UPI linkage), you can request your bank to convert your Visa card to Rupay card.
Where Is the Merchant Here?
While the RBI focuses on the choice available to the customers, there is no mention of the participant that keeps the entire engine of cards running. The merchant who bears the cost of the transaction and the cut/commission (Merchant Discount rate or MDR) that is used to fund the entire value chain.
The reason is obvious. Credit cards are sold to bank customers. Not merchants.
What if the merchants had the power to select the payment network?
If the merchants had the power to decide the card network for any transaction on a real-time basis, they would pick the network where the MDR is the lowest. Only in this case would the market forces come into play and drive down costs. Again, have no idea about operational and technical challenges here. Since the customer does not incur costs, he/she is unlikely to care.
And do not underestimate the power of incentives. There is a reason why UPI payments are accepted everywhere. UPI (and Rupay debit cards) payments have zero MDR. That’s why merchants love UPI. Zero MDR is one reason why UPI payments have grown exponentially over the past few years and UPI QR codes have become ubiquitous in India.
We will have to wait and see how this space plays out.
What do you think of the RBI move? Do let us know in the comments section.
- Draft Circular on Arrangements with Card Networks for Issue of Debit, Credit, and Prepaid cards
- The Ken: Letting customers choose the card network won’t be make transactions more affordable
- Finshots: RBI’s magical mileage for Rupay