How India’s war on cash stands to hurt Visa and Mastercard
The U.S. card brands are already pushing Indian regulators to relax their data storage rules, and a new quirk in the country’s tax code creates a battle on an entirely different front.
Finance Minister Nirmala Sitharaman’s recent budget speech takes aim at cash but also nudges the country’s large merchants toward domestic payment options. Section 269SU, a new piece of India’s Income Tax Act of 1961, requires large businesses, or generally those with more than $8 million in yearly revenue, to provide an electronic payment channel with no fees. It goes into effect on Nov. 1.
While the move is designed to encourage Indians to reduce their use of cash, the policy leans toward government-affiliated rails at the potential expense of outside brands such as Visa and Mastercard.
Visa and Mastercard did not return requests for comment. The U.S. card networks have a lot at stake since both are making major investments in building a market in India.
Mastercard has invested $1 billion in India over the past few years, and recently pledged to invest another $1 billion over the next five years, including $300 million for local processing such as settlement and fraud prevention.
The card brand's investment comes as India has made several dramatic moves to wean the country off of cash. The government removed about 85% of its cash from circulation in 2016. Since then India has adopted EMV and tokenization, among other things, to build momentum for digital payments.
The new budget provides no-fee digital payment options that include India’s United Payments Interface, Aadhaar Pay, “certain debit cards,” UPI-QR code, NEFT and RTGS.
UPI is a government-backed real-time transfer interface that is designed to move merchants and consumers away from cash to more digital transaction modes. Aadhaar Pay is part of India’s national digital ID initiative and is designed to encourage financial inclusion in rural areas. NEFT is an electronic funds transfer system managed by the Reserve Bank of India; while RTGS is the RBI’s real-time gross settlement system.
Merchants in India pay a 2% merchant discount rate for card transactions, and could save by using the government-backed digital payment rails, since Sitharaman’s speech said India’s RBI and banks will absorb the fees.
She contends these fees will be offset by the reduced cost of handling a lower volume of cash and paper-based payments. As a further enticement, India’s government is also proposing a 2% tax “at source” for cash withdrawals of more than about $145,000 in a single year to discourage cash usage.
These incentives potentially come at the expense of external parties such as U.S. card brands if Indian merchants view the government-backed payment rails as more convenient and less expensive than U.S. options.
Visa and Mastercard are at odds with the Indian government over data storage, so another regulatory battle is likely unwelcome. The U.S. card brands recently began complying with India’s local payment data storage requirements while continuing to lobby the Indian government to ease the rules.
Mastercard CEO Ajay Banga contends the local data storage rules will increase security risk since data won’t be shareable across borders. The card brands have also proposed data mirroring, or storing data internally and externally, though the Indian government has rejected that.
India’s new budget does not address Visa and Mastercard directly, though Sitharaman’s reference to “certain debit cards” is an indirect reference to RuPay, India's domestic debit card payment scheme and likely beneficiary of the budget incentives.
The bank-operated National Payments Corporation of India runs UPI, which reports a 600% growth in UPI in past year; and RuPay, which is expanding into credit cards in direct competition with Visa and Mastercard.
Visa has cut its debit processing fees to respond to RuPay; and Visa pledged support for a government-based contactless transit card.
Mastercard has entered a series of partnerships to build its digital payments operations in India, such as a collaboration with low-cost payment acceptance company Payswiff, which connects to digital wallets and UPI; and Signzy, a fintech that offers merchant onboarding. Mastercard also maintains a network of local innovation centers that could provide a venue for compliance with any new Indian regulation.
Other countries have also challenged the U.S. payment networks, including China—which has changed policies several times over the past few years as Visa and Mastercard have tried to establish a domestic payment market; and Russia, which has tried to build its own network.
“The challenge is acceptance,” said Tim Sloane, vice president of payments innovation at Mercator. “When e-commerce is driven by international orders, the local network will simply not suffice — and international orders are growing fast. Competing on price will win business only if fraud rates and disputes are properly managed, and that’s an area where the U.S. payment networks may also have an advantage because they’ve been doing it longer.”