Mastercard, Visa face tough regulations but a big market in India
India’s soaring digital payments market has prompted Mastercard and Visa to increase their investments in India, targeting one of the world’s largest cash displacement opportunities while complying with local regulations such as expensive data store requirements.
The network operators are investing in technologies and partnerships that will enable them to compete with domestic payment schemes, while complying with local regulations such as local data storage.
Mastercard plans to become the first international payments company to operate a domestic transaction processing center in India. The move is part of a $1 billion investment Mastercard will make in its Indian operation over the next five years, following a previous $1 billion investment by Mastercard in India in 2014-2019.
Costing about $350 million, the local processing center is expected to open in the next 18 months and will be Mastercard’s first outside the U.S. It will provide ATM, point-of-sale, prepaid and e-commerce transaction processing plus fraud mitigation in India and could serve other Southeast Asian markets.
Mastercard also plans to build an Indian services hub to develop authentication, tokenization, cybersecurity, intelligence and data analytics for the Indian market.
“The government is committed to Digital India and we’re partnering with them by increasing the acceptance of digital payments and by engaging in consumer and merchant education,” said Porush Singh, Mastercard’s division president for South Asia.
The number of merchants in India that accept Mastercard has risen from 1.2 million in 2016 to 5.2 million merchants, and the company intends to digitally enable 10 million merchants by 2020. Mastercard plans to extend acceptance beyond India's top eight cities into tier 2 and 3 Indian cities, and the card brand also wants to expand India's small-business sector, Singh said.
Mastercard is working with several local fintechs to achieve these goals. One partner, omnichannel processor Payswiff, offers over 60 low-cost payment acceptance options, including credit and debit cards, e-wallets and UPI transfers. Mastercard is also partnering with Mosambee, which offers an Android-based low-cost payments acceptance device called SamosaPoS. A third partner, Signzy, aims to reduce the time and cost of onboarding merchants by up to 90%.
Visa is also active. In April, Visa published its specifications to support India’s National Common Mobility Card (NCMC), a government-backed interoperable contactless transport card that can be used for payments across all transit segments including buses, suburban railways, tolls and parking. The NCMC was launched in March 2019 by Prime Minister Narendra Modi with RuPay as its first partner.
Visa has invested to build India’s digital acceptance infrastructure and to comply with the Reserve Bank of India’s (RBI) recent data localization guidelines, said a spokesperson in Visa's public relations office, adding Visa has also introduced contactless cards, tokenization, and installment payments on debit cards in India. Visa is actively engaged with multiple fintechs to help build India-specific solutions that accelerate the adoption of digital payments.
Both Visa and Mastercard face regulatory and Indian government policy hurdles. In 2018 the RBI mandated that subsidiaries of foreign payments companies should store their payments data in India. Separately, the Indian government mandated that foreign tech firms locally process all personal data determined to be critical. The local storage mandate is a component of the trade row between the U.S. and India.
India's United Payments Interface provides competition for external firms such as Visa and Mastercard. India's bank-owned-National Payments Corporation of India (NPCI) launched the Unified Payments Interface (UPI) in August 2016 with support from the RBI. The UPI is a combined real-time interbank payments system, federated ID scheme and social transfer app similar to Venmo. Bank account-to-bank account transfers over the UPI rose to 733 million transactions in May 2019 from 189 million a year earlier, the NPCI said.
The NPCI also runs the low-cost RuPay debit card scheme, which has recently entered the credit card market. The UPI has led to growth in merchant payments from consumers’ bank accounts via mobile wallets such as Paytm, Google Pay India, and PhonePe that are linked to the interbank system. According to Paytm, the majority of Paytm QR offline payments are drawn from bank accounts rather than from cards.
By enabling mobile payments firms to use standardized digital rails for frictionless connections between merchants and consumers, the UPI threatens Visa and Mastercard’s card networks.
Visa and Mastercard have responded to these challenges by cutting their processing fees and by developing value-added services, technologies and partnerships to attract issuers and consumers.
To compete with the low debit fees charged by RuPay and to increase debit usage for low-value payments, Visa cut its debit processing fees by 95% in July 2018.
There is a large addressable market for both domestic and international companies in India. India is only now starting to transition from a cash-driven to a digital economy, driven by its 440 millennials, according to KeyBanc analyst Edward Yuma. Although Indians performed 20 billion digital payments in the year to March 31, 2018, more than 90% of Indian payments are still cash-based. Also, while India boasts nearly a billion debit cards, its point of sale terminal infrastructure is limited in terms of nationwide penetration.
To encourage digital payments, the Indian government introduced demonetization in November 2016, invalidating large denomination notes and eliminating 90% of the currency in circulation. As a result, the number of Indian POS terminals increased from 1.6 million in 2016 to over 5 million in 2019, while QR code-based mobile payments services such as PhonePe and Paytm saw major growth. Paytm, which counts Alibaba and Softbank as investors, has 371 million users, and PhonePe, whose parent FlipKart was bought by Walmart in 2018, has 150 million.
Mastercard faces competition from Paytm as it builds scale in smaller Indian cities. In June, Paytm said it will invest INR2.5 billion to expand Paytm QR in tier 4 and 5 cities to reach over 20 million merchants by March 2020.