Mobile Gives India's RuPay a Bump, But Long-Term Challenges Remain

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India has one of the highest rates of unbanked citizens in the world—between 40% and 50% still have no access to a traditional bank account. But a new national push for financial inclusion is getting results, triggering a recent surge of growth for RuPay, India's evolving domestic payments scheme.

About 220 million citizens in India have recently signed up for a basic bank account attached to RuPay, available from public banks without the requirements of a formal bank account. Banks are hoping the appeal of mobile payments technology for a young, tech-savvy unbanked population will spur further growth. But it's still too early to tell whether this is a short-term boost or a long-term trend.

RuPay cards now account for about a third of all debit cards in circulation in the country. And after some delays, the first RuPay credit cards are expected to roll out before the end of this year, providing a lower-cost alternative to Mastercard and Visa.

The numbers suggest major leaps forward in the long and complex process to expand financial account access to hundreds of millions of citizens spread across sprawling rural areas and villages. The effort began when the Reserve Bank of India (RBI) in 2009 sanctioned a payments board, which established the National Payments Corporation of India (NPCI), an industry organization tasked with driving RuPay's development.

Progress was incremental for the first several years, but momentum is suddenly picking up, with dozens of Indian banks recently launching RuPay cards, many supported by mobile wallets.

But there is still plenty of uncertainty surrounding RuPay's long-term success, observers say. Banks are complaining of high costs to support account access, and there is no certainty that despite successful account sign-ups, RuPay will see strong, ongoing usage.

More than 25% of RuPay debit cards still have a zero balance, but usage is up substantially over 70% that showed a zero balance a year ago, according to a recent World Bank report.

So far RuPay card usage is highest at ATMs, underscoring Indian citizens' continued heavy reliance on cash, said Tim Mason, a U.K.-based consultant with Edgar, Dunn & Co. 

Merchant acceptance is another hurdle to driving RuPay adoption. About 90% of India's estimated 12 million merchants are currently unable to accept electronic payments, Mason noted, adding: "It will take time to shift cultural preferences away from cash, and incentives or rewards programs are likely to be developed to drive usage, especially when credit cards are launched."

Banks face an interesting conundrum in supporting RuPay, said Gareth Lodge, a senior analyst with Celent.

"RuPay was designed to be affordable for all, and that creates challenges for banks because the [lower] fees they earn for RuPay accounts have to fund everything from expanding the network to marketing, brand development and driving acceptance," Lodge said. On the other hand, RuPay could be the key to huge growth for some players, he added.

"RuPay presents a scale game for banks, and with such a large population, the volumes could be massive," Lodge said. "This is a huge, virtually greenfield opportunity for banks and payments industry providers, and it's interesting because the regulator (RBI) is working with banks. While RBI may impose very short deadlines and expect compliance, RBI is equally gaining a reputation for meaningful dialogue and balancing goals with practicalities."

RuPay also is positioned to benefit from the Indian government's plan to eventually deliver most public aid and retirement benefits to citizens via RuPay accounts. This project is projected to slash the cost and corruption surrounding cash payments, according to the NPCI.

Mobile financial services technology also could be the ignition to drive electronic payments adoption, experts say, citing the examples of emerging nations like Kenya and Tanzania, where unbanked consumers leaped directly from cash usage to transacting via smartphones with M-Pesa.

Behind Africa, India provides huge growth field potential, with the largest number of unbanked consumers in Asia. India accounts for about 21% of the world's unbanked adults, compared with China, which accounts for 12% and Indonesia, with 6%, the World Bank says.

ItzCash, a Mumbai-based prepaid card company serving millions of unbanked Indian consumers, this month launched a cobranded RuPay prepaid card in partnership with RBL Bank supported by a mobile wallet. The product enables online and general spending, plus cash withdrawal through millions of ATMs enabled to accept RuPay.

Oberthur Technologies recently announced a partnership with Axis Bank, India's third-largest private bank, to offer the first open-loop EMV contactless payment cards based in RuPay for public transportation in Bengaluru, India's third most-populous city.

Axis will offer its customers contactless cards with multiple purses to add funds for transit, retail, parking and highway tolls that will be interoperable across other transit systems, France-based Oberthur said in a July 25 press release.

"This model offers unparalleled convenience of one card for multiple payment needs," said Sangram Singh, head of cards and merchant acquiring at Axis Bank, in the release.

Five or six banks plan to issue RuPay credit cards, and several will leverage international acceptance agreements RuPay set up in the past several years with Discover Financial Services, China UnionPay and JCB International, according to NPCI.

Plans originally called for RuPay credit cards to launch early this year, but NPCI rolled the launch back to develop systems to handle greater card volume, based on the growth rate over the last year of RuPay debit cards, industry analysts said.

RuPay's timeline coincides with strong demand for financial services to a fast-growing, young population that's likely to be tech-savvy and welcoming to electronic payments, said Charmaine Oak, practice lead for digital money at Shift Thought, a U.K.-based payments consulting firm.

"We've seen a lot of payments innovation coming from India, including in mobile prepaid cards, and if India gets things right with RuPay, it could help to redefine the economics and business models of payments," Oak said.

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