Will Mastercard's loss benefit Visa and homegrown RuPay?

bank of india, reserve bank of india, RBL Bank, visa, mastercard, NPCI

The Reserve Bank of India (RBI) ban on payments giant Mastercard to onboard new customers has forced banks to mitigate their risk by tying up with Visa and home-grown Rupay.

RBL Bank

and Yes Bank which both had exclusive tie ups with Mastercard for issuing credit cards are already working on alternatives.

While RBL Bank signed up with Visa as recently as last week, a Yes Bank spokesperson said the bank is evaluating migrating to other platforms. Both banks said they expect no disruption to their existing customers due to the RBI action.

“We have just signed with Visa for issuance of credit cards last week. We plan to issue the pipeline in the next week or so till the RBI ban takes effect. Yes there will be a hit in the 6 to 8 weeks till Visa systems are integrated with ours so we expect a 7% to 8% impact on our issuance. But we still will issue more than a million credit cards this year which will be higher than the 600,000 we issued last year,” said Vishwavir Ahuja, CEO RBL Bank.

On Wednesday, RBI banned Mastercard from onboarding new domestic debit, credit, or prepaid customers on its card network in India from 22 July onwards, citing its non-compliance with data localisation mandate wherein all foreign payment operators storing card and customer related data must do so in servers physically present in India.

A Mastercard spokeswoman said the company will work with the regulator to resolve its concerns.

“Since the issuance of the 2018 directive requiring on-soil storage of domestic payment transaction data, we have worked closely with the RBI to ensure that we comply with the requirements. While we are disappointed with the stance taken by the RBI we will continue to work with them and provide any additional details needed to resolve their concerns. This is consistent with our considerable and continued investments in our customers and partners in India to advance the gvernment’s Digital India vision.”

Mastercard and Visa were the two main card issuing companies in India till Rupay was launched by the government backed National Payments Corp of India (NPCI) in March 2012. Though there are no exact numbers of how many debit and credit cards outstanding are issued by all three companies, bankers estimate that upto 35% of the debit cards are cornered by Rupay with Mastercard and Visa splitting the rest between them. Rupay is estimated to have more than 50% market share in incremental debit cards issued as most public sector banks are on it.

But it is the credit cards where Mastercard and Visa have the lions share which is the issue. Yes Bank for example has tie up with all three payment companies for debit cards so the shift away from Mastercard is easier. However, for new credit card issuances, the bank is now evaluating migration to other platforms for seamless transition, a spokesperson said.

However, it is the high margin and lucrative credit card business where banks will face the challenge. Three of the top credit cards issuing banks and companies SBI Card, HDFC Bank and ICICI Bank all have multiple tie ups to switch payment companies as they issue new cards. However, the transition from Mastercard to Visa or Rupay could disrupt banks’ plans for upto two months.

“The key concern is that credit cards which is a profitable product for banks and earning post tax ROAs of about 5-6% could get impacted as banks now will have to transition to a Visa or a Rupay platform which will take time. Our conversations with bankers reveal that it could take two months for the new payment platform (say Visa) to issue new plastics and take up the additional capacity vacated by Mastercard,” said Suresh Ganapathy, analyst at Macquarie.

RBI action on Mastercard is the latest in a series of moves by the regulator starting with banning HDFC Bank from issuing new credit cards and launching new digital incentives effective from December 2020 and also a barring American Express and Diners effective from May.

There is also uncertainty on how long the ban will last. HDFC Bank for example has still not been allowed to issue new credits cards close to eight months since the ban was announced.

In a note Nomura Securities said besides Yes and RBL, HDFC Bank with 60% of its card schemes tied to Mastercard, Amex and Diners is the most impacted, while for Axis and ICICI the proportion could be about 35-36%.

“We don’t know the individual card schemes’ contribution to overall profitability of the issuers to assess the potential impact. HDFC Bank is already restricted from issuing new cards, and hence is not incrementally impacted. On the other hand, Kotak’s card portfolio is entirely allied to Visa and hence won’t face any issues,” Nomura said.

It is unclear whether Visa is compliant with RBI’s norms on data storage. The company did not respond to an email seeking comments but banking sources said the RBI is comfortable with Visa’s data storage policy.

In another report Macquarie’s Ganapathy said the ban could also temporarily affect new bank account openings because of the delays in issuing new debit cards. There are about 900 million debits cards in force in India currently.

“Apart from usual challenges of technology, configuration, authorisation, settlement and other processes which need to be integrated with the bank, there is also a shortage of chips globally which makes in general issuance of these cards difficult,” Ganapathy said.

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