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Why Did RBI Ban Mastercard from Issuing New Cards?

Editor, TRANSFIN.
Jul 16, 2021 5:18 AM 4 min read
Editorial

An upheaval of the payment processing market in India is on the cards (pun intended).

Mastercard on the Rocks

On Wednesday, the RBI barred Mastercard indefinitely from onboarding any new customers from July 22nd.

This means that the American company will not be able to issue any prepaid, credit or debit cards to new customers in India. Existing customers will not be affected.

The Central Bank said Mastercard was found to be "noncompliant with the directions on Storage of Payment System Data" i.e., the 2018 rules that mandated that all Indian transaction data to be stored in servers in the country (aka data localisation).

The rationale was used earlier in April, when American Express and Diners Club were similarly restricted from adding new customers.

For its part, Mastercard said it was "disappointed" by the move but resolved to continue to work with regulators to "provide any additional details required".

 

What Rules?

Three years ago, payment firms operating in India were directed by the RBI (official circular) to store all data relating to payment systems, including end-to-end transaction details, exclusively on servers geographically located in India. The announcement was made to ensure “better monitoring” and “unfettered supervisory access” for the RBI around payments data of Indian citizens.

This formed part of a global trend by governments to expand oversight of their citizens’ data, especially under the onslaught of Big Tech firms aggressively pushing into financial services. Expectedly, the same circular served as a source of trade tension with the US, especially under President Donald Trump.

A six-month initial deadline was granted for compliance. Many foreign players protested the move, lobbying fiercely against it by arguing that it would increase the cost of doing business in the country. But regulators stood their ground.

Many operators missed the initial deadline, including Visa, Mastercard’s biggest competitor. However, in the time since, most relented. Mastercard reportedly held out on complying in wait for the Personal Data Bill’s passage.

 

Mastercard and India

One of the three largest card-issuers in India (accounting for 33% of all card payments), Mastercard has also made ambitious plans for expansion in the market, where digital payments have boomed particularly since demonetisation.

In 2019, the company announced a $1bn investment in the country, and pledged $1bn more for future plans. India also has the second-highest number of Mastercard employees around the world.

The RBI’s move may have caught Mastercard by surprise. After all, only days ago on July 8th the latter had announced a partnership with Axis Bank and Mumbai Metro vis-a-vis the "One Mumbai Metro Card".

With new issuances put on hold indefinitely, it's likely that not only Mastercard but its partners will also be negatively affected. Speaking of which...

 

Together We Rise, Together We Fall

Most Indian banks work with many card networks. Some, however, partner with only one network for specific co-branded cards. Meaning, entire card schemes of some lenders are reliant on Mastercard's infrastructure.

According to Nomura, RBL Bank (-1.74% today), Yes Bank (+3.83%) and Bajaj Finserv (-0.25%) might be impacted the most since a whopping 100% of their credit cards are based on Mastercard. Other players like HDFC, IndusInd, ICICI and Axis Bank are substantially exposed, albeit they have room to manoeuvre. (Either way, HDFC Bank has already been barred from issuing any new credit cards, so it can breathe easy on this development at least.)

Regardless of exposure, Mastercard’s suspension does not bode well for major players. Take the Axis-Flipkart and the ICICI Bank-Amazon co-branded cards. They have so far been two of the fastest-growing players in the ecosystem. Such developments would only further stress the card issuance sector already hit by technology disruptions like mobile payments and UPI.

 

Carpe Diem

Assuming Mastercard will remain debarred for a considerable length of time, Wednesday’s development is likely to work in favour of two entities in the near-term.

One, the lenders who don’t solely rely on Mastercard. According to ICICI Securities research, SBI Card, HDFC Bank, Axis Bank, Citi Bank, and Kotak Mahindra Bank have tie-ups with both Visa and Mastercard.

And two, Mastercard’s competitors. Specifically, Visa and RuPay. RBL Bank has already announced a partnership with Visa; others may follow suit. (FYI: Changing card operators is not an overnight undertaking; it can take up to two months.)

As for RuPay, the platform has given its global peers a run for their money, particularly in the debit card segment where it has grabbed a staggering 60% market share. However, its share of market transactions is relatively low because the bulk of RuPay cards have gone to beneficiaries of the Pradhan Mantri Jan-Dhan Yojana (PMJDY) scheme. Moreover, its presence in the credit card segment is comparatively muted. Mastercard’s hiatus may be the golden goose it was waiting for.

FIN.
 

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