Digital Payment System: Modi’s masterstroke with RuPay

The Narendra Modi Government’s actions in India are being lauded on social media amidst reports of teething troubles with the US payment businesses in Russia. This is due to a result of the US sanctions imposed on Russia in response to the invasion of Ukraine. American service providers such as Google Pay, Apple Pay, and other similar services have ceased working, generating long queues at Russian metro stations and other public capacities. People have stopped retaining cash due to digital payments. As a result, a severe problem has emerged as a result of the payment service’s closure. In such circumstances, Prime Minister Narendra Modi is receiving praise for preparing 

India’s own payment system, #RuPay, which is trending on Twitter.

On August 15th, 2014, PM Narendra Modi announced the Pradhan Mantri Jan Dhan Yojna, which resulted in the rapid expansion of RuPay- an iconic venture by the  National Payments Corporation of India (NPCI). With 37.5 crore transactions in just four years, RuPay has already eclipsed Visa as India’s largest payment card. As of November 2020, around 60.36 crore RuPay cards have been issued by nearly 1,200 banks, and this Indian card holds a market share of 60 percent.

What is the Government’s plan and aim with this ground-breaking effort, and most importantly, as Indian citizens, what do we need to know about the rupee and how it will affect the lives of Indians?

Let us who understand how this ecosystem works. Assume a customer has an Axis Bank Visa Card with a single-loan credit limit, went shopping in a Big Bazar outlet, and Big Bazar is a merchant with an SBI account. As a result, Axis Bank becomes the issuing bank. While SBI becomes the acquiring bank. This is how the backend of our transaction works when the customer enters Axis Bank card credentials to make a Rs 10,000 payment. The card information is entered into the website’s payment gateway, which is Razor Pay; their benefit is that it enables the merchant to accept payments from various sources, including credit cards, debit cards and UPI (Unified Payments Interface). Since the customer is making a credit card transaction, Razor Pay will gather the customers’ credit card information and the transaction amount. The merchant’s bank, which is SBI, will then receive it. SBI will then capture the transaction and transfer it to the credit card network, Visa. This is when Visa routes the transaction to the customers’ bank, Axis Bank, for approval. Thus, Visa is inquiring into the Axis Bank system to see whether the customer has sufficient funds and his/her account condition. If the card is rejected, this purchase will be declined.

Pradhan Mantri Jandan Yojna ensures that any individual in the country can bank without requiring a minimum balance. Furthermore, what astounded most analysts was the anticipated total amount in these accounts of 1.37 lakh crore rupees, which is comparable to 18 billion dollars

Similarly, if the customer does not have a sufficient balance on his Debit Card, then the card will be denied. The transaction is authorised if everything is in order, and the customer must have the required credit limit. This procedure is referred to as “authorisation.” Following this, Axis Bank responds to Visa, stating that everything is well and assigning and transmitting an authorisation code and its response. This places a hold on Rs 10,000 on the customers’ Axis Bank account. The merchant’s payment processor, Razor Pay, receives this authorisation code from Visa. The merchant’s terminal then receives the authorisation code from the acquiring bank, SBI. Depending on the merchant or transaction type, the merchant’s terminal will print a receipt for the customer to sign. This is the method by which the transaction is carried out. 

Let us examine the business portion of this process to complete this transaction. The issuing bank or the customer’s bank and the Credit Card network access fees totalled Rs 300. This percentage could range between 1 to 3 per cent. In this scenario, three hundred rupees are deducted from ten thousand rupees, and nine thousand seven hundred rupees are sent to the merchant’s account. This Rs 300 transaction price is Merchant Discount Rate  (MDR). Apart from this, Razor Pay would impose a 0.5 per cent fee, totalling Rs 9,650 for the merchant. It is only that there are two straightforward distinctions for debit cards. Rather than deducting from the credit limit, the sum is deducted directly from the bank account, obviating the need for repayment. Second, the MDR for Credit Cards is far greater than the MDR for Debit Cards. Hence, while Debit Card MDRs are regulated at 0.9 per cent, Credit Card MDRs are significantly higher. Take note of this since two variables significantly impact the MDR rate. The interchange cost is the first variable, followed by the switching fee.

The customer’s bank charges the merchant’s bank, which is Axis Bank. Then the network charges the issuing bank for the switching fee, and Visa charges the customer’s bank. They were two of the most significant firms in the Indian card network business, having achieved a near-duopoly. However, something unusual occurred: the Indian Government was disrupted by utilising its card network, dubbed RuPay. Since 2014, millions of bank accounts have been opened around the country; by January 2015, this figure had increased to 125 million. By January 2021, this total had increased to 416.5 million, with rural women accounting for more than half. 

Digital India’s different schemes such as, mudra card enables numerous withdrawals and credit availability without collateral security, especially for the unorganised sector. The Pun-grain card entitles the holder to automatic grain procurement on Pungrain Mandi. The Kisan credit card scheme was established to give farmers cost-effective, need-based loans for agriculture expenses and non-farming activities

This is where RuPay comes in, enabling card transactions to be accessible to India’s poorest citizens. Rather than charging a percentage like Visa and MasterCard, RuPay charged a set MDR of just 90 paisa, 60 paisa to the issuer bank and 30 paisa to the acquiring bank. Moreover, what occurred after it was nothing short of revolutionary? All Indian businesses with annual revenue of more than 50 crores were expected to provide their clients RuPay payment choices. According to data from the Ministry of Finance’s Department of financial services, 31.74 crore rupee Debit Cards have been issued til date. In just six to seven years, rupees’ market share increased to 34.5 per cent of India’s 90 million Debit Cards. However, the Indian Government subsequently made another significant announcement. It proclaimed that merchant discount rates for RuPay debit cards would be nil, putting Visa in such dire straits that it is now seeking assistance from the US Government. 

How and why did Visa and RuPay enter into a business fight, and why did the Indian Government adopt the concept of zero MDR? The explanation lies in the underlying issues plaguing India’s banking sector, the most significant of which drove the Indian Government to develop the RuPay. If you go back 11 years to 2011, around 55.7 crores, people did not even have a bank account or about 50 percent of India’s population. This mainly was because banks required consumers to maintain a minimum balance of three to five thousand rupees. This may seem reasonable to us, but for folks on daily wage, contract labour, or our neighbours, this amount represents their entire month’s rent in terms of grocery spending. As a result, most persons in the unorganised sector avoid opening bank accounts. Five hundred fifty-seven million individuals were left without financial assistance or necessities. Even if the Government wanted to offer it, excluding 50 percent of the population at the bottom of the pyramid from the banking system would be a tragedy. This is why the Indian Government launched the Pradhan Mantri Jandan Yojna, which ensures that any individual in the country can  open bank accounts without requiring a minimum balance. Furthermore, what astounded most analysts was the anticipated total amount in these accounts of 1.37 lakh crore rupees, which is comparable to 18 billion dollars. 

However, this is where the Government encounters a crucial obstacle. We receive a chequebook and a Debit Card as part of the account opening process. This debit card is critical since it enables us to make cash withdrawals from ATMs and conduct cashless transactions. As a result, there was a pressing need for Visa and MasterCard-like services. However, at this point, the administration identified three significant issues. The most urgent requirement was for a card network capable of serving the remaining 500 banks in India. MasterCard and Visa have relationships with only 55 of India’s 500+ institutions, and their offers were primarily targeted towards private sector banks. Thus, there was an urgent need for an automobile network capable of serving the remaining 500 number two supplying debit and credit to the unbanked necessitated customisations such as lending credit to farmers or assisting them in procuring cereals. These services were excluded from the scope of players such as MasterCard and Visa. Thirdly, these multinational players’ processing costs were extremely high. Thus, whereas large merchants such as Pizza hut or KFC can have profit margins of 40 percent, 50 percent, or even 90 percent, small-scale vendors such as a grocery store or an electrical store often earn between 10 percent and 30 percent. In that instance, charging an MDR of one to three per cent has a significant impact on their profitability. This is why banks suffer losses. MDR is now zero, which eliminates both interchange and switching fees. To begin, the Government has set aside Rs1300 crores to reimburse players in the ecosystem for losses sustained due to levies such as the interchange fee, which the purchasing bank pays to the issuing bank. 

This is how the Government is draining cash to ensure that India’s bottom-of-the-pyramid population is included in the country’s banking system. The question today is: what benefit is there in investing 1300 crores on a free payment service? After all, why is the Government investing so much money on a card network, and how would this benefit the common public in India? To begin, this step has laid the groundwork for financial inclusion. It provides the Government with a channel for distributing initiatives and services to the Indian people. Second, India can and is delivering services to population sectors that a firm like Visa or MasterCard would never consider. RuPay has already begun doing so through its five-card varieties, including a PM Jan Dhan Yojna Debit Card that includes up to 2 lakh rupees in additional personal accident death and total disability coverage. The Mudra card enables numerous withdrawals and credit availability without collateral security, especially for the unorganised sector. The Pun-grain card entitles the holder to automatic grain procurement on Pungrain Mandi. The Kisan Credit Card scheme was established to give farmers cost-effective, need-based loans for agriculture expenses and non-farming activities. If implemented with tenacity and consistency, this can help India advance financial inclusion and empower India’s ordinary people.

Just as Visa and MasterCard established themselves as dominant forces in the Indian ecosystem, RuPay and UPI are now expanding into international land to revolutionise the payment business in India and throughout the world.