Which card company do you pay?
VISA and Mastercard are two of the most used and hence, powerful companies in the credit and debit card space. These are both card issuers, meaning, they typically partner with banks in order to be the issuer for their cards. They and the banks take a percentage from each transaction that occurs using the cards issued by them.
You most probably had your cards issued by one of these two, at least till RuPay cards came into the scene. (India launched its own card network, called RuPay.) In 2014, the Pradhan Mantri Jan Dhan Yojna was announced and it made banks enable zero balance accounts with deposit insurance and overdraft facilities. India had a huge unbanked population before this and this initiative was geared to solve that. A host of bank accounts were opened after this. In fact, according to reports, the number of bank accounts grew from 125 million in 2015 to more than 400 million by the end of 2020.
This is where RuPay comes in. This card issuer had the goal of getting card transactions to those who couldn’t have used it before. And the difference they created from the bigger companies was that instead of charging a percentage of the transaction (typically 1-3%), the charge they imposed was a fixed one of 90 paise.
All Indian companies with an annual turnover exceeding 50 crores were required to offer RuPay payment options to their customers and according to data, more than 30 crore RuPay debit cards have been issued until now. And this is a big chunk of the card market in India.
It was eventually declared that there will be zero merchant discount rate (MDR) for RuPay debit cards. MDR was the 90 paise which was being levied from each transaction, and which as I said above, was cut down to zero.
So why did India launch the RuPay service? Well, as I said in the beginning, India had a huge unbanked population in the early 2010s, primarily due to the minimum balance requirements set in the banks. Keep in mind, India has a massive percentage of people who are living on daily wages by working in the unorganised sector, and they can’t be expected to maintain 1000s of rupees in their accounts. The total money that was deposited after zero balance accounts were started was in the billions of dollars, but that’s beside the point.
With the opening of these new bank accounts, there was a need to issue cards. Because cards are the way to be able to withdraw cash from ATMs, and obviously, transact without cash too. But there were some problems with using the bigger card issuers.
Since the charges levied were high (1-3% of each transaction), when we deal with small shops and vendors, those numbers would make a very big difference. So the cost also needed to be lowered.
These companies did not have partnerships with most of the banks that existed in India. They were primarily partnered with the private banks of India, but there is a vast network of local banks across the country which needed card issuers.
Providing credit lines to the unorganised sector, like farmers to get new equipment, would not have really come under the bigger companies.
But the banks also had a part of the MDR, so why would they give up money to just help the economy, after all, they are also profit-driven entities. What the government did was, to compensate the banks for the foregone fees, a reimbursement scheme was set up. In 2022, that number stood at Rs 2600 crore. But do you think this is a waste of tax money? Or is it a justified use of that money for financial inclusion in the country for the common man? You tell me.
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