22 Aug

The Reserve Bank of India (RBI) has decided to bring out rules that could potentially restrict card issuers from engaging in exclusive agreements with card networks like Mastercard, Visa or RuPay.
The central bank also proposed that rules would be applicable to both banks and non-banking financial companies that issue credit cards, debit cards, or prepaid cards
The draft circular released by the RBI dated July 5 reveals that the existing arrangements between card networks and card issuers are not favourable in terms of providing customers with sufficient choices.
It adds on to say that several changes, including the prohibition of exclusive relationships between card issuers and card networks are to be relooked into.
The Regulator’s circular also makes it compulsory for the card issuers to offer cards on more than one card network and provide customers with the option to choose between card networks at the time of issuance and subsequently.
These rules are expected to enhance the customer choice and also promote a more competitive landscape in the card network industry.
However, issuers of cards have now requested for some relaxation on certain product categories. Here is an article which explains about the issuers’ concern.

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Issuers seek relaxation on certain product categories for card network portability

Banks want mandate imposed at product category/segment level, not each product

Card issuers have approached the RBI seeking relaxation for certain products from the revised guidelines on card network portability, due to the high costs involved.

Card issuers, majority of which are banks, have sought that the central bank impose the mandate for network portability for each product category or segment but not each product, given the higher cost and operational burden involved and the impact on existing card partnerships.

“Issuers are saying just leave network options at the core product level that is, credit, debit, and prepaid. There are diversified cards within core products like co-brands, premium cards, etc. Management of sub-products will definitely become a challenge because each bank has hundreds of sub-products based on the customer segment,” said Mohit Bedi, Co-founder and Chief Business Officer, Kiwi- India’s First Credit Card on UPI Platform.

Network portability

The revised draft framework on network portability mandates issuers to offer every card on at least two networks and not to enter into bilateral arrangements with card networks, effective October 2023. Five networks currently operate in India, namely Visa, Mastercard, NPCI-backed RuPay, American Express and Diner’s Club.

“The differentiating factors for networks are pricing, extent of their acceptability and the rewards that they offer. Fundamentally if another network is better across any of these, people should have the choice to opt for it but today that option does not exist,” said Abhishek Kothari, CEO, Pepper Money India.

As such, most issuers have also been offering cards across more than one network after the data localisation framework asked some networks to temporarily pause new sourcing. Subsequently, YES Bank, which was entirely dependent on Mastercard, was forced to tie-up with other networks.

Exemptions sought

Exemptions have been sought in certain cases where service providers have exclusive tie-ups with networks such as Visa with the JetMiles programme or Amazon, or RuPay network for FASTag.

For example, the ICICI-Amazon credit card is issued on the Visa network because Visa worldwide categorises e-commerce platform Amazon as a separate Merchant Category Code (MCC), thus levying a lower interchange of about 1.65 per cent compared with other merchant categories.

“It becomes tricky in some situations, for example, Diners Club, which works exclusively with HDFC Bank. The Diner’s card is not available with other banks because Diner’s Club has much better product features as a network too. Similarly, NCMC (National Common Mobility Cards) are on Rupay only, it’s a prepaid card. How will that work? So, it becomes a new challenge for other sub-product categories as well,” Bedi said.

There is also the issue of proprietary cards such as American Express, which is both an issuer and a network and its ability to then issue cards on other networks.

Issuers then prefer a certain network because their cost expense is lower, industry players said, adding that even on an overall basis, while the interchange on Visa and Mastercard is almost four times that on RuPay, the global networks reimburse issuers for marketing costs which is a big line of fee income for banks. However, RuPay offers the additional benefit of linking credit cards to UPI.

“In India, where cards are expected to grow significantly, this will ensure fair competition for networks to exist. Amidst this, RuPay being a new network should likely benefit as there are legacy contractual arrangements in place,” Kothari said, adding that while for card issuers this could translate to on-boarding new network partners and higher operational costs, it would also mean more features and offers for consumers.

Courtesy: Business Lines dt 17^th Aug 2023