COMMENTARY
RuPay Card
An Alternative
K Hari Krishnan, Bipin K Deokar
“RuPay”, the new Indian alternative to international credit/debit card-based systems, is a boon to the Indian user and merchant. Fees for both will be lower and the need to go in for expensive international settlement can be avoided. RuPay, an initiative of the RBI, can be issued by cooperative and regional rural banks as well; this will enable usage in smaller towns hitherto excluded from the Visa/MasterCard system.
The views are of the authors and not of the organisations to which they belong.
K Hari Krishnan (khari238@gmail.com) is with the Reserve Bank of India and Bipin K Deokar (bipin_deokar@hotmail.com) is with the EPW Research Foundation.
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Similarly, in India too, the payment system has improved signifi cantly owing to the Reserve Bank of India’s (RBI) concerted efforts and initiatives towards introducing and upgrading safe, effi cient, accessible and authorised payment systems in the country to meet the requirements of the people who are covered by the banking system.
1 E-Payments
The electronic era in the banking sector began in the mid-1990s when the RBI developed the technology-based payment and settlement systems. Recognising the importance of the payment systems, a number of initiatives were undertaken by the RBI to develop and promote e-payment infrastructure and for bringing efficiency in the payment and settlement system. As a result, there has been a phenomenal change in the architecture and techno logy of payment systems in India.
Implementation of high tech integrated technology like core banking solutions (CBS) and automated teller machines (ATMs) has signifi cantly infl uenced the delivery channels of banks. From 2005, there has been a spurt in ATM installations across the country. At the end of March 2006, there were 21,523 ATMs; there are now 88,838 (January 2012) (Table 1).
In the Asia-Pacific region, India is one of the fastest growing countries for card payments. The share of card payments, both in terms of volume and value has increased significantly in recent years. According to the RBI, the debit card transactions in India have increased by around 32% in 2010-11 to reach Rs 38,700 crore from about Rs 26,400 crore in 2009-10 and the number of debit cards in use also rose by 25% during this period. Despite the decline in the number of outstanding credit cards, the volume and value of transactions using credit cards have increased by 13.2% and 18.1% respectively in 2010-11.
2 National Payments Corporation
In the Vision Document 2005-08, the RBI envisaged the setting up of an institution at the national level to own and operate all retail payment systems in the country as a sound and effi cient fi nancial infrastructure for enhancing access to financial services. The other objective was to facilitate an affordable payment mechanism to benefit the common person across the country and help fi nancial inclusion. Accordingly, the Indian Banks’ Association (IBA) set up a working group which examined this issue and suggested the modalities for setting up an organisation to be known as the National Payments Corporation of India (NPCI). Consequently, it was incorporated in December 2008 and the certifi cate of commencement of business was issued in April 2009.
NPCI has been set up as an umbrella organisation by the banking community to take over the retail payment system activities in the country with an objective to operate for the benefit of all the member banks and their customers. It has been
Table 1: Growth of ATMs, Credit Cards and Debit Cards
| Year | No of | No of | No of |
|---|---|---|---|
| ATMs | Outstanding | Outstanding | |
| Credit Cards@ | Debit Cards@ | ||
| (in million) | (in million) | ||
| 2005-06 | 21,523 | 17.33 | 49.76 |
| 2006-07 | 27,088 | 23.12 | 74.98 |
| 2007-08 | 34,789 | 27.55 | 102.44 |
| 2008-09 | 43,651 | 24.70 | 137.43 |
| 2009-10 | 60,153 | 18.33 | 181.97 |
| 2010-11 | 74,505 | 18.04 | 227.84 |
| 2011-12 | 88,838# | 17.57* | 273.65* |
# Up to January 2012. * Up to February 2012. @ Cards issued by banks (excluding blocked and withdrawn). Source: RBI, Bulletin, March 2012, RBI (2011).
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incorporated as a Section 25 company under Companies Act with 10 banks (six public sector, two private sector and two foreign banks) owning stakes. According to the Vision Document 2009-12 in the initial years the RBI would monitor its operations; thereafter it will function as an independent organisation regulated by RBI.
3 Need of Domestic System
The Vision Document 2009-12 has stated that the need for a domestic payment card system and Point of Sale (PoS) switch network for issuance and acceptance arises from two major considerations: (1) the Indian banks have to bear the high cost of affi liation with international card associations in the absence of a domestic payment system, (2) around 90% of our card-based transactions are routed through a switch located outside the country.
Thus, in the absence of the domestic card payment processing system the banks had no option but to tie up with Visa, MasterCard, American Express, etc, for connectivity between cardholders, issuing banks and merchants. As a result, customers in a market economy and to every domestic transaction carried out minimise the risks associated. In the using a debit or credit card issued by fi rst stage, the NPCI has launched the various banks is routed through network ATM card. The fi rst RuPay ATM card was switches owned by Visa, MasterCard, issued by Gopinath Patil Parsik Janata etc, which are based outside the country. Sahakari Bank. At present, around 15
banks, mostly urban cooperative banks 4 Launch of India Card (UCBs) and regional rural banks (RRBs) Initially the RBI asked the IBA to submit a have issued RuPay ATM cards. A leading detailed report on the feasibility of set-international fi nancial consultancy fi rm ting up a domestic payment card trans-is assisting the RuPay card roll out, action settlement system. Ac-
Table 2: Card Payments at Point of Sale Transactions
cordingly, the IBA appointed a Year Credit Cards Debit Cards Number Amount Growth Amount
Number Growth
committee on the payment and
(in million) (in billion) (in %) (in million) (in billion) (in %)
settlement systems to study the
2005-06 156.09 338.86 45.69 58.97
commercial viability of the new
2006-07 169.54 413.61 18.1 60.18 81.72 27.8 system. The committee proposed 2007-08 228.20 579.85 28.7 88.31 125.21 34.7 the setting up of a domestic card 2008-09 259.56 653.56 11.3 127.65 185.47 32.5 transaction settlement system in 2009-10 234.24 618.24 -5.7 170.17 264.18 29.8 a view of the exponential growth 2010-11 265.14 755.16 18.1 237.06 386.91 31.7
2011-12* 287.68 870.57 13.3 296.87 487.78 20.7
in card-based payments in India
* Up to February 2012.
(Table 2). Accordingly, the NPCI
@ Card payments figures pertain only to PoS transactions. pioneered the payment card sys-Source: RBI, Bulletin, March 2012.
tem called “RuPay” – India’s indigenous including the design and software for card payment system which is a d omestic the card. alternative to the global payment process-In March 2012, India’s own domestic ing fi rms. RuPay offers a cost-effective card payment network was launched range of payment instruments to serve which will facilitate banks in India to
COMMENTARY
issue RuPay debit cards to their customers. The RuPay debit card will be accepted at more than 91,000 ATMs under the N ational Financial Switch (NFS) and all the POS terminals of State Bank of India (SBI), Corporation Bank and Axis Bank. So far NPCI have signed memoranda of understanding with seven banks – SBI, Punjab National Bank, Bank of India, Bank of Baroda, Canara Bank, Union Bank of India and ICICI Bank for issuing of RuPay debit cards. Bank of India and Union Bank of India will be the fi rst two public sector banks which will initiate a RuPay pilot. Five more banks are in the process of testing and certifi cation.
5 Advantages of RuPay Card
The new card will bring a paradigm shift in the payment system in India as the objective of the RuPay card is to e ncourage more debit card usage in the country, especially in rural and semiurban areas. At present, the debit and credit card penetration is concentrated in Tier-1 and Tier-2 cities as many of the cooperative banks and RRBs from Tier-3 and Tier-4 cities are unable to issue debit cards to their customers, mainly on account of higher joining fees and a minimum quarterly fee levied by international schemes. With RuPay, rural banks and small cooperatives banks will be able to offer debit card services and will also get access to the wider ATM network spread across the country.
Like-wise the UCBs and central cooperative banks (CCBs) will be able to join the RuPay card system. Currently, the UCBs are implementing CCBS at much faster pace to retain their customers migrating to commercial banks, while NABARD has embarked upon introducing core banking solutions for CCBs. These initiatives will benefi t UCBs and CCBs customers from electronic payments systems. Thus, the RuPay scheme is expected to set in motion rapid growth of card payment transactions in the country as co-operative banks, RRBs, UCBs and CCBs will launch RuPay debit cards.
The new card is one of the safest debit cards as right from the beginning the RuPay card will have a PIN-based reliable authentication system. The fraud risk in PIN-based card products is far lower than signature products.
6 Cost Savings
As far as pricing is concerned, RuPaybased products will be more cost effective – for both, issuing and acquiring banks as the NPCI fee structure will have only five heads, including the administrative charges as against multiple types of charges levied by the existing card schemes operating in India.
Most importantly, the fee structure of the RuPay scheme will be transparent and not subject to one-to-one negotiation with member banks as the NPCI will be structuring its fees in such a way that the acquiring banks are adequately i ncentivised. It has also planned to waive the administrative charges for RRBs and cooperative banks.
Currently, the banks in India pay a substantial amount annually to Visa and MasterCard for processing debit and credit card transactions. However, the RuPay-based transaction charges are expected to come down as the cost of clearing and settlement for each transaction will incur a lower cost. Moreover, the banks will pay their total fees in rupees instead of paying in foreign currency to the international players.
At present, a number of shops in the country are reluctant to accept debit card payments as they have to pay around 1.5% of the total transaction amount to the international companies for using their payment system. In contrast, the RuPay system will help shops accept card payments owing to a lower transactions cost. Henceforth, the banks will have to pay around 35%-40% lower fees for transactions using the RuPay scheme compared to the existing international schemes on account of smaller processing and joining fees. Finally the customer will benefit by paying lower transaction costs.
7 Financial Inclusion
NPCI has launched Aadhaar-enabled financial inclusion payment cards with biometric authentication in association with Unique Identification Authority of India (UIDAI). With the objective of financial inclusion the NPCI will be working with the government and UIDAI for the distribution of Electronic Benefi t Transfer (EBT) which will cover payment disbursals under old age pension, National Rural Employment Guarantee Scheme, credit of subsidy amount for purchases of liquefied petroleum gas, kerosene and items distributed under public distribution system (PDS), etc. For this the NPCI has designed the Aadhaar Payments Bridge System (APBS) which will use the Aadhaar-based payment cards using RuPay scheme to credit the bank accounts of the benefi ciaries.
Similarly, the Aadhaar-based payment cards can be used at the existing ATMs as well as micro ATMs with business correspondents (BCs) appointed by banks. The BCs will act as mini bank branches enabling withdrawals, balance enquiry, etc, using connectivity provided by Aadhaarenabled payment systems (AEPS) – a new electronic payment network jointly promoted by NPCI and UIDAI which will identify the UID number. The new initiatives are likely to transform the fi nancial inclusion scenario as the ATM card using RuPay payment system will reach the unbanked areas of the country.
8 Road Map
According to the road map of the RuPay scheme, the first product is a micro ATM card. Bank of India has already issued a RuPay ATM card with Aadhaar number to its “No Frills Account” customers in rural areas. The fi nancial transactions carried out using these cards will have online biometric authentication by UIDAI as it has connectivity access with NPCI. A few other banks will be soon issuing Aadhaar-based RuPay cards.
The NPCI has also created a road map for international acceptance of RuPay card and has finalised its alliance with Discover Financial Services (owner of Diner’s Club) for processing international transactions. In a couple of months the RuPay international debit card will be rolled out. It will have a chip and a PIN as against the present magnetic strip cards as the latter is vulnerable to cloning and skimming.
In order to expand the acceptance of RuPay cards at POS terminals across the country the NPCI has taken a number of
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Table 3: Bank-wise Number of Points of Sale
Bank Name No of PoS %Share
Axis Bank 1,90,860 32.5
HDFC Bank 1,49,950 25.6
ICICI Bank 1,42,657 24.3
IDBI Bank 21,581 3.7
American Express 16,210 2.8
Corporation Bank 16,077 2.7
HSBC 14,556 2.5
Other banks 34,783 5.9
Total 5,86,674 100
Source: Banking Frontiers, March 2012.
initiatives. Enabling the POS terminals compatible for accepting new card scheme is a very slow process as the banks have to upgrade their systems to synchronise with the new payment system.
At present India has around 6 lakh POS (Table 3) and initially, RuPay debit cards will be accepted at POS terminals of Axis Bank, SBI, Corporation Bank and Bank of Baroda covering around 35% of the total terminals. In order to expand the network the NPCI is negotiating with two major banks HDFC Bank and ICICI Bank as together they have around 3 lakh (50%) POS terminals. Both banks have committed themselves to upgrading their POS terminals to make them RuPay compatible.
As far as safety and security is concerned the NPCI has procured a state-ofthe-art fraud monitoring solutions for RuPay scheme and its risk management team is implementing the system in stages. The rules for alerts and monitoring are framed on real time and near real time basis.
For providing internet transactions to RuPay cardholders NPCI has tied up with a US-based company to provide internetbased card payment system technology. Thus, soon the RuPay card-holders can make transactions at various e-commerce sites with the two factor authentication, which will be more secure than the internet transactions under the current 3-D secure mode.
In the next two to three years NPCI will be expanding the customer base of R uPay-based ATMs/micro ATMs and debit cards and will not be concentrating on credit card segment. It has planned to enter the RuPay-based credit card market by March 2015 as product development, risk management and risk mitigation issues in credit cards are more complex.
The NPCI is planning to integrate payments through various channels – cards, mobile, money transfer, etc, and will have special emphasis on integrating mobile payment system using the RuPay scheme. In the near future the spread of mobile banking is expected to expand due to the huge subscriber base.
9 Conclusions
Similar national payments are operating in other countries. For instance, China launched its domestic payment network “Union Pay” in 2002. China’s Union Pay has 200 member banks, including 30 outside China and is accepted in 104 countries worldwide.
With the RuPay scheme India could also witness a cashless revolution which would lower transactions costs coupled with enhanced security and transparency leading to better governance. With the NPCI’s three distinct value propositions
– pricing, governance and control – the RuPay scheme will further strengthen the payment system of the country all leading to promote orderly economic d evelopment and growth. However, the challenge both for the RBI and the NPCI is to guard against the risks posed by technological innovations.
References
RBI (2005): “Payment Systems in India”, Vision 2005-08, May.
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