A Brief History of RuPay

In an earlier blog, I’d mentioned that Apple in India accepts RuPay cards. This blog is on RuPay, why it came to be, and how it has grabbed the (Indian) market. RuPay (shortened from Rupee and Payment) is an initiative of NPCI (National Payments Corporation of India). It was launched in 2012. It is an alternative to VISA and MasterCard.

 

This Think School video does a good job of providing many details. First, it explains how VISA/MasterCard works. Say, you want to use your HDFC (debit or credit) card to pay a shop, whose account is with ICICI. Someone has to act as an intermediary who can check if the card is valid, whether the amount is within limits, then authorize (or decline) the transaction, and finally transfer the money from HDFC to ICICI. That intermediary has always been VISA or MasterCard.

 

Doing all this takes effort, requires servers to run, software to integrate with banks and shops; and it is a convenience. Which is why VISA and MasterCard charge a fee called MDR (Merchant Discount Rate). It is 0.9% of the transaction amount for debit cards; and 1-3% for credit card amounts. If you were doing online payments, you’d be using an online intermediary like RazorPay, and their fee would be in addition to all this, usually 0.5%.

 

Ok, so now we know how the system worked. In India, fees apart, such a digital payment system had other reasons why it didn’t become popular. Such cards (debit or credit) are issued by banks, and a huge chunk of Indians didn’t have bank accounts. Even if they had, they couldn’t afford to have separate accounts for all family members – they couldn’t afford to maintain the minimum balance on a one-account-per-family-member basis.

 

The government stepped in and forced banks to support zero balance accounts. As a result, over 400 million new accounts got created. This move was really to enable direct subsidy transfers to individuals. But now, the banks had to issue ATM cards for all these accounts – but VISA and MasterCard weren’t tied to the lower tier banks which ended up with these low/no balance accounts.

 

This is why the government came up with RuPay – an alternative to VISA and MasterCard for those low/no balance accounts was necessary. To make it attractive, the government mandated a flat transaction fee in RuPay of 90 paise – this made it vastly cheaper than VISA or MasterCard. A few years later, they mandated that all businesses with turnover of over ₹50 crore had to support RuPay. Suddenly, acceptance of these RuPay cards increased sharply and RuPay’s market share soon increased to 34%.

 

And then the government reduced the already low transaction fee of RuPay to zero. With that, the attractiveness of RuPay cards went through the roof. After all, with zero fees, more and more merchants were willing to accept it. VISA obviously couldn’t compete with a fee of zero, and even complained to the US government. To no avail. By 2020, RuPay’s market share (number of cards) had increased to 60%. It soon surpassed VISA in the number of transactions as well.

 

Now it costs the banks to run the backend infrastructure for the RuPay system. But if the fee is set to zero, aren’t they at a loss? Yes, and so the government has set ₹1,300 crores aside to pay the banks. Financial inclusion of everyone is worth the price, they feel.

 

This is an example of how one thing (wanting to pay subsidies directly into people’s account) led to another (if VISA/MasterCard weren’t interested in tieing with banks who catered to such low/no balances, an alternative had to be created). After that, the moves to make it popular (mandatory in above ₹50 crore outlets + zero fees) gradually made RuPay the market leader.

 

What are the drawbacks of RuPay? (1) It not usable across the world. Beyond India, it is usable to varying extents in Bahrain, Bhutan, Maldives, Myanmar, Singapore, and UAE. There are ongoing discussions to next introduce it in Australia, South Korea, Philippines and Russia. (2) RuPay cards can’t be used for recurring (repeated) payments e.g. monthly subscriptions to Netflix.

 

Sometimes, systems evolve as a side-effect of trying to fulfil an unrelated need.