Why has the RBI banned Mastercard?
In the midst of striving towards a cashless economy, India bans global card network Mastercard. What could be the reasons and, more importantly, the consequences?
In a glaring decision last month, The Reserve Bank of India barred global card network Mastercard – world’s second largest payment processor – from on-boarding new customers from 22nd July 2021. Which means as of that date Mastercard cannot issue any new credit or debit cards. The reason for this ban was its alleged refusal to comply with RBI’s data localization norms.
Data localization is basically the processing and storage of a country’s citizens’ data within the country itself “- often before being transferred internationally”. Its purpose is to ensure national security.
Recently, countries like Russia and China are making this a requirement to secure the data of their citizens locally. RBI being the watchdog of India’s financial system insisted that Mastercard and similar institutions store the banking and transactional information of Indian users within the country which Mastercard refused to do.
With the ban on one of the major issuer of cards for many banks across the country, many of these financial institutions stand to lose revenue for the upcoming few months. They now have started looking at alternatives like Visa or our indigenous RuPay.
According to Nomura Research, RBL Bank, YES Bank, and Bajaj Finserv are the ones most impacted by the ban as all their credit card schemes are allied to Mastercard. Among others, IndusInd Bank, Axis Bank and ICICI Bank have 35-40 percent of their credit card schemes tied to Mastercard, the report said.
Private sector lender RBL Bank, the fifth-largest credit card issuer, is entering into an agreement with Visa for the issuance of credit cards. As for the banks that completely depend on Mastercard for credit cards like those mentioned above, it will take more than two months to switch to other payment networks and card issuers. It is likely that there will be a lower issuance of credit cards for a few months.
Besides leaving Indians with limited options, a possible drawback of this decision is that it could make global institutions and companies heedful of the protectionist tendencies of the Indian government which they in all likelihood will see as an obstruction to free trade.
As banks hurry to make the switch, the entities which stand to gain most from this ban are Visa and our indigenous Rupay. One peculiar thing about the competition between these two is that although RuPay has a lower processing fee and higher processing speed, many global websites do not accept it as a payment service system yet and hence Visa – the biggest player in the market stands to gain in lump sums. And so with Visa’s superior reward offerings and global identity, it will be looking to get a stronghold in the Indian market with this welcome opportunity.