How US payment groups got on the wrong side of India’s plans
In mid-2018, Ajay Banga, then CEO of Mastercard, enthusiastically championed Indian Prime Minister Narendra Modi’s efforts to promote electronic payments in the country’s cash-dominated economy.
Modi “gets it,” he told an audience in New York City, highlighting the role of cash in everything from terrorist financing to the illegal drug trade.
Three years later, his company found itself on the wrong side of India’s plans for the sector.
The Reserve Bank of India last month banned Mastercard from adding customers, saying it failed to comply with the regulations, implemented shortly after Banga praised Modi’s approach, which banned financial groups to store data abroad. The RBI imposed similar restrictions on American Express and Diners Club in April, reducing the ability of U.S. groups to expand into one of its fastest growing markets.
The central bank and fashions have gone to great lengths to make India less dependent on cash. Digital transactions have increased since the high-value banknotes that made up a large part of the country’s currency were suddenly phased out in 2016. The central bank launched the Unified Payment Interface, a mobile money network that enables instant bank-to-bank transfers. Bank. that same year.
Officials said the reform was vital to lowering the cost of printing tickets and expanding India’s still largely informal economy and increasing financial inclusion and the tax base.
The evolution of the payments market in this country of 1,400 million people can be observed all over the world. In a market where 20% of the population do not have a bank account and only 3% have credit cards, the expansion of financial services creates huge business opportunities.
Three Indian fintech groups, including Paytm, which is backed by Alibaba, and Policybazaar, backed by SoftBank, recently submitted to IPO.
“Everyone is ready to compete,” said Rajan Bajaj, founder of the card startup division in Bangalore. “India is currently the fastest growing credit card market in the world. Our opportunity is enormous. “
But critics said policies like the data location requirements that tripped Mastercard and American Express were designed to tighten control over business activity and erect barriers to trade. The Indian authorities “think of trying to control things rather than setting a framework for innovation,” said a foreign official.
Meanwhile, the United States has called India’s policies “discriminatory and trade-distorting.”
The rules state that all financial data processed overseas must be destroyed within 24 hours and stored in India only. Companies are required to submit third-party audits demonstrating compliance, which the RBI says is necessary to prevent money laundering and other illegal activities.
The changes sparked furious lobbying from US payment groups when they were introduced. The companies argued the rules were costly, counterproductive and encouraged other countries to take similar action, according to a person familiar with their discussions with regulators.
“The free flow of data across borders is the foundation of a strong strategic and economic relationship between the United States and India,” said Alexander Slater, deputy managing director of the United States-India Business Council, which advocates American business interests.
Supporters of the rules responded that Mastercard, which the fintech group PPRO estimated to account for a third of India’s card market, had failed despite numerous opportunities.
The RBI took action after the company missed several deadlines to clarify how it was handling data, according to a person familiar with the matter. Visa was also questioned by the regulator last year, the person added, but was found to be in compliance.
Mastercard declined to comment on this point, while Visa did not respond to a request for comment.
The data location rule “has been very, very clear for a long time,” said an Indian executive. “Some foreign companies prefer to sit and push rather than fix their systems.”
Since the RBI ban last month, Mastercard has said it has submitted a new audit conducted by Deloitte in an effort to address the regulator’s concerns. “We have worked closely with the RBI and the Indian government to ensure that we are following both the letter and the spirit of the order,” Mastercard said in a statement.
“We hope this latest presentation will provide the reassurance needed to address your concerns. We are committed to putting all the necessary resources to meet the additional requirements. “
Existing Mastercard and Amex customers were not affected, but the RBI’s move left Visa the only major player in unrestricted foreign payments in the country.
Its rival is now the National Payments Corporation of India, a non-profit organization created by the RBI with a consortium of Indian banks to develop the payment infrastructure at the heart of the government’s main policy objectives. Its card operator RuPay has issued more than 600 million cards, while its UPI mobile money network soared to 3.2 billion transactions in July, more than double the number of last year.
US business groups have argued that Indian authorities have used the regulations to tip the market in favor of NPCI and other domestic firms to encourage domestic champions of financial services.
This year India invited companies to bid for licenses to set up for-profit companies to compete with NPCI. Those interested included Paytm, Reliance Industries of Mukesh Ambani and Tata Group, according to a person familiar with the matter.
Dilip Asbe, executive director of NPCI, said services like RuPay and UPI have grown because they are well suited to the Indian market, facilitating social security payments and enabling easy, card-less mobile money transfers. The company is in talks to establish UPI in other countries, including Singapore and the United Arab Emirates.
“We are in competition with [other card companies] in a free market. . . NPCI has always created innovative products locally, ”he said. “Who stopped other companies from innovating? . . . We were very clear that whatever India needed, we would build it. “
However, there is one form of cashless payment that authorities are not interested in: cryptocurrencies, which the government has threatened to ban. The government views digital tokens as a threat to sovereign control of the currency, and the RBI, like many other central banks, is considering launching its own digital currency.
Some have argued that India’s efforts to promote digital payments while keeping the market on a tighter leash reflected changing political currents around the world.
“All the biggest countries are. . . create border conditions so that they can have a strong leverage effect, ”said a venture capitalist who invested in Indian fintech companies. “It’s a global thing.”