RBI's card network portability circular is open to different interpretations, may require more clarification

RBI's decision to let customers choose card network throws up unexpected interpretations

The RBI on March 6, issued the final circular on credit card network portability, asking banks or card issuers using cards over multiple networks to ensure that the customer is given a choice of their preferred network.

Last year July, RBI proposed the idea that banks and other card issuers should give customers a choice to decide the card network. It had requested comments from stakeholders, however, whether this is to be implemented at the bank level or card level was not discussed.

Banks are the major card issuers in the country while, Visa, Mastercard and the domestic National Payments Corporation of India-run Rupay are the major card networks. American Express is an issuer as well as a network in the country.

As of now, banks and card networks enter into partnerships to curate a specific card programme and based on the success of these cards, networks often give incentives to the banks. What customers often choose is a particular card product and are often agnostic about the network as long as it serves their purpose.

Card networks earn a payment commission for every transaction made through their platform. So greater the number of cards and transactions on their network, the more money they make.

While RBI is saying that customers should have the choice, the central bank has not said that the option should be available for every card that the banks issue in their portfolio. Most large credit card issuing banks – HDFC Bank, ICICI Bank, SBI Card and Axis Bank – have a portfolio of over 50 different card products.

India has close to 10 crore credit cards in circulation. The commission is not very high on debit cards and the segment has been on a decline since the emergence of UPI as the most popular digital payment system. The competition to issue more cards is mostly restricted to credit cards.

“To issue every single card product over multiple networks is a big expense for the banks apart from the certification and the complications involved. Our understanding is that this implementation is at the bank level and not at the card level. Most large banks are already on all card networks and hence most of us are already compliant,” said a senior banker, who heads the card division at a private sector bank.

However, one particular clause that makes this interpretation untenable is that whenever a bank is reissuing a card at the end of expiry, the consumers should be given a choice of choosing the network. This will require the transfer of reward points from one network to another network, which is not possible under the current commercial agreements banks have with the networks.

This becomes even more complex for co-branded credit cards where the brands that partner with banks also have a commercial with a network. It is often difficult to replicate identical or even similar terms with other networks.

“The understanding among the card networks is that this is at the card level because of the renewal clause. Banks are trying to delay the inevitable. Their current understanding is a position of their convenience rather than what the regulator wants,” said a senior executive with a card network.

“RBI’s purpose behind this move is business continuity and banks opting to go with one network could disrupt payments. This could also cause inconvenience to customers in case of any regulatory action against a network in the future,” said a senior banker, who works in the card division.

When the regulator banned Mastercard, American Express and Diners International for not being compliant with the data localisation norms, a few banks had to scamper for other network partnerships within a matter of weeks.

At the time, some of the banks were working exclusively with Mastercard and they could not even issue debit cards for those who were opening savings accounts with them. According to the regulatory requirement, banks are supposed to issue debit cards for all the accounts they open for customers, which meant banks could not even open savings accounts.

“Banks often enter into five to 10-year partnerships with networks and this creates a monopolistic behaviour, with other networks almost having no chance to break through the system. This put Rupay at a disadvantage and the circular is expected to put the domestic network on an even keel with the foreign networks,” said a senior banker who works closely with the regulator.

Since foreign networks with deep pockets were incentivising banks to issue cards on their network, Rupay had struggled to break through. However, since linking the Rupay credit cards with UPI, the network has seen a huge rise in popularity with all banks integrating the network with their systems.

A lot of premium credit card users wanted Visa or Mastercard as the Rupay network is not widely accepted outside the country. Hence, customers who intend to travel abroad tend to avoid Rupay cards. But most credit card users in the country have multiple cards that they acquire to maximise rewards and convenience.

“If a customer wants a Rupay card, they will get a second or third credit card to maximise the benefits and rewards. And that is easy and fast for existing credit card users,” said a third banker.

According to the banker close to the regulator quoted above, if banks interpret that this is applicable only at the bank level, it will violate the spirit of the guidelines.

“Even if the banks interpret it at the bank level, we will have to see how the networks are reading this. They also have to follow this. Any error in compliance will be caught by the regulator. You have to follow the regulatory guidelines in letter and spirit,” he added.

Bankers say that the impression that customers have a strong preference for a particular network is not correct and hence the choice is not relevant.

“The benefits and rewards customers get are not based on network, but based on the card product they choose. So the regulator’s idea that this gives consumers the choice won’t mean much. The question one should ask the regulator is what customer problem is being solved here,” said a founder at a fintech start-up that works with banks and card networks.

This could put customers at a disadvantage if this is at the card level. The additional expenses could mean that reward points could go down even further.

“This is indeed a burden. We will have to wait and see if this is at the card level or at the bank level. If it is at card level, this will slow down the launch of multiple cards by banks and reduce the options for customers,” the founder said, adding that if this is at the bank level, banks might well issue the low-value Rupay card as an alternative and is an easy circumvention.

Or in simpler terms, at the time of renewal, the customer would be sent a card with the same benefits on the original network and an additional card on a network of their choice, but both within the same existing credit line.

“If this has to be implemented at the card level, this is a classic case of the regulator trying to break the monopolistic behaviour of card networks but in effect, killing a system that has worked well for banks and customers over the years. The customer is actually at a loss,” said a founding member of another startup that works in the card industry.