How US payments groups ended up on the wrong side of India’s plans

In mid-2018, then-Mastercard CEO Ajay Banga enthusiastically defended Indian Prime Minister Narendra Modi’s push to promote electronic payments in the country’s cash-dominated economy.

Modi “gets it,” he told an audience in New York, highlighting the role of cash in everything from terrorist financing to the illegal drug trade.

Three years later, his company has found itself on the wrong side of India’s plans for the sector.

Last month, the Reserve Bank of India banned Mastercard from adding customers, saying it had failed to comply with regulations, implemented shortly after Banga praised Modi’s approach, which prohibits financial groups from storing data abroad. The RBI imposed similar restrictions on American Express and Diners Club in April, reducing the ability of US groups to expand into one of its fastest growing markets.

The central bank and the modes have gone to great lengths to make India less dependent on cash. Digital transactions have increased since the high-value notes that made up a large proportion of the country’s currency were suddenly withdrawn in 2016.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 reducing the cost of printing cash and developing India’s still largely informal economy and increasing financial inclusion and the tax base.

The evolution of the payment market in this country of 1,400 million is being observed around the world. In a market where 20% of the population do not have bank accounts and only 3% have credit cards, the expansion of financial services creates enormous business opportunities.

Three Indian fintech groups, including Paytm, which is backed by Alibaba, and Policybazaar, backed by SoftBank, have recently submitted to IPO.

“Everybody is ready to compete,” said Rajan Bajaj, founder of the card start-ups division in Bangalore. “India is the fastest growing credit card market in the world right now. Our opportunity is huge. “

But critics said policies like data location requirements that stumbled Mastercard and American Express were designed to cement control over business activity and erect trade barriers. The Indian authorities “are thinking of trying to control things rather than setting a framework for innovation,” said a foreign executive.

Meanwhile, the United States has condensed India’s policies as “discriminatory and trade distorting.”

The rules state that any financial data processed abroad must be destroyed within 24 hours and stored in India only. Companies are required to submit third-party audits that demonstrate 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 that 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 lobbies for American business interests.

Proponents of the rules responded that Mastercard, which according to estimates by fintech group PPRO accounted for a third of India’s card market, failed to deliver despite ample opportunities.

The RBI took action after the company missed several deadlines to clarify how it was processing the 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 localization rule “has been very, very clear for a long time,” said one Indian executive. “Some of the foreign companies prefer to sit down and push rather than fix their systems.”

Since the RBI ban last month, Mastercard 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 Government of India to ensure that we comply with both the letter and the spirit of the order,” Mastercard said in a statement.

“We are hopeful that this latest presentation will provide the necessary assurances to address your concerns. We are committed to putting all the necessary resources to meet the additional requirements. “

Existing Mastercard and Amex customers were unaffected, but the RBI’s decision left Visa the only major unrestricted foreign payments player 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 payments infrastructure at the heart of the government’s main political goals. 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 last year.

US business groups argued that Indian authorities used the regulation to tilt the market in favor of NPCI and other domestic companies to encourage national champions in financial services.

This year, India invited companies to bid for licenses to establish for-profit companies to compete with NPCI. Those interested included Paytm, Mukesh Ambani’s Reliance Industries and Tata Group, according to a person familiar with the matter.

Dilip Asbe, executive director of NPCI, said that services like RuPay and UPI have grown because they were well suited to the Indian market, facilitating social security payments and allowing easy mobile money transfers without cards. The corporation is in talks to establish UPI in other countries, including Singapore and the United Arab Emirates.

“We are competing with [other card companies] in an open market. . . NPCI has always created locally innovative products,” he said. “Who stopped the other companies from innovating? . . . We were very clear that whatever India needs, we would build it. “

However, there is a form of cashless payment that the 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, as with many other central banks, is considering launching its own digital currency.

Some argued that India’s efforts to promote digital payments while keeping the market under a tighter leash were a reflection of changing political currents around the world.

“All the biggest countries are. . . creating frontier conditions so they can have strong leverage,” said a venture capitalist who has invested in Indian fintech companies. “It’s a global thing.”