As a small retailer who accepts card-based payments in India, one often asks the questions – how does this work and why does Visa charge me 2%?
Even as a consumer who had used cards, until I got into the Payment industry, I didn’t realize what a sophisticated system this is all about. The term Visa is often a pseudonym for cards – Visa, MasterCard, American Express, Diners, Discover,JCB, or the new Indian brand, RUPAY.
I thought I should explain what really happens and where does the so-called 2% really go.The examples below are for physical retailers – but the concepts are similar for Internet or Mobile Payments.
First and foremost – the rate isn’t 2%, and the majority of it doesn’t go to Visa. Both Visa & MasterCard are organizations that work through members – typically banks. Rupay is the Indian Card network that is being launched as a competitor to Visa & MasterCard. American Express, while similar in concept to the consumer, is run very differently – so some of the details may not be applicable.
These members issue cards to consumers – these may be Credit or Debit Cards (Prepaid cards are a variation of Debit Cards). Typically all members issue cards totheir consumers – these are called issuing banks.
Some of the banks may also sign up merchants – these are called acquiring banks – and often the merchants get a terminal called a Point of Sale (PoS) machine. The rate charged to the merchant is entirely governed by regulation and a negotiation between the Acquirer and the Merchant. In India the typical rates are ~1.6% for Credit Cards and between 0.75 and 1% for debit cards – the latter as per an RBI mandate. On the Internet, the rates may be higher – sometimes even as high as 7%.
How does a transaction work?
When you visit a merchant and choose the pay by card option, all the merchant needs to see is whether the card is Visa/MasterCard/AMEX and soon in India, Rupay – i.e. a card that his business has been acquired for. Which bank issued the consumers card is irrelevant as long as the card has a logo that the merchant has signed up for. All card-accepting merchants typically accept Visa & MasterCard – American Express today is typically with a smaller and more exclusive set of merchants.
When the merchant swipes (or dips in case of a Chip card) the card, the PoS contacts the server of the acquiring bank which in turn routes the transaction to Visa and from there on to the issuing bank. The issuing bank validates the user and blocks the amount from the users card and sends a confirmation response to the merchant, who then lets you walk out the store. All this happens in under-30seconds typically, and the money magically makes its way into the merchant’s bank account in 24 hours.
It’s fascinating that this complex system that talks across any of 25,000 banks in the world actually works – and we now take it for granted. But needless to say a LOT of robust and scalable technology, security, policies, standardization and marketing and consumer education is required behind the scenes, in order for the transaction to work 99.99% of the time.
So where does the transaction fee go?
In reality, neither Visa nor MasterCard makes the bulk of the money. The money goes primarily to the consumer’s bank – i.e. the issuing bank. For Credit Cards this is typically ~1% although it is higher for Gold, Platinum & Signature cards. The logic for this is simple – 1% is approximately the cost of funds forthe initial credit period (30-45 days). This is typically called the “Interchange”. The remaining money is shared between Visa (or MasterCard) and the Acquiring bank and covers the cost of program management – in many cases, for large merchants, acquirers actually lose money.
In the caseof debit cards, given that the bank isn’t lending you the money, these rates are significantly lower – the upper limit on the rates are mandated in India by the Reserve Bank to be 0.75% for small value and 1% for transactions above 2000 rupees. Correspondingly the interchange is about 2/3 of the fee – this is whatgoes to the issuing bank.
Visa & MasterCard don’t make a lot per transaction – but the sheer global volume of transactions helps them add up being multi-billion dollar companies.
As a merchant, why would a merchant want to accept cards?
Granted there is a cost – but there are several benefits to merchants to accepting cards.The key benefits are security & fraud, access to consumers and access to credit.
Security & fraud – are almost never factored in by merchants – the fact is every merchant ends up getting fraudulent bills, thefts, runnerboys who don’t bring back the 1Lakh rupees they collected etc. Additionally exact change,paying 100 rupees for 95 rupees of coins and other such issues can be minimized. These problems are largely eliminated in an electronic payments world.
Access to consumers – in a day of instant gratification and impulse purchases, as a consumer, one often spends more with a card in hand.Often, one doesn’t have cash in one’s pocket – but more often than not, when you pay by card, you don’t think twice to add an extra item or two to the grocery basket, even if it wasn’t in the list. From the merchants perspective, that additional sale is itself worth the transaction fee – but many merchants do not realize this initially
Access to credit – Most retailers are forced to fund their businesses themselves – especially in India. For example, telecom recharge, issold by the distributor to the retailer on a cash/prepaid basis. The same holds for most of the goods a retailer stocks – whether from an FMCG or Pharma-company.
A recent pilot done with small Kirana stores in Bangalore (who were equipped with atablet to become more “organized”) showed that retailers bought and sold 30% more when allowed to borrow from a bank. More importantly the retailer was able to stock what he felt the market wants, rather than whatever the distributor was willing to give him credit for. For banks to lend however, they need to know that the money will come back to them – and card-based payments are a sure way to facilitate the repayment.
Consumer Financing & EMI’s
For credit-card customers, EMI’s are what often decides if you buy a product or don’t – or if you can buy the product you want or the product you can currently afford. This is yet another reason why, in many cases, consumers are starting to prefer cards over cash for any big-ticket high-value purchase. I had never personally used EMI’s until a couple of months ago – and now I’m hooked.
Card acceptance as a marketing tool
I talked earlier about access to consumers in the context of people who might buy despite not carrying cash etc. This is only one side of the story. The banks and card companies are truly focused on spending a lot of the money they earn into programs such as loyalty, discounts, cash-back offers, special deals etc.
For merchants the choice is simple – accept cards and do more business – or ignore them and risk staying small.
I hope the above article is an easy read – I’ve tried to not use too many technical terms which often makes it very difficult to write about and understand for someone who isn’t from the industry. I’ll save the details for next time around.
Would love to hear your feedback here or on Twitter @theswamy
Ankit Mahindru
Very nice and informative. I learned something new today. Thanks!
Sanjay Swamy
Thanks for the note – glad it was informative.
Darshan Bhambiru
Nicely put and easily understood!!!
Although it has been almost a year and above that the system was building up from the base up in India, on the behest of the transactions involving Foreign Players, who have the Majority stake. India being the second largest populated country would definitely want to make use of those numbers for something which would not be an outward flow of the valuable Forex and revenue generated within the country.
Just to add more clarity adding the following here : Though this system was already in place in the International markets it’s now becoming widely acceptable in India as well, what with our very own Payment network system in place it would also become more manageable and cheaper with more participants locally and embracing Plastic money and going Online.
RuPay (RUpee+PAYment) is the Indian domestic card payment network (it is the Indian equivalent of Visa or MasterCard payment systems) being set up by National Payments Corporation of India (NPCI) the umbrella organization of all retail payment systems in India at the behest of banks in India. This project had been conceived by Indian Banks Association and has the approval of Reserve Bank of India.
The technology support is via Euronet. The first domestic debit card will gradually replace the MasterCard and VisaCard,
Since its launch on March 26, 2012, RuPay cards issuance has grown to over 3 million claims NPCI. RuPay debit cards are being issued by 20 commercial banks, 32 Regional Rural Banks and over 75 co- operative banks.
CCAvenue (We have Vishwas Patel as a RodinHooder) has been officially authorized by RBI to process transactions through RuPay Cards. RuPay is competing with Master/Visa and is expected to transform the Indian Banking sector.. Merchants using CCAvenue’s services would be able to collect payments through RuPay Debit cards along with Master/Visa Credit Debit cards. CCAvenue charges as low as 1.25% on RuPay debit cards.
The Internet and Mobile Association of India estimates India has 52 million active Internet users and 40 percent of them have shopped online. The introduction of RuPay as an online payment method is expected to contribute to a substantial increase the number of active online shoppers.
RuPay, a new card payment scheme launched by the National Payments Corporation of India (NPCI), has been conceived to fulfill RBI’s vision to offer a domestic, open-loop, multilateral system which will allow all Indian banks and financial institutions in India to participate in electronic payments. What makes RuPay transactions distinctive from Visa or MasterCard transactions is that the ATM pin number doubles as the secure code since RuPay manages both the ATM and e-commerce network.
The National Payments Corporation of India (NPCI) is a pioneer organization in the field of retail payments in India. It is a body promoted by RBI and has presently ten core promoter banks (State Bank of India, Punjab National Bank, Canara Bank, Bank of Baroda, Union bank of India, Bank of India, ICICI Bank, HDFC Bank, Citibank and HSBC). It has been incorporated as a Section 25 company under Companies Act and is aimed to operate for the benefit of all the member banks and their customers.
Functionality across ATMs, credit card point of sale terminals and over the internet are the holy trinity of any electronic payment service. Until now, the card could be used in ATMs and as a debit card only. Now, with the e-commerce platform also available, banks should have no reluctance in issuing RuPay cards,
Benefits of RuPay Card
The Indian market offers huge potential for cards penetration despite the challenges. RuPay Cards will address the needs of Indian consumers, merchants and banks. The benefits of RuPay debit card are the flexibility of the product platform, high levels of acceptance and the strength of the RuPay brand-all of which will contribute to an increased product experience.
Since the transaction processing will happen domestically, it would lead to lower cost of clearing and settlement for each transaction. This will make the transaction cost affordable and will drive usage of cards in the industry.
RuPay, being a domestic scheme is committed towards development of customized product and service offerings for Indian consumers.
Transaction and customer data related to RuPay card transactions will reside in India.
There are under-penetrated/untapped consumers segments in rural areas that do not have access to banking and financial services. Right pricing of RuPay products would make the RuPay cards more economically feasible for banks to offer to their customers. In addition, relevant product variants would ensure that banks can target the hitherto untapped consumer segments.
RuPay card is uniquely positioned to offer complete inter-operability between various payments channels and products. NPCI currently offers varied solutions across platforms including ATMs, mobile technology, cheques etc and is extremely well placed in nurturing RuPay cards across these platforms.
On Jun 21, 2013 NPCI launched RuPay PaySecure to enable e-commerce or online transactions using RuPay debit cards. RuPay platform’s presence or support in 100% e-commerce or online transactions done in India is expected to be completed only by end of 2013.
Roadmap:
RuPay is well poised to support issuance of debit and prepaid cards by banks in India and thereby supporting the growth of retail electronic payments in India. RuPay is also working towards enhancing the acceptance ecosystem in the country. Further RuPay is well poised to explore innovative payment opportunities such as Contactless to facilitate and increase the efficiency of increasing the small ticket payments electronically.
We can soon boast of India’s very own RuPay, Payment system in place similar to the well known players Visa, Master etc. So by 2020 RuPay transactions touches every Indian.
Karan Pandhi
Sanjay Sir and Darshan Sir,
Thank you to both of you for your wonderful information, will help me negotiate with those banker vamps who come and ask to take their swipe machines.
Glad to know those rates too.
Sanjay Swamy
Dharshan
Your comment merits being a post by itself – seriously RUPAY is a big topic and merits its own thread. However there are some clarifications in your post that are important to understand.
The bulk of the money doesn’t go to the switch provider (i.e. Visa/MasterCard or RUPAY) – it primarily goes to the issuing bank and thus the money going overseas is minimal. In most cases so much money is spent in India on marketing that its questionable if any money is going overseas – more the other way around for now.
Sanjay Swamy
Swipe machines – mPOS one with a bank of your choice. Drop me a private email – I don’t want to do any “named marketing” on this information board.
Darshan Bhambiru
Sorry, Did not have any intentions to Hijack your Post in any way, nor have attempted the same too 😛
Felt it more Relevant adding to the information here, to keep it in One place to find again as required by all or anyone interested 🙂
Yeah while trying to make it more Detailed, I guess the Post became a bit Longer than anticipated, have however not included the very Finer points, which are as you rightly Pointed out, to the Core of the Whole Mechanism to keep it Short 😀
Though now once RuPay is in full strength, majority of the Current account holders (as well as the savings) in all the Indian Banks would be automatically entitled to use this System in place apart from the existing Visa / Master in parallel, but since these would be Local and not Geographically Off Shore this should have the more Important “Mera Bharat” Emotion attached more than anything, every Technology and System does take time to settle down and get used to regular flow. Lets Hope this picks up as well Nicely!
Thanks!! And Cheers!!!
Darshan Bhambiru
Yes Karan,
Now you can also ask for this alternative if you feel Visa / Master is charging more than RuPay or you also are from the Clan “I Love My India” more than to at least get the required discount there Be Indian Buy Indian Mantra applied here. Rest is always as per the Business requirement and Scaleability involved.
So get the Vamps now 😉 And Swipe it off them!!
Cheers!!!