Credit Card Usage: RBI to let Customers Choose Card Network
26-08-2023
01:20 PM
1 min read
What’s in today’s article?
- Why in News?
- India’s Credit Card Market
- What Does the RBI Proposal Entail?
- What is the Role of Credit Card Networks?
- Why Has the RBI Decided to let Customers Choose Card Network?
- Likely Impact of This Decision
Why in News?
- The Reserve Bank of India (RBI), in a draft circulation, directed card issuers to offer their customers the option to choose card networks like Visa, Mastercard, RuPay, American Express, etc.
India’s Credit Card Market
- According to RBI data, banks have issued 8.65 crore credit cards, as of April 2023.
- Monthly credit payments are now over Rs 1 lakh crore every month, with card payments touching Rs 1.32 lakh crore in the month of April 2023.
- On a year-on-year basis, the credit card outstanding has soared to Rs 2 lakh crore.
- Spending has been high in contact-intensive sectors such as travel, hospitality, and tourism.
- Additionally, non-discretionary spending is also being routed through credit cards primarily due to the innovative reward structure followed by various banks.
- The surge in credit card usage in India is a positive indicator of the growing purchasing power of our country.
What Does the RBI Proposal Entail?
- The Reserve Bank of India (RBI) has proposed that card issuers provide an option to their eligible customers to choose any one among the multiple card networks.
- This option may be exercised by customers either at the time of issue or at any subsequent time, the RBI said in a draft circular to banks.
- The RBI has said card issuers should not enter into any arrangement or agreement with card networks that restrain them from availing the services of other card networks.
- The proposal requires banks to parent with more than one card network and to provide an option to their eligible customers to choose any one among the multiple card networks.
What is the Role of Credit Card Networks?
- Credit card networks provide the centralised communication system that card issuers like banks and non-banks use to process credit card transactions.
- The networks and issuers authorise and process credit card transactions, set the transaction terms, and move payments between customers, businesses, and their banks.
- Major credit card networks include Visa, Mastercard, American Express and RuPay.
- Banks usually issue credit cards to customers in association with card networks.
- If a customer has a credit card issued by the bank with its logo and the Visa logo on it, the bank is the credit card issuer and Visa is the credit card network.
- When a customer uses a credit card to make a purchase, the transaction request goes to the credit card issuer, who then decides whether or not to authorise it through the network system of the card networks.
- The bank extends credit to the cardholder, and the cardholder pays the bank back for purchases made with the credit card.
Why Has the RBI Decided to let Customers Choose Card Network?
- Many banks have exclusively tied up – informally – with card networks to offer their services whether the customers prefer them or not.
- While one of India’s leading two private banks have tied up with Visa, the other one offers only the network of MasterCard.
- The RBI observed that existing arrangements between card networks and card issuers (banks and non-banks) are not conducive to the availability of choice for customers.
- Some banks have been forcefully asking customers to accept particular card networks.
Likely Impact of This Decision
- Earlier, global payment networks used to incentivise banks to issue cards on their networks to gain market share.
- As the choice of network provider was with the bank, payment networks had no incentives to cut charges for merchants or customers.
- Now, payment networks that offer a better deal for the customer will stand to gain market share.
Q1) What is NPA in Banking?
Non-Performing Assets (NPAs) are loans or advances issued by banks or financial institutions that no longer bring in money for the lender since the borrower has failed to make payments on the principal and interest of the loan for at least 90 days.
Q2) What is Collateral in simple terms?
Collateral is an item of value that a lender can seize from a borrower if he or she fails to repay a loan according to the agreed terms.