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

In mid-2018, Mastercard’s then-chief executive 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 terrorism funding to trade in illegal drugs.

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

The Reserve Bank of India last month barred Mastercard from adding customers, saying it had failed to comply with regulations — implemented shortly after Banga praised Modi’s approach — that forbid financial groups from storing data overseas. The RBI imposed similar restrictions on American Express and Diners Club in April, curtailing the US groups’ ability to expand in one of their biggest growth markets.

The central bank and Modi have been trying hard to make India less cash-dependent. Digital transactions have surged since high-value notes that made up a large proportion of the country’s currency were suddenly withdrawn in 2016. The Unified Payments Interface, a mobile money network that allows instant bank-to-bank transfers, was launched by the central bank that same year.

Officials said reform was vital to reducing the cost of printing cash and to developing India’s still largely informal economy and increasing financial inclusion and the tax base.

The evolution of the payments market in this country of 1.4bn is being watched around the world. In a market where 20 per cent of the population does not have bank accounts and only 3 per cent have credit cards, the expansion of financial services creates enormous business opportunities.

Three Indian fintech groups — including Paytm, which is backed by Alibaba, and SoftBank-backed Policybazaar — have recently filed for IPOs. “Everyone is out to compete,” said Rajan Bajaj, founder of card start-up slice in Bangalore. “India is the fastest-growing credit card market in the entire world right now. Our opportunity is massive.”

But critics said policies such as the data localisation requirements that tripped up Mastercard and American Express were designed to cement control over business activity and erect trade barriers. Indian authorities “are thinking about trying to control things rather than set up a framework for innovation”, one foreign executive said.

The US, meanwhile, has condemned India’s policies as “discriminatory and trade-distortive”.

The rules hold that any financial data processed overseas has to be destroyed within 24 hours and stored only in India. Companies must submit third-party audits showing compliance, which the RBI says is necessary to prevent money laundering and other illegal activity.

The changes prompted furious lobbying by US payments groups when they were introduced. Companies argued that the rules were costly, counterproductive and encouraged other countries to take similar steps, according to one person familiar with their discussions with regulators.

An Indian bank teller counts out notes as senior citizens wait to withdraw money at a bank in Amritsar, IndiaIndian policymakers have been trying to make the country’s economy less cash-dependent © Narinder Nanu/AFP via Getty

“The free flow of data across borders is the bedrock of a robust strategic and economic relationship between the US and India,” said Alexander Slater, deputy managing director of the US-India Business Council, which lobbies for American business interests.

Advocates of the rules countered that Mastercard, which according to estimates from fintech group PPRO accounted for one-third of India’s card market, failed to comply despite ample opportunity.

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 localisation rule “has been very, very clear for a very long time,” said one Indian executive. “Some of the foreign companies would rather sit and lobby rather than fix their systems.”

Since the RBI’s 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 Indian government to ensure we are compliant with both the letter and the spirit of the order,” Mastercard said in a statement.

“We are hopeful that this latest filing provides the assurances required to address their concerns. We are committed to putting in whatever resources are required to meet any additional requirements.”

Mastercard and Amex’s existing customers were not affected, but the RBI’s decision left Visa as the only unrestricted big foreign payments player in the country.

A police officer walks past the Reserve Bank of India in MumbaiThe Reserve Bank of India has argued that regulations on storing financial data overseas were necessary to prevent money laundering and other illegal activities © Kanishka Sonthalia/Bloomberg

Its biggest rival is now the National Payments Corporation of India, a not-for-profit set up by the RBI with a consortium of Indian banks to develop payments infrastructure at the heart of the government’s policy goals. Its card operator RuPay has issued more than 600m cards, while its UPI mobile money network soared to 3.2bn transactions in July, more than double the number last year.

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

This year, India invited companies to bid for licences to set up for-profit businesses to compete with the NPCI. Among those interested were Paytm, Mukesh Ambani’s Reliance Industries and Tata Group, according to a person familiar with the matter.

Dilip Asbe, NPCI’s chief executive, said that services such as 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 set up UPI in other countries, including Singapore and the United Arab Emirates.

“We’re competing with [other card companies] in an open market . . . NPCI has always built local innovation products,” he said. “Who stopped the other companies from innovating? . . . We were very clear that whatever India needs, we would build.”

There is, however, one form of cashless payment that authorities are not keen on: cryptocurrencies, which the government has threatened to ban. The government views digital tokens as a threat to sovereign control of currency, and the RBI, as with many other central banks, considering launching its own digital currency.

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

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

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