India's Digital Payments: Visa and Mastercard Facing Challenges

India's Ascent in Digital Payments: A Model for Reducing Western Dependence

The evolving landscape of digital payments is witnessing a shift, with India emerging as a potential blueprint for nations aiming to lessen their reliance on established Western payment networks.

Global regulatory bodies are intensifying their examination of the fees levied by Visa and Mastercard on merchants. However, India has adopted a distinct strategy: the development of competing payment systems that are progressively diminishing the role of international card networks.

The Foundation: Unified Payments Interface (UPI)

India’s approach is centered around the Unified Payments Interface (UPI), a nine-year-old system facilitating direct connections between bank accounts. This bypasses traditional card networks through the use of QR codes and mobile phone numbers.

Currently, the UPI network processes over 13 billion real-time transactions each month. This represents approximately 71% of all transactions within the world’s most populous country and accounts for 36% of all consumer spending, as detailed in a Bernstein analysis.

The remarkable success of UPI has not gone unnoticed, prompting the government to leverage this momentum in reshaping the credit card market with RuPay, a domestically developed card network.

RuPay's Strategic Advantage

RuPay benefits from a significant advantage: it is the sole payment system authorized to process credit card transactions via UPI. This exclusivity, implemented in 2022, is proving to be a pivotal factor in its growth.

In the first seven months of fiscal year 2025, RuPay processed ₹638 billion ($7.43 billion) in UPI credit card transactions, nearly doubling the amount from the previous year.

These figures now constitute 28% of all credit card transactions in India, a substantial increase from 10% the prior year, according to Bernstein. (It's important to note that RuPay’s credit card market share is likely higher, as data on swipes at merchant outlets and certain other transactions is unavailable.)

Last year, authorities actively promoted the adoption of RuPay credit cards, a move initially met with resistance from some banks concerned about potential interchange fee losses.

Fee Structure and Regulatory Changes

The strategy incorporates a carefully considered fee structure. RuPay credit cards on UPI only impose charges on merchants for transactions exceeding ₹2,000 ($23.3). This is particularly attractive to small businesses, which have historically avoided credit cards due to merchant fees, as the average UPI credit transaction currently falls below ₹1,000.

Furthermore, India’s central bank mandated lenders to allow consumers to select their preferred card network when obtaining or renewing credit cards, effectively prohibiting exclusive agreements with global networks.

The National Payments Corporation of India (NPCI), which oversees both UPI and RuPay, also directed banks to ensure RuPay cardholders receive equivalent rewards to those offered by other networks.

Growing Market Share and Future Outlook

The initiatives appear to be yielding positive results. RuPay accounted for half of all new credit cards issued in India in June 2024, as revealed in a recent parliamentary disclosure.

A Bernstein report suggests that, “Assuming UPI linkage remains exclusive for RuPay cards, RuPay is likely to emerge as the dominant network for credit cards.”

The report further posits that, “Once QR code based payments become dominant for credit based payments too, credit accounts of banks could be directly linked to the UPI network bypassing the cards.”

Impact on Visa and Mastercard

Faced with strong governmental support and evolving consumer preferences, payment giants Visa and Mastercard have been compelled to adapt their operations in India.

They have recently partnered with fintech companies to expand card support to UPI-powered merchant terminals, utilized by over 10 million retailers across India. This collaboration represents a significant shift, as these card networks previously deemed it unfeasible to engage with such small merchants just a few years ago.

However, these efforts may prove insufficient. The exponential growth of UPI is eclipsing the broader credit card industry – credit cards’ share of India’s digital payments declined to 21% in 2024 from 43% in 2018.

For Visa and Mastercard, the challenge is substantial, and the path forward will be increasingly difficult unless they can successfully capitalize on this evolving opportunity.