Is Mastercard and Visa real winners of much of the FinTech wave, as majority of FinTech startups offer Mastercard or Visa debit cards?
Fintech spans Neobanking, Wealth Management, Personal Finance Management, Automated Savings and a wide category of other industries. I’m not so sure if a majority of fintechs offer Visa or MasterCard debit cards.
But it’s quite likely in the Neobanking subset of Fintechs.
In USA and Europe, one of the core messages with which Neobanks went to market was “zero fees” to differentiate themselves from traditional banks who allegedly slap many hidden charges (e.g. Overdraft Protection). Having done that, they had to find some way to generate revenues. Debit Interchange was a low hanging fruit.
Most Neobanks in USA don’t have a banking license and partner with a bank having a banking license.
Debit card interchange is capped under Frank Dodd Durbin regulation for banks above a certain size by assets (I think it’s $50B). It’s unlikely that Neobanks can partner with Big Banks and hope to get a slice of the meagre debit interchange. So, it became a practice de rigueur for Neobanks to partner with Small Banks whose debit interchange is unregulated. These banks make 1–1.5% in debit interchange. Even assuming that’s shared 50:50 with Neobanks partnering with them, that still leaves a good source of revenues for Neobanks.
To earn Debit Interchange, Neobanks have to issue Debit Card (via their bank partner). Since a majority of debit card market is owned by Visa / MasterCard, it’s natural that Neobanks will be offering Visa / MasterCard debit cards. To that extent, yes, they’re increasing the distribution of Visa / MasterCard.
Coming to India, Neobanks can eschew debit card and get away by offering UPI since UPI enjoys widespread acceptance. However, according to #ZeroMDR regulation which came into effect from 1 Jan 2020, there’s zero interchange fees for UPI – and RuPay Debit Card – transactions. This regulation is not applicable to Visa / MasterCard, whose cards continue to have interchange fees. Neobanks who were offering only UPI suddenly lost their source of revenue. It’s possible that they began offering Visa / MasterCard debit cards in order to earn some revenue.
As I highlighted in my blog post How RuPay Can Disrupt Visa and MasterCard:
So, Merchants have a strong incentive to promote RuPay against Visa / MasterCard.
Has it helped increase RuPay’s market share?
No, according to MoneyControl article entitled Finance Ministry move on merchant discount rates killing RuPay cards: Study:
IIT Bombay study says since there is nil merchant discount rates on the card, banks may not be able to make any money on RuPay card transactions. As a result, Visa and Mastercard are gaining. The study, Merchant transactions through debit cards – costs and prices, conducted by Professor Ashish Das of the Mathematics department, has found less RuPay debit cards being issued by banks from September 2019 to August 2020. Only 65 lakh debit cards have been issued in the period, compared to 4.6 crore cards in the corresponding period of the previous year, the study found. More Jan Dhan accounts, less RuPay cards. Das argues that this happened when 3.6 crore new Jan Dhan accounts were opened this year, compared to 4.2 crore in the previous year.
Will #ZeroMDR help boost RuPay’s offtake in future? I don’t think so.
So, even in India, I wouldn’t be surprised if Neobanks have increased the distribution of Visa / MasterCard.