Navigating the Card Payment Landscape: Decoding RBI's Circular on Card Network Agreements
[Nikita is a student at Lovely Professional University, School of Law, Punjab.]
On 5 July 2023, a draft circular on ‘Arrangements with Card Networks for the issue of Debit, Credit, and Prepaid Cards’ was issued by the Reserve Bank of India (RBI) in order to provide customers the liberty to decide the card network providers (CNPs) on the debit cards, credit cards, and prepaid cards. This step has been taken to by the RBI to: (i) enhance customer centricity in the current payment ecosystem; and (ii) protect customers rights and give them freedom of choice (which is curtailed due to exclusive agreement among the issuers and the CNP).
This article discusses the possible hurdles that may be faced while implementing the directions of the finalised circular and probable recommendations including that a further phased implementation by RBI can help in the smooth transformation.
Current Framework and Challenges
At present, it is the autonomy of the issuing banks or financial institutions to decide the network provider for the customer. However, post issuance of this circular, RBI has made it clear to give customers the upper hand in determining which CNP they wish to have while taking cards. The certificates of authorization issued by the RBI under the Payment and Settlement Systems Act 2007 for setting up and operating the payment system in India have been given to 5 card payment networks and only these networks have the authority to provide card networks to the issuers and ultimately, to the customers. In view of the competition, these CNPs enter into restrictive agreements with the issuers, ultimately resulting in limited options for the customers. Along with fewer options to the customers, these agreements also hurt competition due to their exclusivity. At present, there is no framework to regulate the relationship between the CNP and the issuers, and this is governed by bilateral contracts.
Phased Approach of RBI
The RBI wishes to make directions in Paragraphs 3(b) and (c) to be effective from 31 October 2023. Still, the circular needs to clarify the implementation of other parts such as Paragraph 3(a) i.e. card issuers shall not enter into any arrangement or agreement with card networks that restrain them from availing the services of other card networks. The potential reason for not making the above provision effective with the remaining portion of the circular can be due to current contractual obligations that the card issuers might have with the CNPs. Implementation of all the directions at once can be cumbersome for the issuer entities and the customers on account of additional compliance burden. Issuers might need some time to inculcate advanced technologies and a database of customers. Authentication and verification measures for customers wanting to port to other network providers will have to be implemented. In view of the above, a phased implementation can play a vital role.
Transfer of Information From One Network Provider to Another
This circular will overhaul the whole functioning of the issuers and CNP as it will result insignificant changes to the current functionality, for example - the transfer of data of the customers at the time of porting. When an existing customer chooses to port his / her CNP under these directions, the data of the customer will need to be transferred between the network providers. This can not only be a cumbersome process, but also raise issues such as privacy and data protection. Specific guidelines for transferring CNP should be implemented – for example, once the data is transferred, it should be erased from the transferor’s database after a reasonable time. In this context, the author suggests that subsequent directions should be issued after consultation with the stakeholders for proper collection, storage, and disposal of customers' data stored by the CNP.
Tokenization by CNP
The RBI on 7 September 2021 notified tokenization of card transactions in order to protect the sensitive data of customers while using online platforms. Earlier, tokens were also provided by CNPs – accordingly, in the event the customers are initiating portability, it is unclear on what will happen to such tokens created (for instance, will they be transferred or will new tokens be generated by the transferee CNP?). The RBI released a list of authorized entities of the token service providers with whom the service of tokenization can be availed, but the same is silent on the mechanism for cases of portability.
Possible Hurdles and Recommendations for Implementation
The RBI's circular holds significant implications for the card network market. By providing customers with the freedom to choose their network provider, it fosters a more competitive landscape and encourages innovation. However, promoting financial literacy becomes paramount to ensure this initiative's success. Educating customers about the implications and benefits of different card networks will empower them to make informed decisions.
As per a survey mentioned in the RBI’s National Strategy for Financial Education: 2020-2025, only 27.18% of the participating people surpassed the minimum threshold of financial literacy in 2019, this very data raises concern about the influence that issuers might have over the rest 72.82 % of the population.
Financial literacy initiatives should focus on improving consumers understanding of the various CNP options available, their benefits, and the potential impact of their choices. Collaboration between regulators, financial institutions, and educational institutions can help bridge the knowledge gap and enable customers to make independent and informed choices.
A potential hurdle lies in ensuring that customers are able to make unbiased choices without being swayed or influenced by card issuers. To address this concern, a comprehensive surveillance system must be put in place to monitor the actions of card issuers. Regulators should actively oversee the practices of these issuers, ensuring they adhere to the principles of transparency and fairness. By closely monitoring their marketing tactics and customer interactions, regulators can identify and prevent any attempts to unduly influence customers card network choices.
The other possible hurdle can be the definition or meaning of the term ‘eligible customers’ as referred to in Paragraph 3(c) of the draft circular which has not been clarified, thereby potentially leaving a room for card issuers to interpret the definition as per their convenience. To address this concern and ensure fairness, it would be advisable for the RBI to provide a clear and specific definition of an ‘eligible customer’ within the circular or through supplementary guidelines. This definition could include criteria such as minimum age, income thresholds, creditworthiness, or any other relevant factors to ensure that the eligibility of customers is determined objectively and uniformly across all card issuers. By establishing specific eligibility criteria, the RBI can mitigate the risk of manipulation by issuers who selectively designate customers as eligible based on their convenience. A transparent and standardized definition of ‘eligible customers’ would promote fairness, prevent discriminatory practices, and protect customers interests.
It would be beneficial for the RBI to consult with industry stakeholders, including consumer advocacy groups and card issuers, to develop a comprehensive definition of eligible customers that considers various perspectives and ensures a level playing field for all participants in the card issuance process.
India, being a developing country economically and digitally, has welcomed steps to protect and facilitate its stakeholders, and the RBI has played a critical role in maintaining and uplifting the objective of protecting customers. While awaiting the finalized circular, the author believes that it is crucial to provide ample time for issuers and CNP to adapt and implement the necessary changes, and other factors such as transfer of data and tokenization liabilities should also be considered. By addressing the above-mentioned challenges and (i) ensuring data security; (ii) promoting financial literacy; and (iii) establishing fair practices, the RBI can potentially create a competitive landscape that empowers customers to make informed choices regarding their card network providers.