How Virtual Cards are Helping India Go Cashless

October 2022

Fintech & Payments

Michael Greenwood

Senior Research Analyst

What Are Virtual Cards?
 
Virtual cards are a digital payment tool that works in much the same way as a traditional credit or debit card. They generally have a 16-digit card number, an expiry date, and a CVV number. However, they are a purely online product, being ordered and delivered electronically. The virtual card is assigned to a payment source, which allows online payments to be made from that source through the virtual card, and virtual cards do not have magstripes or chips - so they cannot be used for chip and pin payments using card readers or cash withdrawals from conventional ATMs.
 
This setup means that virtual cards offer greater fraud prevention than traditional cards. The card number of a virtual card is randomly generated and can be unique for each electronic payment made, while the use of a third-party payment source means that if a virtual card’s details are stolen, the perpetrators do not get access to the user’s bank accounts.
 
India’s Adoption of Virtual Cards
 
Compared to other developing countries, India has been relatively quick to adopt virtual cards. This adoption has been driven, in no small part, by how the SBI (State Bank of India) began issuing their own B2B (Business-to-Business) and B2C (Business-to-Consumer) virtual cards in 2017; with the consumer virtual cards having a minimum amount issued of $1.26 (₹100) and a maximum amount of $629 (₹50,000).
 
Virtual cards can also be linked to major digital wallets, which in recent years, has enabled more Indians – including the country’s significant unbanked population – to access international eCommerce services and subscription-based products such as video streaming.
 
Given this situation, we expect India to see a large growth in virtual card usage over the next five years, in both B2B and B2C markets. Our forecasts for in-person POS virtual card transaction revenue, for instance, indicate that the Indian Subcontinent (which comprises India alongside smaller markets including Pakistan and Bangladesh) will grow at a CAGR of 80.9% over the next five years. This is in comparison to the relatively slow growth seen in North America, West Europe, and Far East & China, where there is a high level of competition from established digital payment methods.
 
Complex Regulatory Landscape
 
In recent years, the RBI (Reserve Bank of India) has issued guidelines to strengthen India’s digital payment sector – which is overwhelmingly aimed at a less cash-centric economy. These regulations require that providers standardise their security to follow established best practice, including setting out how partnerships can be formed and the circumstances in which third-party apps are allowed to interact with users’ accounts.
 
The RBI has also released guidance related to recurring payments. This regulation instructs that payment gateways require user approval for auto-renewable financial transactions worth over ₹5000 ($63), adding friction to the user experience where previously there was none. Given that this applies to reusable virtual cards of the sort typically used to manage subscription services, some large firms have suggested that this regulation will lead to an increase in recurring payments being declined.
 
For international vendors, cross-border payment products in India are governed by the Foreign Exchange Management Act 1999. This regulation enables selected financial institutions and payment providers to offer foreign currency pre-paid cards to Indian residents. If selected to be part of this, a virtual card provider would be able to offer pre-paid virtual cards in a foreign currency on the Indian market – providing a great opportunity to connect India’s growing economy to the world of international eCommerce.