India’s credit card rules just took the ease out of Uber

In India, there are an estimated five million taxi rides daily.
In India, there are an estimated five million taxi rides daily.
Image: AP Photo/Saurabh Das
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This story has been updated.

For the Indian commuter, Uber has been the coolest ride on the block. The cab-booking service’s convenient, cashless payment system made it a hot favorite in India—it brought freedom from hailing a cab, haggling over the fare, or dealing with notorious taxi drivers who won’t give change or comply with the prescribed meter fare.

No wonder then that within a year of its launch, India became Uber’s largest market outside the US. A big part of the appeal was that paying for an Uber ride was completely frictionless: riders could walk away from their Uber car and their credit cards would be automatically billed for the fare.

But now things are about to change. Due to a long-running dispute with the Reserve Bank of India (RBI) about Uber’s use of customers’ stored credit card details—which was triggered by complaints from India’s old-school taxi operators—Uber has been forced to set up a new system with local payments firm Paytm that allows users to load cash onto a virtual wallet that can then be used to make transactions.

How Uber hit a roadblock in India

India has stringent rules on recurring payments using credit cards: For a “card not present” transaction, as in most online or in-app payments, the RBI requires a mandatory two-step authentication system, with a verification code that is sent to a customer via text message or email. The customer then enters the code to finish the transaction.

The rule was put in place in 2009 to reduce fraud and cyber crime—especially merchants that kept charging customers even after they wanted to discontinue payments. But it has been criticized by many Indian tech start-ups as a cumbersome restriction that has made it difficult to build online businesses.

Uber had been dodging the regulation by routing payments through a foreign subsidiary, which made it exempt from the two-step authentication. Though the receipt was issued on behalf of the Indian driver, a Dutch bank was accepting the payment in rupees from the customer, while the payment for the cabbie was being routed in dollars.

In August, the RBI closed that loophole, and clarified that online payments for goods and services within the country, “the acquisition of such transactions has to be through a bank in India and the transaction should necessarily settle only in Indian currency.” Uber was given until the end of November to comply with the bank’s rules on two-step authentication and payment in local currency.

The fact that Uber was bypassing the rulebook was brought to the Reserve Bank’s attention by homegrown taxi companies, such as Meru Cabs and Easy Cabs, which face tough competition from the sophisticated American company. And it’s a big homegrown market: India has 2.3 million registered taxis and an estimated 5 million daily taxi rides; the sector is valued at about Rs54,000 crore ($9 billion).

Despite raising objections about Uber’s business practices, some of taxi services have started imitating Uber, building similar apps to make the booking process easier.

How the new system works

When Uber first launched in India, the process couldn’t have been simpler: Enter your credit only once, and then use the service without ever having to deal with payment details again. But now it’s about to get a lot more complicated.

Under the new set-up, Uber users will now need to first put money into a virtual wallet powered by Paytm, which requires a separate app that’s available for Android and iOS devices, and link their Paytm wallets to their Uber accounts. The minimum recharge amount is Rs. 100 ($1.60).

After every Uber ride, the ride fare will be debited from the wallet. And when the wallets run out of money, they will need to be refilled, and a two-step authentication code will need to be generated each time a credit card is used.

If a rider overdraws on the wallet, the account goes into a negative balance, and the rider is prompted to recharge the account.

Update: A spokeswoman for Uber told Quartz that an overdraft will not be able to hail a cab.

It’s a relatively straightforward, if undeniably more cumbersome process. But there are still some questions remaining: Is there a limit on the overdraft amount? Who will bear the losses if overdrafts go unpaid?

Paytm, too, mentioned nothing on dealing with negative balances. Whether its arrangement with Paytm will require Uber to be locally registered and pay more taxes in India is also unclear. However, Uber users can still use international cards directly to make payments.

The good news

Through Paytm, Uber has been able to expand service to users without credit cards, since the virtual wallet can also be recharged using a debit card or banking account. In India, where debit cards are issued about 20 times mores commonly than the credit cards, the move will almost certainly bring in new customers.

And the deal is a big win for Paytm. Announcing its tie-up with Uber, the company said it was looking at expanding beyond its roughly 16 million users in India. Soon after, Vijay Shekhar, CEO of Paytm, sent out this tweet:

And some early offers:

Currently, Uber is operational in 10 cities, including Kolkata, Mumbai, Bangalore and Delhi, and employs more than 15,000 drivers. The smartphone-based car-booking company is funded by Goldman Sachs and Google Ventures, among others, and is reported to have generated over $1 billion in gross global bookings over the last year.