Card-Based Payment Systems

Card-based payments in India refer to transactions done via debit cards, credit cards, or prepaid cards. These cards, usually plastic but increasingly also virtual, are linked to electronic payment networks that allow funds to be withdrawn or spent digitally. The use of cards has been a cornerstone of cashless payments for decades, and in India it has grown alongside ATM expansion and point-of-sale (POS) infrastructure.

Types of Cards

Debit Cards

These are linked directly to a customer’s bank account (savings or current). When used for payment or ATM withdrawal, funds are debited from the account almost immediately. Debit cards are commonly used for ATM cash withdrawals, swiping at merchant POS terminals, and online shopping. Banks issue debit cards to account holders (often on the RuPay, Visa, or MasterCard network) for convenient access to their deposits.

Credit Cards

These provide a line of credit to the user for making payments. A credit card transaction is a loan from the issuer bank to the cardholder, which the cardholder must repay (usually monthly). Credit cards allow purchases even if the bank account doesn’t have balance at that moment, up to an approved credit limit. They are widely used for retail shopping, online payments, and even cash advances. Key features include interest-free periods, rewards/cashback, but high interest on revolving dues.

Prepaid Cards

These cards are pre-loaded with a certain amount of money in advance. They could be gift cards, travel forex cards, or prepaid wallets issued as cards. The user can spend up to the loaded amount. Prepaid cards can be reloadable or for one-time use. They do not require the holder to have a bank account (in some cases), thus serving people who may not qualify for credit or debit cards. Examples include prepaid meal cards or toll payment cards. They are typically issued by banks or authorized prepaid payment instrument issuers and can be open-loop (usable at any merchant, e.g. Visa/Master/RuPay prepaid cards) or closed-loop (usable only at specific issuer’s outlets).

ATM and POS Usage:

ATMs (Automated Teller Machines)

ATM cards or debit/credit cards are used at ATM terminals to withdraw cash, check account balance, deposit cash or cheques (at advanced machines), and obtain account mini-statements. India has a large ATM network with over 250,000 ATMs nationwide, connected through the National Financial Switch (NFS) managed by NPCI.

Thanks to this shared network, a customer of any bank can use any other bank’s ATM for basic transactions (subject to certain free limits and fees).

For example, a SBI debit card can withdraw cash at an ICICI Bank ATM – NFS will route the transaction and settle the funds between SBI and ICICI. ATMs have been crucial in last-mile cash delivery; they operate 24×7, reducing the need to visit bank branches for cash.

The interoperability via NFS, which started in 2004 and was taken over by NPCI in 2009, has made ATMs extremely convenient and contributed to the popularity of debit cards.

POS Terminals

These are card swipe or dip machines (now also contactless NFC readers) at merchant outlets – shops, restaurants, fuel stations, etc. When a customer uses a debit or credit card at a POS terminal, the machine reads the card details (magstripe or chip), the customer enters a PIN or provides a signature (or simply taps for small contactless transactions), and the transaction is processed via the card network.

The POS terminal is usually provided by an acquiring bank to the merchant. India has seen a rapid increase in POS installations, including mobile POS devices and QR-code based payments, to encourage digital transactions.

Debit cards are often used in POS for direct payments from bank accounts, whereas credit cards offer buy-now-pay-later convenience. With the advent of contactless payments, many cards now allow tap-and-pay for transactions (generally under ₹5,000 without PIN) using NFC technology.

Settlement of Card Transactions and NPCI’s Role

When a card is used (debit or credit), the transaction goes through a card network. Major card networks operating in India include Visa and Mastercard (international networks), and RuPay (India’s domestic card network launched by NPCI in 2012). The card network acts as an intermediary between the issuer bank (the bank that issued the card to the customer) and the acquirer bank (the bank that installed the POS at the merchant or operates the ATM used). Here’s how it works:

For a POS transaction

Suppose a customer uses an HDFC Bank debit card (Visa network) at a merchant whose bank is Axis Bank. The POS terminal sends the transaction request to Visa, which then authorizes with HDFC (checking the customer’s account for funds). Upon approval, the merchant completes the sale.

Visa network will then clear the transaction, meaning it calculates that HDFC (issuer) needs to pay Axis (acquirer) the transaction amount (minus any fees). Settlement happens typically by the next day: the issuer bank transfers the amount (minus interchange fee) to the acquirer, which then credits the merchant’s account. This interbank settlement often occurs through the RBI (debiting issuer’s account, crediting acquirer’s) or through net settlement files processed by RBI.

For an ATM withdrawal

If a Bank of Baroda customer uses a Punjab National Bank ATM, the transaction is routed via NPCI’s NFS network. NFS instantly checks with BoB (issuer) for funds and debits the customer’s account, while instructing PNB’s ATM to dispense cash. NPCI then nets all such ATM transactions across banks and does a multilateral settlement – e.g., at day end BoB will pay PNB the total of all its customer withdrawals at PNB ATMs, etc. This sharing of infrastructure greatly expanded ATM reach in India with lower costs.

NPCI’s specific roles in card payments

NPCI is instrumental as an operator and settlement agency in multiple ways:

RuPay Card Network

NPCI’s RuPay is a domestic card scheme that has wide acceptance at ATMs, POS devices, and e-commerce websites across India. RuPay was developed to reduce dependence on foreign networks and to offer lower transaction costs. By 2025, RuPay cards are issued by most banks (including for Jan Dhan financial inclusion accounts, PMJDY). NPCI manages the clearing and settlement of RuPay transactions. It processes these transactions and settles interbank amounts often through RBI. RuPay’s share of card transactions has grown substantially, and it includes debit, credit, and prepaid variants (e.g., RuPay Metro transit cards, RuPay Kisan cards for farmers).

National Financial Switch (NFS)

NPCI took over NFS – India’s largest network of shared ATMs – in 2009. NFS connects over 1,200+ members (banks) and 3 lakh ATMs nationwide. It switches millions of ATM transactions monthly. NPCI also enables ATM services like card-to-card fund transfers (one can transfer money using debit card at an ATM to another account via NFS). By handling ATM interoperability, NPCI ensures you aren’t limited to your own bank’s ATMs.

Card Settlement and NPCI

Even for card networks not run by NPCI, the settlement may involve RBI and the use of net settlement files. NPCI as the retail payment organization often acts as an aggregator to send combined multilateral net settlement batches (MNSB) to RBI for various systems, including card networks. NPCI’s systems operate under RBI oversight to maintain stability.