Earlier this month, the Reserve Bank of India (RBI) said it would be setting up an acceptance development fund (ADF) to boost the card payment infrastructure in the country. The proposed ADF which will be funded by card issuers to build a corpus by diverting a percentage of their transaction revenue into the fund. Money from the fund is then invested in structured initiatives to expand acceptance infrastructure such as POS terminals.
We have the dubious honour of having one of the lowest POS terminal penetration, according to an Ernst and Young report. The report said there were only 693 machines per million of India’s population, compared to similar emerging countries such as Brazil, which has 32,995 terminals per million people and China and Russia, each of which has around 4000 terminals per million people.
This was back in 2015 and the number of POS machines issued from banks has improved to over 14 lakh in July, as shown by RBI data.
Isn’t it odd that there are over 697 million debit cards and 25.94 million credit cards and there are only 14,43,899 POS terminals in the country?
Indeed, the RBI, in its concept paper to boost card acceptance, points out that people primarily used their debit cards to withdraw money from ATMs.
Closer look at POS terminal data
However, a if we look at closer at the POS terminals deployed in the country, we see a curious concentration. The top banks in the country – State Bank of India, ICICI Bank, HDFC Bank, Axis Bank and Corporation Bank – have the highest number of POS terminals accounting for 80.94% of all terminals in the country.
The RBI counts 56 scheduled commercial banks in the country. Not to mention that there are 56 functioning regional rural banks and 93 cooperative banks.
It’s interesting to note that the banks mentioned above generally have a well developed credit card business portfolios which contribute to their balance sheet in a significant way.
Enter the MDR
An explanation for the skew of POS terminals within these banks could be that they get to charge merchants a higher merhcant discount rate (MDR), an inter-bank interchange fee, for credit card transactions.
The MDR is fee collected by banks from merchants for a card transaction. When a customer uses a HDFC Bank credit card on a POS terminal, the merchant is charged a fee to settle the payment in another bank.
Typically banks charge around 2-2.5% per transaction on credit cards. However, the RBI has capped the MDR for debit cards at 0.75% for transactions below Rs 2,000 and 1% for transactions above Rs 2,000.
The devil, however, lies in how the MDR is split between the bank issuing the card and bank accepting the payment. For credit cards, the issuing bank gets around 1.8% of the 2-2.5% MDR. Meanwhile for debit card transactions, issuing banks make around 0.5% out of the 0.75% interchange fee.
No incentive to develop the system
Currently, other banks (public, regional and cooperative banks) have no incentive to develop card acceptance networks. They are not interested or do not have the expertise to develop a credit card business to command a higher MDR. They would rather have their customers use debit cards as a dumb instrument to withdraw cash at ATMs instead.
Rahul Kothari, vice president and head of business at PayUbiz explained that banks look at POS as a means to retain customers through current accounts and offer them other products.He added that right now there is no level playing field between third party companies who develop POS solutions and banks. RBI guidelines say that third party companies need to take permission from banks to process POS payments, Kothari added.
Third party POS players in India include PayU, MSwipe, Ezetap and Oxigen.
Industry sources also pointed out that banks charge around 5-10 basis points (bps) for getting a bill of sponsorship to handle POS payments. MediaNama was unable to independently verify this.
What needs to be done
There needs to be a more equitable distribution of the MDR between banks which will open up competition between smaller banks who will now have a reason to build their card acceptance networks. To an extent, the ADF aims to do that by taking a portion of the fees got by the issuing bank and put it into a corpus to get more POS terminals in the country.
However, the RBI should ensure that the proceeds of the fund should go to banks who do not have a proper card acceptance network.
Secondly, third party POS players must also be brought into the discussion. For example, Oxigen has a product called Super POS which also doubles as a mini ATM and has biometric and Aadhaar authentication. The RBI recently issued a notification which instructed banks to upgrade ATMs and POS machines to accept Aadhaar. Banks should figure out a way to work with non-bank entities to push for a cash less environment.
Perhaps, banks can employ third party players as banking correspondents in rural areas and get give a cut from the MDR to them.
What about QR codes
Paytm has an interesting approach to offline merchants. Recently the company announced that it has more than a half a million offline merchants. Paytm’s offline merchants have a QR code which a customer has to scan on the app to make a payment. Effectively, it has turned the POS system on its head by cutting the costs of installing and maintaining a POS terminal.
Once a customer decides to move his/her money to a bank account, they need to pay a fee of 1% to Paytm which is considerably lesser than the MDR charged by banks. I spoke to a mom-and-pop shop owner in the neighbourhood who said that this was a lot more cheaper than the costs associated with cards. He explained that he wants acceptance of Paytm to increase so that savings on transactions will be reduced.
To sum up
There are a number of factors which are inhibiting the growth of POS terminals in India:
– Allowing only banks to lead the way on POS.
– The bank interchange fee (MDR) for merchants is too high.
– The cost of handling and maintaining machines are an added cost for merchants.
– The split of MDR disproportionately favours the banks issuing cards. There needs to be a more equitable distribution of the fee between the issuing bank and the accepting bank.