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The Reserve Bank of India came out with a concept paper earlier this week for improving the card acceptance infrastructure and is seeking comments, suggestions and views from relevant players on the same.

“The “economics” of card payments plays an important role in ensuring greater and wider participation of all stakeholders involved in the card payments value chain and, as such, any strategy geared towards expansion of the infrastructure in a “managed” way has to also address these issues,” the RBI said.

Accordingly, the RBI has outlined a broad strategy to enhance the growth in acceptance infrastructure through POS terminals and usage of cards which includes further rationalisation of  merchant fees for debit card transactions. Here are some of the take aways from the paper:

Card payments in India

– The RBI noted that growth in electronic payments is not uniform across all segments nor is it visible at all locations across the country. Particularly, in the context of cards, while the card base is increasing rapidly, activation or usage rates are quite low, especially for purchase of goods and services. Card usage at ATMs, on the other hand, is quite high.

– Debit cards registered a growth of 64% between Oct 2013 and Oct 2015 while credit cards grew at 23% during the same period. As at end-December 2015, the total number of credit cards stood at 22.74 million while debit cards stood at 636.85 million cards in the country.

RBI card payments 1

– Between Oct 2013 and Oct 2015, ATMs increased by around 43% while POS machines increased by around 28%. As of end-December 2015, the number of ATMs has increased to 193,580 while POS machines had increased to 1,245,447 in the country.

RBI card payments 2

–  From April 2015 to December 2015, the usage of debit cards at ATMs continues to account for around 88% of the total volume and around 94% of total value of debit card transactions. Usage of debit cards at POS machines accounts for only around 12% of total volume and 6% of total value of debit card transactions.

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–  From April 2015 to December 2015, credit card usage at ATMs accounted for around 0.73% of volume and 1.25% of value of total credit card transactions. Use of credit cards for POS transactions accounted for 99.27% of volume and 98.75% of value of total credit card transactions in the country.

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– While almost every bank is a card issuer, very few banks are engaged in the activity of merchant acquiring and setting up of card acceptance infrastructure. Thus, there is concentration in acquiring business with the top 5 acquirer banks accounting for nearly 81% of the POS infrastructure and top 10 acquirers’ share of POS being above 90%.

–  The number of merchant establishments accepting card payments has increased from 0.85 million merchant establishments in Oct 2013 to around 1.15 million establishments in Oct 2015, a growth rate of 34%. As on Dec 2015, the number of such merchant establishments was 1.26 million.

Factors inhibiting growth for card acceptance

High cost of acquiring business that include high capital cost of POS machine, recurring maintenance, difficulty of servicing POS machines in rural areas.

– Low utilization of cards makes acceptance for small merchants and in rural areas unviable due to low card footfalls and low transaction values besides other costs associated with merchant acquiring, ultimately forcing acquiring banks to withdraw the POS terminal.

Lack of adequate and low cost telecommunication infrastructure 

– Lack of incentive for merchants to accept card payments is another inhibiting factor. Further, transparency and audit trails associated with card payments often act as deterrent for accepting card payments by merchants.

– Insufficient awareness about the costs associated with use of cash  apprehension of using non-cash payments, especially concerning its safety and security, anonymity associated with cash payments, surcharge and convenience fees being levied for use of card and electronic payments, difficulties in changing consumer behavior, etc. also inhibit growth / usage of card of payments for purchase of goods and services.

– Merchant Discount Rate (MDR) also often acts as a disincentive.

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Strategies for enhancing acceptance

Mandate installations of POS terminals in proportion to cards issued: The RBI said that banks issuing cards should install proportionate number of POS terminals to the number of cards issued. However, it noted that not every bank is equipped to run merchant acquisition business. The lack of expertise may lead to some banks entering this business through outsourcing model which later might prove costly.

Setting up of Acceptance Development Fund (ADFs): The RBI also mooted for setting up an ADF where different stakeholders in the card payment chain come together to set up a program to encourage wider deployment of card acceptance infrastructure. These are generally funded by card issuers to build a corpus by diverting a percentage of their transaction revenue into the fund which is then invested in structured initiatives to expand acceptance infrastructure.

ADFs are usually managed by third parties who establish the framework for use of funds which include subsidies for installation of terminals, development of new technologies / segments / geographies, marketing and education to increase awareness for acceptance as well as for usage.

Rationalisation of Merchant Discount Rate

The major source of revenue in the card business is the Merchant Discount Rate (MDR) or Merchant Service Fee. MDR comprises other cost segments such as the interchange fee (fee paid by acquirer to card issuing bank), processing and other fees payable to the card network, and other costs incurred by the acquirer along with acquirer’s margin. The RBI has proposed a number of options for the rationalization of the MDR some of them are:

Uniform MDR across all merchant categories & locations proportionate to transactions size:  RBI had fixed a cap on MDR  for debit card usage as

  • not exceeding 0.75% of the transaction amount for value upto Rs. 2000/-
  • not exceeding 1% for transaction amount for value above Rs. 2000/-

This is basically maintaining status quo for the regulatory structure. However, the growth in deployment of POS terminals has come down as lower MDR was cited as on of the reasons making the business unviable.

Differentiated MDR at select merchant categories at all locations: Another approach is to have a differentiated MDR framework for some select merchant categories across all locations. For example, some merchant categories could include  utility bill payments (electricity, water, gas, telephone), municipal taxes, primary hospitals and health centres, primary educational institutions, public distribution system outlets ( like ration shops), fertilizers, seeds and similar agricultural products, public transport, etc.

Differentiated MDR at select merchant categories in Tier III to VI locations: An another alternative  is to rationalise MDR in select categories in Tier III to VI locations with the objective of ensuring wider deployment of POS terminals.