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RS Sharma’s “work done” principle does not make sense for financial services

by Anand Raman

This post is triggered by the recently published Op-Ed piece in the Indian Express: Conditions for a less-cash India by Shri RS Sharma, Chairman TRAI (with a disclaimer that the views are his own and not of the authority).

Before venturing into discussing some of the points mentioned by Mr. Sharma, it is important to lay down some of my own views that I feel I have clarity on, with respect to digital payments. Despite being an early and intrepid convert, I do not believe that digital is the right answer all the time. I subscribe to the view that card based payment systems will continue to serve a valuable customer need for a long time to come. I do not see cash as evil – just inefficient. I hold the view that multiple payment mechanisms are the outcome not only of payments evolution, but also because they provide customers choice.

With respect to Mr. Sharma’s post, two out of three factors he mentions as essential for sustainability and scalability of digital payments – convenience (or ease) and confidence (or trust and security) are valid. The third: cost, is not. The preferred term is value instead – and this goes back to customer choice.

Customers will always be divided on whether such an item to be purchased is costly or not. This excludes buying the exact same item from two different stores at different prices. The difference is between buying a pen that costs Rs 10 or Rs 100 or Rs 1000. This is where there is a discussion precisely because customers are constantly making value choices. The same customer is likely to make different choices against the same product or service at the same price point – based on what other choices the customer faces at that time for that decision. To generalize that we are cost-sensitive is an oversimplification – even more so in financial services.

Hence the hypothesis that digital will be used only if it is cheaper than cash is not easy to prove. The success of all credit provider businesses including short term ones like Bajaj Finserv is proof that customers seek more than just cost when making purchase decisions. The cost of the item is less if one is able to pay for it outright. Customers deliberately choose to pay more, for a two-wheeler on an EMI, for example, because – and this is not an exhaustive list –

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  1. the customer does not have the necessary liquidity
  2. the customer knows that the other inconvenience (time spent waiting, commuting using public transport) and costs (use of an auto-rickshaw or taxi or metro) may cumulatively outweigh the premium that she pays for credit
  3. the customer knows that the immediate possession of the vehicle may create either a livelihood or efficiency opportunity that provides a very viable business case to her to make that decision
  4. the customer is recognizing that the provider is taking a risk –

All of these are a recognition of value rather than cost.

Mr. Sharma is entirely correct in saying that the copy-paste imposition of merchant discount rates from the Credit Card business model onto Debit Cards in particular is flawed. The value is not self-evident to the merchant or the customer. When there is no legitimate case to deny customers access to customer funds in the form of physical cash when withdrawn from branches (very expensive to Banks) or ATMs (less so, but still quite expensive to Banks) the bank’s (acquirers) pitch to merchants to pay a “premium” which is smugly called a “discount rate”, for the privilege of accepting digital payments via a debit card holds little value.  Besides, it is clear to the merchant that cash withdrawal costs his customer nothing and receiving that payment in cash costs the merchant nothing (certainly for the transaction as a unit).

Even so, merchants over a certain formalization threshold do not need to be goaded to accept these charges – fair or not. What explains that? For such merchants, their customers are paying a sufficient premium for the value being offered – enough that the merchant does not need to negotiate a margin on every transaction. This goes to the heart of the issue – in almost every case where the merchant [shoes, apparel, fashion, entertainment, food and many others] has the ability to create value and discover price without regulatory mandates, they are willing to adopt digital. Conversely, for every instance [fast moving consumer goods, mobile phones, white goods] or commodities that are critically dependent on cost rather than value differentiation, any additional burden becomes a choice between losing profits or passing up the opportunity itself.

This is why assessing pricing on the “work done” principle does not make sense for financial services. In fact, as Dr. K.C. Chakraborty (former deputy governor of the RBI) vehemently argued recently at the Mint Annual Banking Conclave in January 2017 in Mumbai, cash requires no work at all. Zero accounting entries, zero devices, no electricity, no literacy, negligible security risk and instant settlement – because the settlement is happening in central bank money i.e., physical cash.

This is not to say that digital cannot compete with cash or does not offer value. Remote payments are the simplest use case in point. There is no way cash can ever match the speed, ease, security or convenience of delivering a payment far away. The value is obvious and inherent. For remote payments cash is clearly a poor choice for customers.

A case in point is the domestic remittance business. Less than ten years ago, domestic remittances cost anywhere between 3 to 10 percent. Today, the market price for converting cash to digital for remote transfer is just under 1 percent and severely under threat. It is conceivable that in less than 3 years from now, domestic remittance will largely be free digital peer to peer. There will be no value available for providers to price – regardless of what it costs them.

Mr. Sharma is right that the categorization of banking clients as merchants and customers is completely artificial. In the real world, as soon as a merchant is able to set up shop, buy goods and attract paying customers that find value in the goods being sold, the merchant is in business. There is no requirement for the merchant to register the business, open a current account with a minimum balance or get a point of sale terminal – until he reaches the “formalization threshold” when enough customers demand that they would like to pay for his goods digitally.

The requirement to register the business is that of the government to levy taxes. The requirement to open a current account is that of the bank to make it’s business model sustainable. Neither the customer, nor the merchant attaches value to either of those at the point of transacting. Unless the merchant finds enough value – even the simple one of safekeeping his cash, the merchant will not choose to bank. There is every reason therefore to treat digital payments to merchants as free peer-to-peer transactions – at least when these do not involve credit or settlement risks.

I have posited here that for digital transactions that do not involve credit risk or settlement risk and are otherwise secured using any two factor or similar strong authentication mechanism that can potentially limit fraud to an acceptably low level, an extraneous transaction based ad-valorem pricing does not stand the test of scrutiny for value.

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For this, the simpler solution could be to offer customers choice of being able to make unlimited digital transactions for a fixed periodic fee. This is a payments neutrality position, not dissimilar to the net neutrality position. The choice of what end-use I put my data connection to, should not allow the provider of the connectivity infrastructure to determine price. Whether I use my data connection to search on Google, browse Wikipedia, listen to music, watch a movie, use net banking or shop on an e-commerce site is no concern of the Internet Service Provider. Similarly, whether a user of a digital financial service pays a person, business, government, merchant or charity, whether it is a remittance or payment or loan repayment or investment should be of no concern to the financial infrastructure provider.

Internet service providers have now moved to regimes where pricing is completely destination agnostic and linked directly to value they provide – that is speed of the connection and volume of data consumed per month.

It is time providers of payments also moved to a regime where pricing is completely beneficiary or end-use agnostic and linked directly to value they provide – volume of settlements and value of credit risk.

Ironically, the only pricing scheme that currently adheres to this today is for the use of cards at ATMs. There are n free transactions per month after which there is a flat fee per transaction. There is also a daily/per transaction ceiling to limit value which is evident to customers. Is it any surprise then that over 95% of customers use their cards at ATMs but not for purchases?

The regulator should resist the urge to prescribe or engineer market pricing or become a market participant. That runs the risk of reduced market freedom and may result in adverse consequences for customers. Market participants should be free to evolve business models based on customer behavior, promise of value delivery commensurate with price and competition dynamics. Stipulating pricing constrains business model discovery as well as innovation, the lack of both of which is mostly detrimental to customer and market interest.

In addition, consumer protection measures – preferably non-prescriptive – are most certainly the concern of regulatory authority. Every policy measure that can ensure security without introducing needless friction or causing disproportionate technological and supervisory overheads on market participants is most welcome.


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Anand Raman has over two decades of professional experience across Financial Services, Telecommunications, IT and Media. In the last five years he has been deeply interested and involved in the Financial Inclusion movement in India as part of the early team of a national Business Correspondent. Prior to that he was part of leading media and telecommunications businesses focused on Mobile enablement of content services.

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