This is a continuation of the discussions on the Watal Committee Report

Encouraging increased use of electronic modes of transactions was one of the objectives pursued by the Watal Committee. In this direction the committee considered the transaction cost structure  involved in the use of cards where the acquiring Bank collects MDR, (Merchant Discount Fee/Rate) pays interchange fee to the card issuing bank and the scheme fee to the scheme owner such as Master or Visa. In the present scheme MDR is 0.75% for transactions less than Rs 2000 and 1% for transactions above Rs 2000.

There is no MDR cap in Credit Cards where the charges made by the industry may be around 1.5% to 2.%

In high margin transactions,  it is possible for the merchants to absorb this cost though many donot. In some transactions where the margin in the business is low, say less than 5%, this MDR becomes a substantial part of the business margin and it would be unfair to expect it to be borne by the Merchant.

It was one of the recommendations of the Watal Committee that  there has to be a parity between cash and digital payments (R6-to be implemented within 3 months).

This rules out the possibility of the consumer being charged the MDR fee separately by the merchant. The consumer makes payment for the services in a legal tender which is cash or an alternate method which is digital payment using a Card or a Mobile Wallet or an UPI type system.

In the case of UPI or USSD system, the only intermediary involved is the NPCI apart from the two Banks. In such transactions the transaction cost can be fully absorbed by the system without being passed on either to the Merchant or the consumer.

In the event a Debit/Prepaid Card is involved, the card issuing Bank should waive its charges since use of cards in preference to cash is a direct benefit which they enjoy with a lowering of the footfalls in the Bank/ATM and the avoidance of the cash inventory cost.

The “Debit Card” is a part of the account opening and represents the balance in the account. The debit card issuing Banks therefore should not charge separately for transactions with the use of debit cards. RBI should strictly mandate that no such transaction charges should be levied on the acquiring Bank or the customer.

The involvement of scheme managers should also be eliminated here with the substitution of NPCI as the gateway as in the RuPay cards.

The cost of the card itself is a one time cost and most banks are charging it to the customer. As long as this is reasonable, this may continue.

The ATM withdrawal charges are a “Disincentive” for cash withdrawal and as long as the Debit/Prepaid card transactions are waived off, the present system of a reasonable charge for the number of ATM transaction exceeding a minimum number of say one per week, may be tolerated.

Banks s do incur a cost for authentication of transaction for which they may engage the services of outsource agents. However this is part of the “Cost of Banking” and just as a Bank cannot separately charge  extra fees because one ledger clerk enters the debit entry, one officer verifies your signature and a cashier makes the payment of cash, they should not be allowed to charge the authentication services such as OTP verification or VBA authentication to the customer.

The bottom line is that the “Interchange charges” should be eliminated in the case of Debit or Prepaid Cards.

Further, ensuring “Safe Transactions” is part of the Banker’s obligations and hence all transactions through the debit/prepaid cards should be insured against frauds and transaction failures at the cost of the Bank.

As regards Credit Cards, it is a separate contract where the Bank agrees to provide a credit line to the customer and once a credit line is approved, there should be no difference between a debit card/Prepaid card and the Credit Card.

Banks may therefore charge a Credit Approval Charge and Basic card cost. As regards the transaction cost, in the event the credit line is utilized, the card holder pays interest charges which are always usurious. Hence the issuing bank gets adequate reward by way of interest. Probably they could charge a “Commitment Charge” for those who use the card but does not avail the credit line. This commitment cost can replace the transaction cost so that the “Interchange charge”.

In view of the above, the “Interchange charges” can be eliminated even in the case of Credit cards so that at the merchant level, he could be neutral as to whether the consumer presents a Credit Card or a Debit Card or a Prepaid Card in lieu of currency.

The acquiring Bank and the scheme provider may be entitled to some reward for their services, depending on the services rendered.

Some acquirers provide POS machines free of charge and they are entitled to recover their cost either as one time fee or per transaction fee. However, since the cost they incur is fixed, there is no reason why they should be allowed to make unreasonable profits by endlessly collecting transaction fee.

There can therefore be a cap on the MDR charges payable to the acquiring Bank.

Today since the interchange charges are a substantial part of the MDR, elimination of this should bring down the MDR charges from the current levels of 0.75% or 1% to around 0.4 to 0.5%.  If a cap is placed on the MDR fee of the acquiring Bank, then the total MDR can be brought down further based on the turnover of the merchant in terms of number and volume of transactions to even around 0.1% at which every merchant including the petrol bunks should have no problem in accepting cards of any type.

Again there could be a transaction based insurance cost which can be a reasonable load at around o.05% .

This leaves the scheme owners like the VISA or Master who are an overhead on the system.  VISA and Master do not take any credit risk and except for providing international acceptability which is required only for those who need to use their cards on international channels (which may include online transactions), they are not of much value for other transactions except as a transaction gateway.

If NPCI can take over issue of RuPay credit cards, then the need for VISA and Master or AMEX can be further reduced and hence their cost can also be eliminated. Those who need to use their cards for foreign merchants who donot recognize NPCI as the scheme owner,  may use”Virtual/Prepaid cards” with VISA/Master branding.

There is therefore a good scope for

a) Elimination of Interchange charges of the card issuing Bank for Debit and Prepaid Cards

b) Elimination of Interchange charges for Credit Cards which may be substituted by a “Credit Approval Charge” and “Monthly/Annual Commitment charge” for those who use a credit card only for the free credit it provides within a billing cycle.

c) Elimination of the Scheme Charges by NPCI stepping in to replace VISA/Master/AMEX

d) Reduction or elimination of the acquiring Bank charges by replacing it with one time instrument cost

e) Introduction of Cyber Insurance for all transactions for which Banks should bear the major responsibility.

Following the Committee’s report, RBI has reduced the MDR for Debit Cards to 0.25% for transactions upto Rs 1000 and 0.5% between Rs 1000-2000.

There is however a lot more that RBI can do and whatever is discussed above is within the powers of RBI and NPCI. However it would be resisted by the Banks since it may hurt their revenue potential. Presently Banks are used to counting their profits without assuming responsibility even for frauds and using their clout to prevent RBI from introducing consumer safety measures. It is time to put an end to such unfair business practice in Banking by RBI asserting its regulatory role and powers.

Banks may submit a cost benefit analysis to RBI to justify the charges if they think that the suggestions for complete elimination of the interchange charges and the reduction of the acquiring bank cost is unreasonable.

The arguments presented above for elimination of charges for card transactions equally apply to the other mobile apps such as wallets and UPI and there should be no reason for any charges to be applied for such transactions whether the services are privately owned or not.

These suggestions are important since it is in the interest of the Government that Cash usage is reduced in the economy and it is in a way forcing the Citizens to adopt tot his new Digital payment ecosystem. Government cannot force their citizens to adopt to currency replacement without protecting them from additional cost and fraud risk.  Hence we believe that Government would be interested in pushing such suggestions.

In the above suggestions, it has been assumed that NPCI does not become greedy on its own and try to introduce its own charges. It should be considered as an “Infrastructure”  created by the Government for the efficient administration of the “Cash Less or less Cash” society for the larger good of the country.

NPCI should therefore be funded by the Government. At no point of time in the future also, NPCI should turn into a commercial organization like many other infrastructure organizations such as BSE.

Naavi