India has been using electronic payment systems for many years now. However, the retail sector still has predominance of cash transactions, and payment through cards is yet to pick up. Cards (both credit and debit) are one of the most secure and convenient modes of cashless payment in retail market. The card payments data shows that even though we have 19 million credit cards, 190 million debit cards and half a million point-of-sale terminals, on an average there is just one transaction annually for every debit card and 11 transactions annually for every credit card. While trying to look for the reasons of poor usage of payment cards, this paper studies the costs involved in India by holding independent interactions with all players in the system— the banks, the card companies and the merchants; and by comparing the practice in different countries. The objective is to rationalise the costing in such a way that the merchants and customers prefer card payments as against cash and it becomes the attractive mode of payment even in the country‘s hinterland. With the rationalization in costs, the banks and card companies would continue to gain, as revenues would increase due to increase in usage and user base. Additionally, for the Government, with the new pricing the gain will be twofold— firstly there will be sizable reduction in the growth of currency management cost, and secondly, the system will generate volumes of data on spending behavior of individuals that can be used by the Government for developmental planning. It is expected that the report would prove useful for RBI and Government to further their endeavor towards bringing in an efficient cashless payment system in the country.
The card based payment system includes the card companies (switch provider), banks (acquirer and issuer), merchants and cardholders, and cannot function in absence of any of these players. It is seen that though card based payment systems have been in vogue for several years, its use and popularity is still very limited. There are 190 lakh credit and 1,900 lakh debit cards in the system, but there are just 11 transactions per credit card and one transaction per debit card annually. To locate the reasons for the subdued transition to cashless payments, this study carries out a review of the roles performed by various players of the system and then arrives at a structured and implementable roadmap to move towards a cashless retail payment system in India.
In the present scenario, credit card is a mode of payment that is an alternative to cash. Credit card offers free credit, bears risk, and thus is an expensive payment mode. However, the product design and promotions are such that the pricing is kept hidden and the users are oblivious of the fact that the cost is ultimately borne by them.
Debit card is another alternative to cash. Though this mode of payment offers no credit, carries no or minimal risk it has still been priced at par with the credit card by the banks- a price that is borne by the cardholder.
The costs of the debit and credit card system are passed on to the merchants who accept card payments. Such expenditures for the merchants can be as high as 50% of their profits. There are two options for the merchant- (i) if he is not allowed to surcharge; he passes this cost to his product price. The card user, who ultimately bears the cost, is not able to feel this hidden price adjustment upfront. (ii) If on the other hand, the merchant is allowed to surcharge or offer discounts for cash, the card user prefers to use cash instead leading to a payment by an inefficient mode
Drawbacks of the present system
The oblique pricing structure that treats and prices the credit and debit card in a similar manner has several drawbacks that hinder its growth / popularity and some features of the product even cause potential risk to the users. We list few of the drawbacks.
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