The government’s move toward a digital economy might be gaining momentum in the country, but it seems to have come with a price. According to a report by the SBI, the costs associated with card transactions have led to a massive loss to the tune of Rs.3,800 crore a year in the banking industry.
Following demonetisation, the number of point-of-sale (PoS) terminals in the country went up drastically. As of July 2017, it is estimated that there are more than 28 lakh PoS terminals in the country. The number is also increasing day-by-day at the rate of around 5,000 machines per day. Card payment transactions occur in these terminals everyday, and they contribute to a significant share of all transactions.
Here, the off-us transactions (inter-bank) have resulted in a net loss of around Rs.4,700 crore last year. The on-us transactions (issuing and acquiring banks are identical) have brought in additional revenues of Rs.900 crore. Hence, the net loss from both these transactions is around Rs.3,800 crore.
In India, all card transactions involve four parties – cardholders, merchants, acquiring bank (merchant’s bank), and issuing bank (cardholder’s bank). On-us transactions happen when the issuing bank and the acquiring bank are similar. There is no need for a card network in these transactions, and the costs are minimal. When the issuing and acquiring banks are different, off-us transactions happen and banks incur additional costs for inter-bank transactions.
The report cited various factors such as low card usage, poor telecom infrastructure, low merchant discount rates, and poor incentives for merchants to accept card transactions as the reasons for this loss. The report also added that the business would be viable in the long-term only if card transactions exceed ATM transactions in the country.
A better telecom infrastructure is required to ensure that card transactions are adopted by most people across the country. Moreover, there must be sufficient awareness among the general public about the costs of cash transactions and the benefits of using PoS transactions.
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