Electronic Payments in Retail: Are we moving from Cash to Less-­Cash Society?

Year 2000 to 2010 can be termed as the decade of ICT i.e. Information & Communication Technology in India. Indian software industry reached global scale and mobile telephony clocked close to 600-700 million mobile subscribers by 2010 in a 1.2 billion people economy.

This decade 2011 to 2020 is arguably “Payments Decade” for the simple reason that this is an area, where like the case of mobiles in year 2000, there is a large gap between what is available today and what can be made available, as regulatory regime has become progressive to business growth.

A look at RBI statistics as on December 2013 gives a lot of insights. Here are the Credit card statistics for Dec 2013.

Looking closely at these numbers, the following picture emerges:

PoS : Point of Sale terminals : These are Credit Card/debit card swipe machines installed by banks to carry out payment transactions by swiping customer’s card and charging merchant establishment a fee for this called Merchant Discount Rate (MDR). MDR varies between 1.25% to 2.5% for Credit card and 0.75% to 1% for Debit cards.

(Also read: mPOS in India: What, Why and more)

Clearly a very small number of 19 million customers have access to credit cards. However, once a customer has an access to a credit card, the use of credit card is largely for electronic transactions and negligible for emergency cash withdrawals. Banks discourage cash by virtue of upfront fee and there are subsequent charges if repayment is not on time. The result is a healthy usage of 2.44 times per card per month with an average spend of INR 2960 per transaction, i.e. INR 7222 spend per card per month.

But the story becomes completely different for ATM cum Debit cards. Here although the number of cards are a staggering 372 million as on Dec 2013 as against 19 million Credit cards, the spending pattern is just reverse of Credit Cards.

The analysis of this data throws information which is opposite of Credit cards spends.

What it shows is the fact that Debit cards are mainly used for cash withdrawals from ATM even though all PoS terminals accept Debit Cards now, after RBI has issued fresh guidance in Mid 2013. The terminals have been capable of Visa Debit Cards for a very long time.

Compared to 2.44 transactions per credit card per month, when it comes to debit cards, it slides to negligible value of 0.14 transaction per Debit card per month with an average spends of INR 1567 per transaction, i.e. average spends of INR 219 per Debit card per month.

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At a broad level:

  • 19 million Credit cards account for INR 135 Billion (USD 2 Billion) spends on PoS network in a month and negligible amount of INR1.5 Billion (USD 25 million only) cash withdrawals
  • 20 times higher in number, i.e. for 372 million Debit cards, the spends on PoS network is only INR 82 Billion (USD1.3 Billion) per month
  • Cash withdrawal using these debit cards is a huge INR 1.7 Trillion (USD 28 Billion) per month

What is the problem? Why debit cards are not used for payments?

Let’s look at country’s ATM and PoS terminal base as on Dec 2013:

The problem:

These 1 Million PoS terminals are predominantly in Metros and Class A cities of India with concentration around shops catering to Fast Moving Consumer Goods (FMCG) where due to competition, more than one PoS terminal are installed in one shop; an extremely inefficient use of payment infrastructure. The effective deployed base may not exceed 600,000 shops due to this reason.

India has estimated 10 Million unorganized foods and grocery retailers consisting of Kirana stores/Food stores/General Stores/Chemist etc. where customer, to buy goods, uses a significant portion of this INR 1.7 Trillion cash so withdrawn from ATM. With such large number of shops not having electronic payment mechanism, customer is left with no choice but to first withdraw cash using debit card and then pay cash at retail.

Then why on these 600,000 shops, debit cards spend is so low compared to credit cards? The answer is not difficult. These urban shops have spends on PoS terminal where the target group has both credit card and debit cards to a large extent. There is no incentive to use Debit card. On the other hand, market is plastered with advertisement of interest free equal monthly installments (EMIs) for FMCG Goods and mobiles using credits cards of different banks.

On top of that, there are 600,000 villages in India that have very low access to banking through Business Correspondents and the ATMs are predominantly urban rollouts. An INR 100,000 crore annual estimated domestic remittance in India goes to these villages where there is no payment infrastructure. In most cases, customer has to go from 5 to 25 km to get access to a bank branch/ATM to withdraw cash from this remittance transaction.

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Clearly we are still far away from Less-Cash Society.

What can be done?

Payment Systems require costly infrastructure to be deployed and maintained. The business case of PoS terminal requires certain minimum card spends at a shop to make it viable. On a stand-alone basis a large number of such target shops are already identified in these 600,000 retail shops in urban locations mentioned above.

Last 3-4 years, financial inclusion initiative of RBI has seen rapid development of Business Correspondent (BC) network at national level. This has brought some penetration in villages but over 400,000 villages are still unbanked. BCs are agent network set up by companies that work for limited set of banking services like Cash-in/cash-out/Money Transfer/No-Frills Bank account opening etc. to bring in customers where normal banking through branches is not viable. PoS terminal deployed for BC networks are called Micro ATMs and have advantage of interoperability. PCs as well as Mobiles are also finding use in BC network expansion program.

In order to have large-scale proliferation of electronic payments system, the retail payment infrastructure or ecosystem has to be inclusive. There is no business case of dedicated eco system separate for card payments at retail, BCs and other payments system like mobile/DTH recharges/Bill payments carried out at retail.

Cash on the other hand needs to be discouraged. Currently cash from ATM is free (5 transactions of upto Rs 10,000 per transactions in a month) and Debit/Credit card use on PoS terminal costs the merchant MDR. It should be reversed to encourage electronic transactions.

Unlike the popular myth, it is not the tax evasion, which is the problem but no disincentive for cash at ATM, which popularizes these Rs 1.7 Trillion cash withdrawals per month from just 150,000 ATMs. Cash for Merchant has no direct cost or effectively zero MDR. How will electronic payments transactions happen with such adverse business cases?

The choices are very clear:

  • Encourage aggregated payment eco system
  • Discourage Cash withdrawals
  • Bring-in infrastructure credit for setting up payment infrastructure as Priority Sector
  • Standardization and interoperability

About the author: Sunil Kulkarni is currently the Deputy Managing Director at Oxigen Services (India) Pvt. Ltd. He is referred to as the techno-savvy mind behind designing the Oxigen Technology for dispensation of various service & products to the Retail in India. He has over 27 years of experience and also previously worked with organizations such as Motorola and Siemens Ltd.