Due Diligence. Cash to cashless economy — the challenges

For those grappling with cash scarcity due to the recent demonetisation move, debit and credit cards have come in handy. Thanks to the recent drive towards financial inclusion, a large segment of the population has access to these payment options now.

The number of banks providing card payment option has increased from barely 60 in 2011 to more than 700 today. The card base — both debit and credit cards combined — has also crossed 750 million.

But challenges in the system are many. First and foremost is inadequate acceptance infrastructure in terms of ATMs as well as point of sale (POS) terminals. For a vast country like India, having only 2.3 lakh ATMs and 14 lakh POS terminals is too low. Countries like Brazil, Australia, France and the UK have POS terminals three or four times that of India. The metros have a large concentration of ATMs, but the number declines in the suburban and rural areas.

The country has about 15 million merchants where POS terminals can be set up. But beyond the top 100 cities, terminals are very few. In this context, the Reserve Bank of India’s move to set up an Acceptance Development Fund (ADF) with a reasonably good corpus is welcome. From this fund, banks can perhaps be incentivised to set up terminals, beginning with Tier-4 centres.

Second, as a corollary to the first, the challenge is to improve activation of cards on all the channels. It is noticed that bulk of the 750 million cards are used on ATM channel. While it is natural that a PMJDY ( Jan Dhan Yojana) customer new to card payment system would initially use the cards on ATMs, a mainstream customer not using any other channel for a long period should be a matter of introspection.

In the fitness of things, on a user base of 750 million cards in the country, the usage on POS should be at least 375 million transactions in a month, assuming that the customers, on an average, use the card at least once in two months on a POS terminal.

But data published by the RBI indicates the volume of POS and e-commerce transactions together for all banks is about 130 million (as against 765 million on ATM channel) as on August 2016.

Third, the current business model of card payment system is under stress. Participant profile in card payment system is uneven. While public sector banks are the predominant issuers of cards, only a few banks in private sector are the main acquirers. The business interest of issuers and acquirers being different, there is underlying tension in benefit distribution of fees collected.

For ATM transactions, while the acquiring banks would like the “interchange income” to go up, the issuers are not interested. Even White Label ATM (WLA) providers have stopped expanding the ATM network under the fear that the acquiring fee would be under stress if it is revised downward. For POS transactions, it is primarily an issuer market and profitability of the acquiring business is under threat.

It is learnt that except for two or three acquiring banks, almost all the acquiring banks have been incurring loss for years.

Fourth, customer awareness drive is virtually missing. The regulatory framework for card payment is sound.

Migration to EMV cards (Europay, MasterCard and Visa), making POS and ATMs EMV-enabled, two-factor authentication for Card Not Present transactions, PIN requirement for card present transactions, terminal line encryption, liability shift in reported card fraud transactions etc have a salutary effect on making the card payment system reasonably secure. But making the consumer aware of these measures is equally important. This is no doubt, a mammoth task.

But the efforts being taken by banks are not adequate. Bank customers are frequently falling into the trap of fraudsters by cyber attacks whereby the fraudsters fake themselves as staff of the customer’s bank and collect full details of the cards and misuse the same. Reporting of loss of cards or de-activating international use of cards is cumbersome.

Customers need to change the PIN regularly and avoid writing it down on the card. They should be careful not to share the PIN with any one. It is necessary to spread awareness on such aspects. Notwithstanding the above challenges, card payment system in India has evolved. Though there has been an instance of data compromise for about 3.2 million cards, damage caused is very limited compared to several instances in other parts of the world.

The writer is MD & CEO of National Payments Corporation of India

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