Card payments push may land banks with a Rs 3800 cr annual hole

Mumbai: The government's digital payments push, mainly online card payments through PoS machines, may leave already capital starved banks bleed by a whopping Rs 3,800 crore annually, warns a report.

After the note-ban last November, the Narendra Modi government has pushed banks into deploying millions of points-of-sale (PoS) machines to encourage online payments. Since then, banks have more than doubled their PoS terminals.

The number of PoS terminals post-demonetisation has increased from 13.8 lakh in March 2016 to 28.4 lakh as of July 2017. On an average banks are installing 5,000 PoS per day.

This has resulted in increase in debit plus credit cards transactions at PoS from Rs 51,900 crore in October 2016 to Rs 68,500 crore in July 2017, with peak reaching in December 2016 to Rs 89,200 crore.

"We estimate that for OFF-US transactions, the aggregate annual loss for card transactions at PoS terminals around is Rs 4,700 crore. However, the net revenue gain per annum from ON-US transactions at PoS would be around Rs 900 crore only.

"Therefore, the total annual loss to the banking industry is around Rs 3,800 crore," SBI Research said in a report on Thursday.

The payment card industry is based on a four-party model - the issuing bank, acquiring bank, merchant and the customer. The transactions at PoS are termed as ON-US transactions if the issuing bank and acquiring bank are the same bank.

If the issuing bank and acquiring bank are different entities, then it is known as OFF-US transactions. The acquiring bank bears the entire cost to create the infrastructure for PoS terminals, clearing and settlement, merchant training, terminal maintenance, and supply of consumables among others.

The issuing bank involves the cost of issuing the cards and also manages other risks relate to card holders like failed transactions and frauds. Acquiring bank receives revenues only in the form of MDR (merchant discount rate) and monthly rental.

 The MDR on debit cards has been at 1 per cent, while there is no fixed MDR on credit card transactions.

"The overall loss of around Rs 3,800 crore per year is quite substantial and hence the sustainability of the card business depends on a number of factors like, MDR, low card usage, poor telecom infrastructure, lack of incentives to merchants to accept cards and insufficient awareness about the costs associated with use of cash," the report said.

A better telecom infrastructure is needed to drive the digital payments agenda successfully, it said, adding this can be achieved by ensuring dedicated spectrum for financial transactions alone, as there is insufficient quantum of spectrum for the infrastructure to take the additional load.

The report said the current humongous PoS infrastructure that banks have developed have to be supported wholeheartedly.

"Though government has proposed various measures to incentivize PoS infrastructure and banks are installing PoS terminals, in the long-run, the business would be viable, only if the transactions at PoS surpass ATM transactions, an enviable task indeed," the report concluded.