According to Reserve Bank of India in 2010-11, card payments (both debit and credit) constituted just over 20% of total non cash retail transactions in terms of volume, but less than 1% in terms of value.
Why card is king: the need forimproving card acceptance in IndiaThought Paperwww.infosys.com/finacleUniversal Banking Solution | Systems Integration | Consulting | Business Process Outsourcing
Why card is king: the need for improving card acceptance in India “Money isn’t everything - there’s credit cards, money transactions in terms of volume, but less than orders and travelers’ checks.” 1% in terms of value. Contrast this with the scenario in the United States and Europe, where -Anonymous cards are used for almost all retail transactions. According to the Reserve Bank of India (RBI), in This clearly indicates that card usage in India has 2010-11, card payments (both credit and debit) a long way to go, which is surprising, considering constituted just over 20% of total noncash retail the innumerable benefits on offer. Cash versus card Advantages to consumers Advantage to banks The most obvious advantage of cards to Banks gain in several ways when their customers customers is that they are easy to carry around. use credit cards. Firstly, they earn a fee on Cards score over cash from the security point every transaction. Secondly, their relationships of view too. with customers become stronger. Last but not least, they are able to derive rich insights into Advantages to vendors customers’ buying behavior, which they can use The larger the number of cash transactions, to create customized and differentiated offers. the higher the chances of counterfeit money being used for making payments. While Advantages to the economy vendors can use infrared scanners to detect Increased card usage automatically brings down fake currency, this is feasible only for notes of the circulation of black money. large denominations. Moreover, this also Fewer card transactions translate to large involves an additional cost. Acceptance of amounts of hot cash in the economy. Higher card payments takes care of this problem to a cash levels lead to spiraling costs, which in turn great extent. feed inflation. When card payments form the Unlike card transactions, cash sales necessitate bulk of total transactions, hot cash levels trade reconciliation and counting of currency remain subdued. This is the reason why the RBI notes manually or otherwise, adding to the costs encourages noncash payments through card, in terms of labor and time. Also, there is check, NEFT, ECS et al. the additional expenditure of securing and transporting the money to the bank.02 Thought Paper
Reasons for low card usageThe numerous advantages notwithstanding, ‘card not present’ (online) transactions are evencard usage in India remains limited on account less secure than those where the card is swiped.of the following factors: Customer liabilityDelayed loss awareness In India, the liability arising from unauthorizedWhen cash is lost, the extent of the damage card use shifts to the bank only after theis known immediately. When a card is stolen customer lodges a complaint. So, it is in theor misused, the cardholder will not know the interest of the cardholder to report unauthorizedamount he has actually lost until much later. transactions immediately; but this might not always be possible, and is usually cumbersome.High transaction costTransaction costs, which are quite high – owing Vendor inconvenienceto bank charges, service tax etc. – discourage Vendors are of the opinion – not entirelycard usage, in turn pushing up costs even unfounded – that accepting payment throughhigher. This turns into a vicious cycle with the cards is an inconvenience. Successful paymenthigh costs and low volumes feeding off each acceptance depends on the robustness of theother, further putting off customers as well card payment network, which is often too slowas vendors. or unresponsive. As a result, card transactions are frequently delayed or converted to cashLow perceived security payments or even canceled. Also, there is limitedIndian customers are still not convinced about support for card associations like Diners Clubcard security. Also, they wrongly assume that and AMEX, causing further inconvenience.Towards greater usage...To boost the number of transactions, banks Heighten merchant awarenessand regulators need to make concerted efforts By accepting card payments, merchants cantowards improving the awareness, security and do away with various inconveniences, such asconvenience of cards. the additional tasks of checking for counterfeit currency, arranging for change, reconciling cashDevelop customer awareness and transporting money. Banks should bringThe frequency and volume of credit card home these advantages to merchants. Merchantstransactions will pick up only with widespread should also be made to realize that notadoption. Banks should dispel customer accepting cards will result in the loss ofapprehensions regarding card security by business from impulse purchases, and from Gendisseminating related information through Y customers, who prefer cashless transactions.websites, emails to customers and other modesof communication. They can also use the media Improve security frameworkas vehicles for showcasing credit cards – their Most card transactions in India today have theconvenience, ease of use and other advantages. barest minimum of security – just a signature. Thought Paper 03
Introduction of additional authentication levels also recommended that banks, which are will go a long way in enhancing security and required by law to follow basic KYC norms card usage. However, since this implies a while onboarding customers, should also look bigger turnaround time (TAT) and cost, a via at applying the same principles to monitor media may be required, such as a provision card transactions. The regulator is also of the for additional security measures only for high view that there is a need to review consumer value transactions, or a demand for proof of protection provisions and the responsibilities identity in suspicious transactions. of banks and customers in the event of fraud or disputed transactions, to bring them in • PIN based authentication line with the practices of other countries. More banks should set up PIN based Finally, it urges banks to step up communication mechanisms for validating credit card to customers on the dos and don’ts of transactions. At present, the usage of PINs credit card usage. is mostly restricted to ATMs. It is worth considering extending it to debit and credit Improve convenience card transactions. If banks were to make card usage more convenient in the following manner, it would encourage • Identity proof adoption among customers and vendors. If the regulators make furnishing of ID • Support for card associations proof mandatory, vendors might embrace cards more easily, as it limits the scope of Very few payment networks in India accept fraudulent transactions. Diners Club and AMEX card payments, to the chagrin of customers. Banks can resolve this • One Time Password (OTP) problem by creating independent networks, which interface with all debit and credit While OTP is widely and successfully used as card associations. This will enable vendors second factor authentication for Card Not to accept all types of cards while also Present transactions, it will further bolster saving them the hassle of interfacing with card security if introduced in Card Present multiple associations. transactions also. • Redundancies • EMV Today, vendors dependent on a single network EMV chips take card security to another provider are unable to accept card payments level altogether. The PIN and cryptographic when there is a service breakdown. Addition algorithm in these cards render it almost of redundancies, like intelligent network foolproof. For merchants, the advantage is selection, will facilitate seamless transition that the burden of proof shifts to the across providers at such times. cardholder in the event of a card misuse complaint. The application of EMV technology • Zero or limited liability is mandatory in Europe and has been Customers are always at the receiving end successfully implemented there as well of wrong debits, overcharges or service as in some parts of Asia Pacific. However, issues with the vendor. They have to prove the U.S. lags behind because it is yet to themselves innocent and are compensated make the infrastructural changes this only upon successful completion of the technology demands. investigation. Instead, if customers were On its part, the RBI is taking as well as to receive immediate credit on complaint suggesting several actions to secure card registration, as is the case in the U.S. and transactions. It has already made alerts Europe, such that they would not lose even mandatory for all card transactions. It has the interest on the disputed amount,04 Thought Paper
they might be tempted to use cards more applications like Square, if made available frequently. Conversely, if the transaction is in India, will enable even very small retailers proved valid, the customer can be asked to to accept credit card payments while also pay up, as well as fork out a stiff penalty. reducing transaction costs.• Quick dispute resolution Develop rural markets Today, when a customer disputes a Transactions in rural India are mostly cash transaction, the vendor has to prove its based. But thanks to the initiative of the RBI validity by making a ‘represent’ request. This and the National Bank for Agriculture and is a long drawn out process wherein the Rural Development (NABARD), the Kisan Credit request is directed first to the acquiring bank Card has already made its presence felt. It is and from there to the issuing bank. time that banks realized the potential of this Simplification of this process will make things neglected segment and stepped into this easier for both vendor and customer. potentially lucrative market by introducing cards for farmers, artists, traders and the self-employed.Reduce card transaction costs Banks can raise card usage levels in IndiaThere are various fees and charges associated substantially, by working on the problemswith card payments, which if reduced, will surely faced by credit card users while alsoshore up the volume of credit card payments. highlighting the various advantages of cards. It will not be out of place to mention one more• Merchant fees plus point of card usage, which is its impact With the objective of popularizing card on community health. Currency notes are payments, banks can sacrifice a small notorious germ carriers as they pass through portion of their profitability, that is, they thousands of hands. In fact, when the SARS can reduce the fee they charge on every epidemic broke out a decade ago, China started transaction processed. This will encourage disinfecting and quarantining its currency notes vendors to shift to card based receipts. as a disease containment measure. The danger of communicable diseases spreading through• Service tax paper money is real and might be reason enough for health conscious consumers to shift The government can reduce the percentage from cash to cards. of service tax to attract more people into the credit card fold.• Point of Sale (POS) machine costs POS machines are expensive and only large retailers can afford them. Cheaper Thought Paper 05
References 1. www.newsflash.org/2003/05/si/si001628.htm isn-t_ever ything-there -s_credit_cards- money/174200.html 2. t h i n k e x i s t . c o m / q u o t a t i o n / m o n e y _ Mahimna Pawar Senior Associate Consultant, Finacle, Infosys06 Thought Paper