Cashless Payment System in India. Ashish Das Department of Mathematics Indian Institute of Technology Bombay Mumbai-400076, India April 20, 2012. A. Objective The card based payment system functions with its players that include The card companies (switch provider)
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Department of Mathematics
Indian Institute of Technology Bombay
April 20, 2012
Costs of the debit/credit card system are passed on to the merchants who accept cards.
Oblique pricing structure treats and prices the credit and debit card in a similar manner.
This has several drawbacks hindering its growth/popularity and even cause potential risk to users.
We list few of the drawbacks.
Under utilisation of debit cards: Though the number of debit cards is currently 16 times higher than the credit cards, the average number of transactions per debit card is 14 times less.
Lower acceptability of cards by merchants: The merchant fees at POS for debit card swipes is a disincentive for small and medium merchants, who have less pricing power due to their low volumes, to transit to card based payments. With 6.3 lakh POS terminals, Debit and credit cards together account for only three card transactions per day per POS.
Increase in cost of currency management: Card transactions at POS have been only about 6.5% of retail sales. This large cash dependence (93.5%) imposes huge pressures on currency management.
Reduces reserve base of the banking system: Stock of currency held outside of the banking system constitutes a potential source of unproductive economic resources because these cash stores are not available for credit expansion— thereby impeding monetary growth.
Lack of accountability: Predominance of cash in retail sales leads to deterioration in business accountability as transaction tracking is not possible, it enables tax leakage, diminishes financial inclusion and enables existence of a parallel economy.
Potential of fraud: There is greater risk attached to debit cardholders in case of fraud as cardholder is deprived of the money. Currently banks offer either pin-based or signature-based debit cards. As a lost or stolen debit card is useless without its PIN, consumers usually prefer pin-based debit cards.
In order to address the issues of credit and debit card usage, we aim to
Accounting for MDR:
Modes of Payments:
Preference of Payment Modes:
Preference for Debit Card if MDR has a Ceiling:
Merchants’ Reasonable MDR:
The credit card is a frilled product since it provides quick credit. The interchange on credit cards should therefore best be left to the issuer banks and competition should dictate the pricing in consonance with RBI’s general policy on non-priority sector personal loans. The interchange, currently being borne by merchants, forms a part of the MDR. In order to provide a level playing field, it is recommended that the merchants should be given the freedom to surcharge on credit cards.
The Government may also consider promoting avenues where tax benefits are provided to merchants for accepting card based payments, e.g. an appropriate tax rebate can be extended to a merchant if at least 60% value of his transactions are through cards. The government should minimize, if not eliminate, theduties and taxes on manufacture and sale of EDC machines to promote its acceptability.
The report’s recommendations will lead to a transition from the expensive and thrusted credit card system to a need based debit card system which is optimal for the economy and beneficial to the end users (merchants and consumers). It is time that the artificial tilt that has been in existence for the benefit of the providers (banks and switch providers) at the cost of the users gives way to a rationalized system.