Cashless goldmine for US card cos

Visa, Mastercard are poised to rake in billions as India goes digital

Hyderabad: Dosa is a delectable delicacy that no one in this part of the world wants to miss. Even cash crunch doesn't deter us from devouring it as breakfast and as a snack in the evening because we have cards debit or credit at our disposal. But how many of us are aware that every time we pay bill for our favourite dosa at restaurants through cards, we are making American card giants, Mastercard and Visa, rich? This may sound strange, but it's a multi-billion dollar truth.

Conservative estimates put the commission on the card transactions earned by the card companies like Visa and banks at Rs 8,000 crore in 2015-16. This commission, also called transaction cost, is expected to touch Rs 68,000 crore (about $10 billion) a year in four years from now as cashless purchases are projected to increase by nearly 10-fold from Rs 4 lakh last fiscal to Rs 34.11 lakh crore, or 15 per cent of the GDP, by the year 2020. That’s going to be a staggering income, indeed, for the card companies.

And this is how it works. There are 2.74 crore credit cards in India while the number of debit cards has reached 73.92 crore by end of October last year, taking the total active cards – both credit and debit – to 76.66 crore. Of them, Mastercards account for 20 crore while Visa has about 24 crore in circulation. Interestingly, India’s homegrown card brand, Rupay, leads the global brands with as many as 31.7 crore cards issued thus far. But the number includes 20.7 crore cards linked to Jan-Dhan Yojana accounts and a majority of them are said to be inactive.

Moreover, Rupay is confined to the debit card space as the National Payments Corporation of India (NPCI), which launched the debit card, is yet to come out with a credit card. NPCI is an organisation floated jointly by the Reserve Bank of India (RBI) and the Indian banks to develop payment technologies in India. According to RBI statistics, people made 78.57 crore transactions, valued at Rs 240,662 crore, through credit cards at points of sale (PoS) machines during 2015-16. The debit cards were swiped 117.36 crore times to purchase products worth Rs 158,927 crore. Thus, the total card transactions in India were valued at Rs 4 lakh crore ($58.5 billion) last fiscal.

But these card transactions don’t come free. They come at a significant cost though card companies refuse to reveal the details of the service charges they levy. As per an RBI mandate, banks that provide swiping machines to merchants are allowed to charge one per cent of the transaction amount as MDR (merchant discount rate) on debit card transactions exceeding Rs 2,000. It’s 0.75 per cent MDR, or commission, on the transactions lower than Rs 2,000. The interesting element here is that merchants should not collect MDR from customers.

They have to absorb it. But that’s not true in reality and many merchants routinely collect higher MDR of 2 per cent from customers. Even if they do not do that openly, they factor in these costs into the bills or their revenue stream. However, there is no RBI mandate for credit card transactions and service charges depend on the agreement between the card issued and the banks. Therefore, credit card holders shall have to shell out more service charges, which will be anywhere between 1.5 per cent and 2.5 per cent. It’s a common experience for the customers to pay two per cent as service charge on the credit card transactions as well.

The service charges thus collected are shared by banks and payment gateways such as Mastercard and Visa. A part of the commission goes to the acquirer (the bank that issues swiping machine) and the bank that issues the card also gets a cut. But a significant portion of the commission lands into the accounts of Mastercard and Visa, which dominate the payment gateway space in India. Homegrown Rupay is also in the picture, but its share in the overall pie is miniscule.

These services charges appear to be insignificant for some customers but they bring in windfall gains to the card companies and to some extent, banks. The total transaction costs at 2 per cent on an average work out to be around Rs 8,000 crore on Rs 4 lakh worth card purchases made during 2015-16. In the current fiscal, card transactions totaling over Rs 295,000 crore were made till just October 2016, with service charge working out to be about Rs 5,900 crore at 2 per cent rate. And those are not small amounts.

An exhaustive study by Boston Consulting Group and Google (BCG Google Digital Payment Report released in July 2016) revealed that cashless purchases in India would take a 10-fold jump and reach Rs 34.11 lakh crore ($500 billion), or 15 per cent of India’s GDP, by the year 2020. On that count, the card companies and banks are likely to earn a whopping Rs 68,000 crore as commission annually on the projected $500 billion and a large chunk of that pie will go to the US card giants. This service charge income will be much higher if the efforts of the Modi government at the Centre and several state governments to push digital transactions bear fruit and adoption of card payments exceeds estimates.

“Even before the demonetisation, the Indian electronic payments had been expected to shoot up. With a population of over 1.25 billion eager to partake in rapidly evolving advancements in technology, India is poised to make the most of digital developments transforming the payments space,” Murali Nair, Senior Vice-President (market development), South Asia, Mastercard, informed The Hans India in an email response. According to him, Mastercard has 200 million cards in circulation in India.

The American giant, however, refused to disclose the structure and the extent of service charges that were being levied on the card holders in India. “As a global policy, we don’t reveal country-specific financial numbers. Also, we don’t offer comments on the service charge numbers that are in public domain,” another spokesperson of the company maintained. However, Visa and NPCI did not respond to the emails sent by The Hans India.

By P Madhusudhan Reddy​