The Indian Banks’ Association (IBA) has shown its interest in setting up of an indigenous payment and settlement association in a view of the exponential growth in card-based payments. Though there has been considerable controversy and confusion afflicting the issue.
But the question arises whether such a system is really needed. Further, if it does finally come up, will it really serve any purpose?
Last year the banking industry had paid an estimated $100 million in terms of fees and commission to card associations like Visa and MasterCard. IBA feels that with the heavy promotion and adoption of card-based payments, this figure will grow futher.
The concept of the indigenous payment and settlements association as is known, for India Pay, it is not new and not without international standard. However, IBA has been working on it for over a year now. IDBI Intech MD & CEO Sanjay Sharma, is in-charge of the project and is confident that it will see the light of the day soon.
“Everyone in the IBA feels there is a need for such a system. We have set up a working group to look into the investment required, and will be preparing a business case within two or three months,” says Mr Sharma. He doesn’t expect any problems regarding the approval since all stake holders are “in sync with the idea”. RBI too supports it completely, he adds.
India Pay is a payment-settlement network that is looking for the replacement of the Visa and MasterCard-dominated system. Though, it will continue to have a tie-up with these card associations to facilitate international payments. Usually, payment-settlement networks make possible the payment of a credit or debit card transaction.
Simply placed, a merchant’s point of sale machine is connected to the card association’s server, which in line is connected to the acquiring banks concerned. So when a card is swiped, the card association acts as a ‘switch’ and makes easy the payment from the bank to the merchant in return it charges a certain fee for each transaction.
Fees based on their relationship and the volume is also charged from the bank. The India Pay network looks for to replicate the role of these card houses. According to Mr Sharma the fee being charged will be considerably lower than what MasterCard and Visa are charging.
But margins are not really all that large in the payments business. The charges taxed on merchants range from 1.2% to 1.6% of the transaction, out of which up to 1.1% goes to the issuing bank and card associations get about 0.05%. The rest goes to the acquiring bank. At present it is not clear as to how much of decrease will be there in these charges from the current levels. “The payment to MasterCard or Visa is a very small part of the value of the payment chain,” says a MasterCard official.
On a point of sale terminal the average size of a transaction is around Rs 1,000. In case where the charges are only 4 cents it comes up to around Rs 1.50 which would mean a cost of 0.15%. There is variation in the cost, differ from bank to bank. Increase in the transactions lower the costs. In some of the transactions no charges are made. The charges have to be careful of investments in standards, security, technology, international connection and inter-operability among other things.
Although the figure of 1.1% of a transaction appears to be very high for the issuing bank to get, it needs to provide for a 45-day interest-free repayment period for a credit card; where there is transaction cost involved.
According to a senior private sector banker, “Maintaining a payment gateway for cards is much more complicated than maintaining an ATM switch. There are a lot of issues involved relating to frauds, dispute-resolution and charge-backs. Even if an Indian player comes in, it’s unlikly to make a major difference as the charges by Visa and Master are minuscule, at around 5 basis points.”
Some bankers are of a view that there is no need to generate a parallel infrastructure for a system that is working perfectly now. The most relevant issue senior bankers are concerned with is whether Indian players can bring in the same amount of strength and fool-proof methods as in the current system.
IBA’s vice-president and deputy CEO K Unnikrishnan pointed out that India Pay is an effort towards developing an internal system for card-related payments rather than having to depend on international players. “It is more from a perspective of development of a system that will foster the growth of further innovations than a cost-cutting one,” he feels.
A considerable amount of infrastructure is already available which the India Pay network can make use of, for example RBI-owned Indian Financial Network (Infinet), and the National Financial Switch (NFS). “What needs to be created is an inter-bank switch, which will facilitate inter-bank transactions,” feels Mr Sharma. However it is to see how IBA is going to tackle it, as acquiring banks might not want to do away with the commissions they get out of these transactions.
Banks’ competitive advantages might get affected by such a concept. At present infrastructure, in terms of networks, tie-ups and ATMs, is owned by a select group of banks, and use it as a competitive advantage. Recently State Bank of India had refused to join NFS because it did not want to part away the commission it earned out of charging banks for use of its ATMs.
At a conference organized by the IBA last week, a data was presented according to which the number of debit cards in the country is set to double to 140 million by 2011, while the credit card base is expected to more than triple to 75 million. Such integrated payment networks have found importance in countries like China, Singapore and the Middle East.
China Union Pay, was set up in 2003, is the backbone of Chinese electronic payments and has been recognized by Visa and MasterCard for international transactions. Network for Electronic Transfers, Singapore (NETS) is another such network, whereas Gulf Payments is a Middle-East based network that facilitates payments in all its member countries, including Kuwait, Bahrain, Oman, Qatar, the UAE and Saudi Arabia.
At the primary stage, the India Pay network aims to cater only to the card-related payment and settlements. Further a complete unified payment gateway can be formed as backbone for other electronic transactions such as card-to-card transfer and mobile money transfers. “Once the infrastructure is put in place, it can give rise to further innovations like gift cards and micro-payments by the mobile phone,” says Mr Sharma.