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Why card is king: the need for improving card acceptance in India

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Why card is king: the need for improving card acceptance in India

Cash versus card

“Money isn’t everything - there’s credit cards, money orders and travelers’ checks.”

-Anonymous

According to the Reserve Bank of India (RBI), in 2010-11, card payments (both credit and debit) constituted just over 20% of total noncash retail

Advantages to consumersThe most obvious advantage of cards to customers is that they are easy to carry around. Cards score over cash from the security point of view too.

Advantages to vendorsThe larger the number of cash transactions, the higher the chances of counterfeit money being used for making payments. While vendors can use infrared scanners to detect fake currency, this is feasible only for notes of large denominations. Moreover, this also involves an additional cost. Acceptance of card payments takes care of this problem to a great extent.

Unlike card transactions, cash sales necessitate trade reconciliation and counting of currency notes manually or otherwise, adding to the costs in terms of labor and time. Also, there is the additional expenditure of securing and transporting the money to the bank.

transactions in terms of volume, but less than 1% in terms of value. Contrast this with the scenario in the United States and Europe, where cards are used for almost all retail transactions. This clearly indicates that card usage in India has a long way to go, which is surprising, considering the innumerable benefits on offer.

Advantage to banksBanks gain in several ways when their customers use credit cards. Firstly, they earn a fee on every transaction. Secondly, their relationships with customers become stronger. Last but not least, they are able to derive rich insights into customers’ buying behavior, which they can use to create customized and differentiated offers.

Advantages to the economyIncreased card usage automatically brings down the circulation of black money.

Fewer card transactions translate to large amounts of hot cash in the economy. Higher cash levels lead to spiraling costs, which in turn feed inflation. When card payments form the bulk of total transactions, hot cash levels remain subdued. This is the reason why the RBI encourages noncash payments through card, check, NEFT, ECS et al.


Towards greater usage...

Reasons for low card usage

To boost the number of transactions, banks and regulators need to make concerted efforts towards improving the awareness, security and convenience of cards.

Develop customer awarenessThe frequency and volume of credit card transactions will pick up only with widespread adoption. Banks should dispel customer apprehensions regarding card security by disseminating related information through websites, emails to customers and other modes of communication. They can also use the media as vehicles for showcasing credit cards – their convenience, ease of use and other advantages.

The numerous advantages notwithstanding, card usage in India remains limited on account of the following factors:

Delayed loss awareness When cash is lost, the extent of the damage is known immediately. When a card is stolen or misused, the cardholder will not know the amount he has actually lost until much later.

High transaction costTransaction costs, which are quite high – owing to bank charges, service tax etc. – discourage card usage, in turn pushing up costs even higher. This turns into a vicious cycle with the high costs and low volumes feeding off each other, further putting off customers as well as vendors.

Low perceived securityIndian customers are still not convinced about card security. Also, they wrongly assume that

Heighten merchant awarenessBy accepting card payments, merchants can do away with various inconveniences, such as the additional tasks of checking for counterfeit currency, arranging for change, reconciling cash and transporting money. Banks should bring home these advantages to merchants. Merchants should also be made to realize that not accepting cards will result in the loss of business from impulse purchases, and from Gen Y customers, who prefer cashless transactions.

Improve security frameworkMost card transactions in India today have the barest minimum of security – just a signature.

‘card not present’ (online) transactions are even less secure than those where the card is swiped.

Customer liabilityIn India, the liability arising from unauthorized card use shifts to the bank only after the customer lodges a complaint. So, it is in the interest of the cardholder to report unauthorized transactions immediately; but this might not always be possible, and is usually cumbersome.

Vendor inconvenienceVendors are of the opinion – not entirely unfounded – that accepting payment through cards is an inconvenience. Successful payment acceptance depends on the robustness of the card payment network, which is often too slow or unresponsive. As a result, card transactions are frequently delayed or converted to cash payments or even canceled. Also, there is limited support for card associations like Diners Club and AMEX, causing further inconvenience.


Introduction of additional authentication levels will go a long way in enhancing security and card usage. However, since this implies a bigger turnaround time (TAT) and cost, a via media may be required, such as a provision for additional security measures only for high value transactions, or a demand for proof of identity in suspicious transactions.

• PINbasedauthentication

More banks should set up PIN based mechanisms for validating credit card transactions. At present, the usage of PINs is mostly restricted to ATMs. It is worth considering extending it to debit and credit card transactions.

• Identityproof

If the regulators make furnishing of ID proof mandatory, vendors might embrace cards more easily, as it limits the scope of fraudulent transactions.

• OneTimePassword(OTP)

While OTP is widely and successfully used assecond factor authentication for Card Not Present transactions, it will further bolstercard security if introduced in Card Presenttransactions also.

• EMV

EMV chips take card security to another level altogether. The PIN and cryptographicalgorithm in these cards render it almost foolproof. For merchants, the advantage is that the burden of proof shifts to the cardholder in the event of a card misuse complaint. The application of EMV technology is mandatory in Europe and has been successfully implemented there as well as in some parts of Asia Pacific. However, the U.S. lags behind because it is yet to make the infrastructural changes this technology demands.

On its part, the RBI is taking as well as suggesting several actions to secure card transactions. It has already made alerts mandatory for all card transactions. It has

also recommended that banks, which are required by law to follow basic KYC norms while onboarding customers, should also look at applying the same principles to monitor card transactions. The regulator is also of the view that there is a need to review consumer protection provisions and the responsibilities of banks and customers in the event of fraud or disputed transactions, to bring them in line with the practices of other countries. Finally, it urges banks to step up communication to customers on the dos and don’ts of credit card usage.

Improve convenience

If banks were to make card usage more convenient in the following manner, it would encourage adoption among customers and vendors.

• Supportforcardassociations

Very few payment networks in India accept Diners Club and AMEX card payments, to the chagrin of customers. Banks can resolve this problem by creating independent networks, which interface with all debit and credit card associations. This will enable vendors to accept all types of cards while also saving them the hassle of interfacing with multiple associations.

• Redundancies

Today, vendors dependent on a single network provider are unable to accept card payments when there is a service breakdown. Addition of redundancies, like intelligent network selection, will facilitate seamless transition across providers at such times.

• Zeroorlimitedliability

Customers are always at the receiving end of wrong debits, overcharges or service issues with the vendor. They have to prove themselves innocent and are compensated only upon successful completion of the investigation. Instead, if customers were to receive immediate credit on complaint registration, as is the case in the U.S. and Europe, such that they would not lose even the interest on the disputed amount,


they might be tempted to use cards more frequently. Conversely, if the transaction is proved valid, the customer can be asked to pay up, as well as fork out a stiff penalty.

• Quickdisputeresolution

Today, when a customer disputes a transaction, the vendor has to prove its validity by making a ‘represent’ request. This is a long drawn out process wherein the request is directed first to the acquiring bank and from there to the issuing bank. Simplification of this process will make things easier for both vendor and customer.

Reduce card transaction costsThere are various fees and charges associated with card payments, which if reduced, will surely shore up the volume of credit card payments.

• Merchantfees

With the objective of popularizing card payments, banks can sacrifice a small portion of their profitability, that is, they can reduce the fee they charge on every transaction processed. This will encourage vendors to shift to card based receipts.

• Servicetax

The government can reduce the percentage of service tax to attract more people into the credit card fold.

• PointofSale(POS)machinecosts

POS machines are expensive and only large retailers can afford them. Cheaper

applications like Square, if made available in India, will enable even very small retailers to accept credit card payments while also reducing transaction costs.

Develop rural markets

Transactions in rural India are mostly cash based. But thanks to the initiative of the RBI and the National Bank for Agriculture and Rural Development (NABARD), the Kisan Credit Card has already made its presence felt. It is time that banks realized the potential of this neglected segment and stepped into this potentially lucrative market by introducing cards for farmers, artists, traders and the self-employed.

Banks can raise card usage levels in India substantially, by working on the problems faced by credit card users while also highlighting the various advantages of cards. It will not be out of place to mention one more plus point of card usage, which is its impact on community health. Currency notes are notorious germ carriers as they pass through thousands of hands. In fact, when the SARS epidemic broke out a decade ago, China started disinfecting and quarantining its currency notes as a disease containment measure. The danger of communicable diseases spreading through paper money is real and might be reason enough for health conscious consumers to shift from cash to cards.

Mahimna PawarSenior Associate Consultant, Finacle, Infosys

References1. www.newsflash.org/2003/05/si/si001628.htm

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 _

isn-t_ever ything-there -s_credit_cards-money/174200.html


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