The recent controversy over charges on fuel purchased with plastic cards is interesting as it underscores a larger issue when it comes to digitisation. The customer will not use cards if there is a charge of 2%, while the OMC would not accept the deal in case the charge is waived as it will have to pay the bank and card company the amount. The government says that it will not bear this cost, and hence if the arrangement has to go through the bank and card company have to compromise. And they cannot because charging this fee is the raison d’etre of card business.
Economics is a zero-sum game where every transaction through any mode has someone paying and another one receiving the consideration. Today, there is an interesting conversation on digitisation, which has a plethora of advantages in terms of setting an audit trail. It is superior to cash transactions from the regulator’s point of view as transparency comes in. This is one of the reasons that there has been a big push given to moving all payments to the virtual world with the ultimate stick being that there can be a cash transaction tax at the withdrawal level.
While such a transition is efficient at the macro-level, upsetting the present equilibrium also involves certain costs that are not visible at the first glance. There are costs that have to be incurred because no business runs for philanthropic reasons, and there is a return that is required while enabling a plastic card transaction or an e-wallet transfer. The battle today is for resolving the question as to who should bear the cost of such transactions.
The business of the credit/debit card products is quite well-established. While credit cards are meant for more elitist people who are borrowing money for purchases, the debit cards are more for withdrawals and purchases. In a way, debit cards are a substitute for currency with the added features of security and convenience. The present dispensation favouring ‘less cash in the system’ encourages the same.
The question ‘who pays’ is important because every debit card payment involves a merchant fee of 1-2% depending on which platform is being used because at the end of the day, the provider of this service has to earn money. Otherwise, it does not make business sense. Typically, the consumer does not pay for such transactions; but the merchant does and would not mind it as it helps increase volumes of sales which will compensate for the cost. But this is voluntary.
Before remonetisation, banks had witnessed an increase in volumes transacted through debit cards at point of sale (PoS) terminals of around R20,000 crore a month. This increased to R30,000 crore in November, and such volumes mean a cost of R300-600 a month as interchange fees, which was waived. If the entire amount is scaled up to, say, Rs 1 lakh crore a month (which will be once we all move to this mode of payment), then for Rs 12 lakh crore of transactions, the cost for the merchants or income for the banks and card companies would be an awesome Rs 12,000 @1% cost and Rs 24,000 in case it remains at 2%. This holds also for net banking which is being encouraged by the government.
The other mode which has caught on is the e-wallet. Here, a person transfers money to the e-wallet of any platform and keeps transacting with various parties. As long as the money circulates in this micro-system, there is no cost for anyone, and hence merchants prefer this to the card. But once the amount is transferred back to the bank account then there is a charge of 1-3%, depending on the provider of the service. The trick is to keep the money circulating in the system to ensure that there is no charge.
From the point of view of a businessman, there will be a net gain in the activity dealt with and logically every business ploughs back this profit to either one’s own consumption or any other kind of savings and investment. When this is done, there will be a cost to be paid to the e-wallet company (EWC). Depending on the profit margins, which can be between, say, 10-20% depending on the activity, the transfer could be 10% of, say, the hypothetical Rs 12 lakh crore, or Rs 1.2 crore with a cost of Rs 1,200-3600 crore at 1-3% transfer charges.
The other important aspect of using e-wallets is that as it circulates in the system, it creates a free float for the EWC, which can be large and used for treasury operations. This money with the EWC would have otherwise resided with the business in an account that could be used for similar activity. Hence, there is an opportunity cost which is involved in passing on this prerogative to the EWC. The opportunity cost of these funds would be a minimum of 4% which is the savings account rate that has been transferred from the retailer to the EWC. Assuming half of the amount of Rs 12 lakh crore is in demand deposits and the balance Rs 6 lakh crore could be in potential time deposits, the opportunity cost for these merchants could be around Rs 24,000 crore.
These calculations are just approximations, but provide some idea of the cost that is involved in going digital. The government has indicated that it will not bear the cost, which could be an alternative given that ideally such a transformation has to be subsidised. This is something that has to be considered when going digital, as there will be an implicit 1-2% increase in the effective cost of all transactions which will be distributed across various constituents.
The cost of using currency on the other hand would be only a one-time expense and even if there are new notes printed, the cost would be lower. For example, if the Rs 15 lakh crore of old notes is divided equally into Rs 500 and Rs 2,000 denominations, will mean a one-time cost of not more than Rs 6,000 crore.
Hence, while moving to the e-mode addresses the issues of opacity and tax-avoidance, there is a cost involved which has to be addressed by the government, especially if it is not willing to take it on its books but wants to enforce the same. The charges or fees have to come down or else it will be a major disadvantage for those forced to use this mode. Can these charges be rationalised or can the government come up with a free-to-use platform which will then make the market more willing?
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