January 2018 saw digital transactions in India reach a record high of 1.11 billion, up by 4.73% from the 1.06 billion mark touched in December last year. 1These figures include payments made by credit and debit cards, Unified Payments Interface (UPI), prepaid payment instruments (PPIs), Internet banking and Unstructured Supplementary Service Data (USSD). However, in spite of the numerous payment options available to consumers and merchants alike, debit cards continue to be the number one choice for digital payments in India. In January 2018, a total of 267.7 million transactions were carried out using debit cards, as against 263.9 million in the month of December. 2Overall, debit and credit card usage at point-of-sale (PoS) machines was at its second highest level since the government’s demonetisation exercise in November 2016. This sudden uptake in card-based payments could be partly due to the government’s decision to rationalise the merchant discount rate (MDR) on debit cards, in addition to bearing MDR for a period of two years on transactions up to 2,000 INR.3
All these measures, coupled with the increasing acceptance of digital payments and a positive change in customer behaviour, are setting a positive tone for the Indian card industry. Further, banks are working relentlessly towards dispelling the preconceived notions and misgivings about digital banking. This has led to a visible increase in card issuance and usage. With the number of card-based transactions on an upward trajectory, it is becoming increasingly important for banks to understand the expenditure that they incur while providing card services.
An increasing regulatory push towards digital payments has led to a rise in both the demand for digital payment modes and the number of transactions being processed. With card-related costs being directly proportional to the number of cards issued and the number of transactions processed, there is an ever-pressing need for banks to minimise the charges they incur while providing card services.
There are multiple costs involved with card transactions, such as interchange, MDR and customer loyalty, and while most are commonly known to banks, a number of elements around card scheme fees continue to be shrouded in mystery.
These charges are essentially the fees that prominent card schemes or card network providers levy on banks for their services. With banks and technology vendors relying heavily on these services, the fees represent the cost that banks incur for processing transactions
Charges by card schemes account for close to 15% of the total charges that mid- and large-sized banks incur for their card business. Understanding the business logic behind these charges can help banks streamline their internal processes and reduce costs.
When it comes to understanding the charges levied upon banks for the services provided by card schemes, banks often face complexities at various stages of the process.
Gain a complete understanding of the charge heads: Banks should be wary of the services offered by card schemes that may attract a higher fee and are often not utilised, necessary or relevant to their specific card portfolio. Therefore, it is crucial for banks to understand both core and non-core charges for each card portfolio. This will help banks in recognising the relevance of charges and the calculation logic and in further reviewing and validating charges once they are billed by card schemes.
Maintain operational efficiency: Operational efficiency can only be achieved through the correct interpretation of charges. Banks need to ensure that no additional payouts are levied on them because of errors or oversights on their part, or due to misinterpretation of the general terms and conditions or/and rules and regulations of the card scheme providers.
Automated platform for reconciliation: The frequency of charges levied, which varies across card schemes, causes confusion while reconciling these recurring invoices. Thus, it’s crucial for banks to ensure that no additional payouts are made due to the cumbersome manual reconciliation process. This can help banks in reducing errors, provisioning funds for their card portfolios, reducing financial risks and also efficiently deploying personnel who might otherwise be involved with the manual reconciliation process.
Application for dashboards/analytics: The information used by banks for analysing and validating charges is sourced from various internal stakeholders. It is critical for banks to ensure that the gathering of information is carried out in a manner that is not time consuming. Currently, most banks source data in a format which may not be standardised and hence the need arises to create a tool which can be used to upload the relevant data on a single platform and system. This will provide a single view of all the charges incurred by banks.
Aided by a thorough understanding of card scheme charges, banks need to proactively take steps to validate the payouts made to the various card schemes they have collaborated with. The growth of card portfolios and reducing MDR make it important to look at card scheme costs minutely. This is especially important for debit card portfolios where MDR has reduced while the costs of operations have remained constant for PoS transactions.
Understanding the business logic behind card scheme charges will help banks gain a broader perspective of changes/modifications to processes required for their card business. Interventions in card scheme charge rationalisation will thus bring about a positive change across the different functional levels at banks.
At an operational level, it helps understand ways to improve operational and technical efficiencies so as to avoid errors.
At a business level, it will provide the division of costs across systems and services.
At a decision-making level, it can help banks rationalise and analyse their existing portfolios of network costs incurred.
Card scheme charges will impact multiple players across the payments ecosystem. As services in this ecosystem are interdependent, it is important for all the stakeholders to develop clarity around the business model followed by card scheme companies. As technology vendors work towards achieving greater efficiency via consolidation of data for card scheme charges, they have the opportunity to develop bespoke solutions for banks. The various stakeholders involved in the payments landscape can thereby promote a seamless operational and functional process which aims at enhancing efficiency and revenues.
From a long-term business efficiency perspective, an automated engine with clear business logic will help determine the cost, both core and non-core, for a bank’s existing card portfolio (debit, credit and prepaid). The engine should be system-based and banks can evaluate the systems through a consolidated view of the number and category of cards issued and the count of transactions, thereby determining the services that attract a higher fee. It should also be capable of generating reports on the calculation of basis point (BPS) cost for each scheme and card portfolio, along with highlighting product-wise risk areas. Overall, it should provide options for the optimisation of costs and enhance operational efficiency. Banks should aim at benchmarking their card charges related processes against the industry best practices. This will help them develop an action plan that will enable their internal teams to meet their functional goals through gap analysis and corresponding interventions in process/operations.
Partner, India FinTech Leader, PwC India
Partner, Payments and FinTech, PwC India
Tel: +91 99 3094 4573