The humble debit card may already be on the verge of obsolescence in India.
A couple of months ago, I had questioned the logic of the fee structure for card payments—particularly debit cards—in a piece titled “How to kill cash”. Banks across the board have little incentive to push for greater use of offline card payments, and the way to fix that, I’d argued, is to flip the free structure on its head.
A quick recap: the card payment industry works on a decades-old model. You have an issuing bank—the one that issues you your debit or credit card. Let’s call it Bank A. On the other side you have the acquirer bank, Bank B, which “acquires” merchants—i.e. convinces them to lease card machines, or point-of-sale (PoS) devices.
When you use your card at a PoS terminal, Bank B pays the merchant the amount entered, after deducting a fee called the merchant discount rate (MDR). This is usually a combination of device rental, fixed fee and variable fees tied to the number or value of transactions the merchant accepts.
Bank B then collects from Bank A, which in turn, bills you (if you have a credit card) or debits your savings account instantly (if you have a debit card). But Bank B also has to pay Bank A an interchange fee.
I suggested that Bank A should instead pay Bank B a nominal fee for using the PoS terminal—exactly as it works when you use Bank A’s debit card to pull out cash at Bank B’s ATM. I assumed two things in my hypothesis: (a) debit cards would continue to be the payment instrument of choice; and (b) there is leeway for debit card issuers to fund a payment transaction, given that their costs were very different from credit card issuers.
The article generated lots of discussion, led me to dig deep into issuer-side economics and, surprisingly, has led to a very different interpretation—thanks to the Unified Payments Interface, or UPI, debit cards may be the first roadkill on the way to killing cash.
Consider a few data points. Over a 10-month period starting April 2018 (the latest for which comparable data is available across the payments ecosystem).
- Debit cards in circulation stagnated at 931 million. The number of unique cardholders is much lower—perhaps about 700 million. But according to some estimates, almost half of India’s retail bank accounts are inactive. And while the government has created over 350 million new bank accounts under its flagship financial inclusion programme, the Jan Dhan Yojana, there is no data available on their uniqueness (i.e. did the beneficiary already have an account?) or their usage.