State-run banks to cut debit card usage fee

At present, many vendors discourage card usage by customers, 
especially for high-value purchases, and sometimes even insist the customers
 bear the transaction costs. 
Photo: Pradeep Gaur/Mint

Remya Nair :Mon, Oct 08 2012. 01 14 AM IST

Charges could be as low as Rs.2 per transaction, 
are expected to promote greater use of debit cards

In a major fillip to e-commerce, state-run banks will soon lower fees for debit card transactions. The fee could be as low as Rs.2 per transaction and is expected to promote greater use of debit cards and a gradual reduction in cash purchases.

The fee will be charged per transaction rather than as a percentage of the value of a purchase, as a massive proposed roll-out of point-of-sale (POS) terminals is expected to reduce costs. Public sector banks are expected to collectively roll out 600,000 POS terminals in the next two years as part of the government’s plan to encourage shopping through cards.

Credit card transactions will continue attracting higher transaction costs.

At present, many vendors discourage card usage by customers, especially for high-value purchases, and sometimes even insist the customers bear the transaction costs. For credit cards, the charge is 1-2% of the value of the transaction, depending on the merchant size and location. For debit cards, the charge goes up to 1%. The Reserve Bank of India capped debit card charges earlier this year.

“Payments are still linked to value of the transactions for both debit and credit cards. At a time when we are looking to encourage e-payments, such high costs act as a big disincentive,” said a finance ministry official who did not want to be identified. “In debit cards, there is no risk of default. We have asked banks to charge a flat rate on every debit card transaction,” the official said.

The decision is in line with the recommendations of a committee set up by the finance ministry to examine issues affecting the growth of online shopping. The committee, which included software industry lobby Nasscom, recommended that the fee on debit cards be reduced because of the lower risk involved.

“With the roll-out of POS machines, costs for banks will come down to as low as Rs.2 and there is no reason why they should charge a higher fees,” the official added.

“Vendors may not pass on the costs to the customers, especially in high-value transactions, if charges are levied at a flat rate. This will lead to greater use of debit cards and also discourage cash handling,” said Anish Thacker, a tax partner at audit and consultancy firm Ernst and Young.

IDBI Bank Ltd has issued a tender to procure POS machines for all public sector banks. The bidding is likely to be completed by next month. An official with a public sector bank said there was scope to reduce the fee, but the rates will be finalized only once the bids come in.

Sudip Kumar, head, Tata Communications Banking InfraSolutions Ltd, said the proposed huge roll-out of POS terminals will help banks lower their costs due to economies of scale. “There will be savings on the information technology infrastructure. There will be pressure to lower interchange costs and change the business model,” he said.