According to Reserve Bank of India in 2010-11, card payments (both debit and credit) constituted just over 20% of total non cash retail transactions in terms of volume, but less than 1% in terms of value.

1. Why card is king: the need for
improving card acceptance in India
Thought Paper
www.infosys.com/finacle
Universal Banking Solution | Systems Integration | Consulting | Business Process Outsourcing

2. Why card is king: the need for improving
card acceptance in India
“Money isn’t everything - there’s credit cards, money transactions in terms of volume, but less than
orders and travelers’ checks.” 1% in terms of value. Contrast this with the
scenario in the United States and Europe, where
-Anonymous
cards are used for almost all retail transactions.
According to the Reserve Bank of India (RBI), in This clearly indicates that card usage in India has
2010-11, card payments (both credit and debit) a long way to go, which is surprising, considering
constituted just over 20% of total noncash retail the innumerable benefits on offer.
Cash versus card
Advantages to consumers Advantage to banks
The most obvious advantage of cards to Banks gain in several ways when their customers
customers is that they are easy to carry around. use credit cards. Firstly, they earn a fee on
Cards score over cash from the security point every transaction. Secondly, their relationships
of view too. with customers become stronger. Last but not
least, they are able to derive rich insights into
Advantages to vendors customers’ buying behavior, which they can use
The larger the number of cash transactions, to create customized and differentiated offers.
the higher the chances of counterfeit money
being used for making payments. While
Advantages to the economy
vendors can use infrared scanners to detect Increased card usage automatically brings down
fake currency, this is feasible only for notes of the circulation of black money.
large denominations. Moreover, this also
Fewer card transactions translate to large
involves an additional cost. Acceptance of
amounts of hot cash in the economy. Higher
card payments takes care of this problem to a
cash levels lead to spiraling costs, which in turn
great extent.
feed inflation. When card payments form the
Unlike card transactions, cash sales necessitate bulk of total transactions, hot cash levels
trade reconciliation and counting of currency remain subdued. This is the reason why the RBI
notes manually or otherwise, adding to the costs encourages noncash payments through card,
in terms of labor and time. Also, there is check, NEFT, ECS et al.
the additional expenditure of securing and
transporting the money to the bank.
02 Thought Paper

3. Reasons for low card usage
The numerous advantages notwithstanding, ‘card not present’ (online) transactions are even
card usage in India remains limited on account less secure than those where the card is swiped.
of the following factors:
Customer liability
Delayed loss awareness In India, the liability arising from unauthorized
When cash is lost, the extent of the damage card use shifts to the bank only after the
is known immediately. When a card is stolen customer lodges a complaint. So, it is in the
or misused, the cardholder will not know the interest of the cardholder to report unauthorized
amount he has actually lost until much later. transactions immediately; but this might not
always be possible, and is usually cumbersome.
High transaction cost
Transaction costs, which are quite high – owing
Vendor inconvenience
to bank charges, service tax etc. – discourage Vendors are of the opinion – not entirely
card usage, in turn pushing up costs even unfounded – that accepting payment through
higher. This turns into a vicious cycle with the cards is an inconvenience. Successful payment
high costs and low volumes feeding off each acceptance depends on the robustness of the
other, further putting off customers as well card payment network, which is often too slow
as vendors. or unresponsive. As a result, card transactions
are frequently delayed or converted to cash
Low perceived security payments or even canceled. Also, there is limited
Indian customers are still not convinced about support for card associations like Diners Club
card security. Also, they wrongly assume that and AMEX, causing further inconvenience.
Towards greater usage...
To boost the number of transactions, banks Heighten merchant awareness
and regulators need to make concerted efforts
By accepting card payments, merchants can
towards improving the awareness, security and
do away with various inconveniences, such as
convenience of cards.
the additional tasks of checking for counterfeit
currency, arranging for change, reconciling cash
Develop customer awareness
and transporting money. Banks should bring
The frequency and volume of credit card home these advantages to merchants. Merchants
transactions will pick up only with widespread should also be made to realize that not
adoption. Banks should dispel customer accepting cards will result in the loss of
apprehensions regarding card security by business from impulse purchases, and from Gen
disseminating related information through Y customers, who prefer cashless transactions.
websites, emails to customers and other modes
of communication. They can also use the media Improve security framework
as vehicles for showcasing credit cards – their Most card transactions in India today have the
convenience, ease of use and other advantages. barest minimum of security – just a signature.
Thought Paper 03

4. Introduction of additional authentication levels also recommended that banks, which are
will go a long way in enhancing security and required by law to follow basic KYC norms
card usage. However, since this implies a while onboarding customers, should also look
bigger turnaround time (TAT) and cost, a via at applying the same principles to monitor
media may be required, such as a provision card transactions. The regulator is also of the
for additional security measures only for high view that there is a need to review consumer
value transactions, or a demand for proof of protection provisions and the responsibilities
identity in suspicious transactions. of banks and customers in the event of fraud
or disputed transactions, to bring them in
• PIN based authentication line with the practices of other countries.
More banks should set up PIN based Finally, it urges banks to step up communication
mechanisms for validating credit card to customers on the dos and don’ts of
transactions. At present, the usage of PINs credit card usage.
is mostly restricted to ATMs. It is worth
considering extending it to debit and credit
Improve convenience
card transactions. If banks were to make card usage more convenient
in the following manner, it would encourage
• Identity proof adoption among customers and vendors.
If the regulators make furnishing of ID
• Support for card associations
proof mandatory, vendors might embrace
cards more easily, as it limits the scope of Very few payment networks in India accept
fraudulent transactions. Diners Club and AMEX card payments, to the
chagrin of customers. Banks can resolve this
• One Time Password (OTP) problem by creating independent networks,
which interface with all debit and credit
While OTP is widely and successfully used as
card associations. This will enable vendors
second factor authentication for Card Not
to accept all types of cards while also
Present transactions, it will further bolster
saving them the hassle of interfacing with
card security if introduced in Card Present
multiple associations.
transactions also.
• Redundancies
• EMV
Today, vendors dependent on a single network
EMV chips take card security to another provider are unable to accept card payments
level altogether. The PIN and cryptographic when there is a service breakdown. Addition
algorithm in these cards render it almost of redundancies, like intelligent network
foolproof. For merchants, the advantage is selection, will facilitate seamless transition
that the burden of proof shifts to the across providers at such times.
cardholder in the event of a card misuse
complaint. The application of EMV technology • Zero or limited liability
is mandatory in Europe and has been
Customers are always at the receiving end
successfully implemented there as well
of wrong debits, overcharges or service
as in some parts of Asia Pacific. However,
issues with the vendor. They have to prove
the U.S. lags behind because it is yet to
themselves innocent and are compensated
make the infrastructural changes this
only upon successful completion of the
technology demands.
investigation. Instead, if customers were
On its part, the RBI is taking as well as to receive immediate credit on complaint
suggesting several actions to secure card registration, as is the case in the U.S. and
transactions. It has already made alerts Europe, such that they would not lose even
mandatory for all card transactions. It has the interest on the disputed amount,
04 Thought Paper

5. they might be tempted to use cards more applications like Square, if made available
frequently. Conversely, if the transaction is in India, will enable even very small retailers
proved valid, the customer can be asked to to accept credit card payments while also
pay up, as well as fork out a stiff penalty. reducing transaction costs.
• Quick dispute resolution Develop rural markets
Today, when a customer disputes a Transactions in rural India are mostly cash
transaction, the vendor has to prove its based. But thanks to the initiative of the RBI
validity by making a ‘represent’ request. This and the National Bank for Agriculture and
is a long drawn out process wherein the Rural Development (NABARD), the Kisan Credit
request is directed first to the acquiring bank Card has already made its presence felt. It is
and from there to the issuing bank. time that banks realized the potential of this
Simplification of this process will make things neglected segment and stepped into this
easier for both vendor and customer. potentially lucrative market by introducing cards
for farmers, artists, traders and the self-employed.
Reduce card transaction costs
Banks can raise card usage levels in India
There are various fees and charges associated substantially, by working on the problems
with card payments, which if reduced, will surely faced by credit card users while also
shore up the volume of credit card payments. highlighting the various advantages of cards.
It will not be out of place to mention one more
• Merchant fees plus point of card usage, which is its impact
With the objective of popularizing card on community health. Currency notes are
payments, banks can sacrifice a small notorious germ carriers as they pass through
portion of their profitability, that is, they thousands of hands. In fact, when the SARS
can reduce the fee they charge on every epidemic broke out a decade ago, China started
transaction processed. This will encourage disinfecting and quarantining its currency notes
vendors to shift to card based receipts. as a disease containment measure. The danger
of communicable diseases spreading through
• Service tax paper money is real and might be reason
enough for health conscious consumers to shift
The government can reduce the percentage
from cash to cards.
of service tax to attract more people into the
credit card fold.
• Point of Sale (POS) machine costs
POS machines are expensive and only
large retailers can afford them. Cheaper
Thought Paper 05

6. References
1. www.newsflash.org/2003/05/si/si001628.htm isn-t_ever ything-there -s_credit_cards-
money/174200.html
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 _
Mahimna Pawar
Senior Associate Consultant, Finacle, Infosys
06 Thought Paper

7. About Finacle
Finacle from Infosys partners with banks to transform process, product
and customer experience, arming them with ‘accelerated innovation’
that is key to building tomorrow’s bank.
For more information, contact Finacleweb@infosys.com www.infosys.com/finacle
© 2012 Infosys Limited, Bangalore, India, Infosys believes the information in this publication is accurate as of its publication date; such information is subject to change without notice. Infosys
acknowledges the proprietary rights of the trademarks and product names of other companies mentioned in this document.
Thought Paper 07