It pays to revamp

Did you know that of the Rs 100 spent on your credit card, about Rs 2 is divided among financial institutions? A part of this, known as assessments, goes to the company that your card is affiliated to, which in India is usually Mastercard or Visa. In effect, the two players stand to earn roughly 0.09 per cent per transaction or over $100 million annually. Despite the fact that 95 per cent of all card-based transactions in India are domestic, using these two global payment networks pushes up the cost for banks and is passed on to customers.

Now, the RBI is planning to revamp the entire payment system. In a new report, it has outlined some ambitious projects that it is likely to roll out in the next three years.

Domestic gateway

The apex bank is keen to explore the concept of a domestic payment card, tentatively called India Card, as well as a point-ofsale (PoS) switch network. According to industry insiders, a credible domestic interchange, limiting the use of international gateways to crossborder transactions, could bring down a bank's costs by 10-15 per cent. Consider ATMs. When the National Financial Switch was launched to facilitate ATM sharing, the default bank interchange switching fee was set at Rs 18 per transaction. This, at a time when the transaction charge paid to Visa or Mastercard was Rs 50-55 per transaction. A domestic gateway could similarly revolutionise the payment system.

A 24x7 system for fund transfers
The present National Electronic Funds Transfer system operates between 9 a.m. and 5 p.m. on weekdays, and for half-a-day on Saturdays, which mars the convenience factor. With the RBI planning to develop a 24x7 processing system, even the retail payment segment will soon enjoy the Real Time Gross Settlement experience (limited to transfers of over Rs 1 lakh). This, in turn, will help banks develop instant money transfer services.

Automated clearing house
Currently, the local ECS for bulk electronic transactions is operational at 76 centres. The centralisation of this process began last year with the launch of the credit variant of the National Electronic Clearing Service (NECS). Presently, 114 of the 166 commercial banks are enabled to participate in NECS. There is a pressing need for an automated clearing house (ACH) by redesigning the existing ECS. While the ACH system in the US processes 5.4 million transactions daily, the ECS handles one-ninth of these. This, then, may be the key to expanding the reach of e-payments.