Monopoly position enables international behemoths Visa and MasterCard to levy exorbitant costs on client banks; a domestic payment system would be considerably cheaper

The country’s central bank, the Reserve Bank of India (RBI), is considering putting in place a domestic card payment system that would handle all debit or credit card transactions in the country. If implemented, the new system would compete against international card associations Visa and MasterCard, who have a virtual monopoly in card transactions worldwide. These two players have access to superior technology and employ stringent practices that make settlement of card transactions a breeze for banks worldwide.

This position of strength enables the two giants to demand huge fees for their services from client banks. Banks thus have to pay a high cost for associating with Visa and MasterCard. So much so that there is no alternative for banks but to accept whatever charges these two players think fit to levy for their services.
The list of service charges is quite exhaustive. Apart from transaction charges, they have a plethora of other fixed charges including annual service charges, monthly maintenance charges and quarterly charges. These are levied irrespective of whether the cardholder uses the card. The problem lies in the fact that banks cannot transfer all these charges to the customer. They have to bear the costs themselves. A senior banking official said, “These organisations are exploiting their monopoly position and technological expertise. Our current agreement requires us to unilaterally accept any future charges that may be introduced. They dictate their terms and conditions; banks don’t have any say in the matter.”

Dhimant Roy Turakhia, assistant general manager, Bank of Maharashtra said, “This is a welcome move from the RBI. If the RBI is to introduce this system, it is going to be highly economical to the bank and also to the cardholders. The charges would come down to 10%-15% of current outgo. The profitability of public sector banks will also increase and the burden will also reduce to that extent. After all, we can only pass on limited expenses to our customers.”
The most astounding fact is that Visa and MasterCard are not liable to pay a penny to the government in the form of taxes. Essentially, they are earning truckloads of revenues which are entirely tax-free. Banks are supposed to pay the service tax on behalf of Visa or MasterCard.

The RBI has already established a National Financial Switch (NFS) which handles many domestic transactions for cash withdrawal. It has been operating since the last 18 months. For the same transactions, Visa charges more than 10 times what RBI asks from banks. RBI is also looking at establishing a PoS (point of sale) switch network for routing domestic card transactions. Currently, even domestic transactions are routed through a switch located outside the country. The Visa switch lies in the US as well as Singapore. However, for this new system to work, a 24-hour fund transfer mechanism will have to be put in place. The existing National Electronic Fund Transfer (NEFT) network operates during weekdays from 9 am to 5 pm and on Saturdays from 9 am to 12 noon. The RBI is also pursuing the suggestion to extend this network to work on a 24*7 basis.

–Sanket Dhanorkar news@moneylife.in