The debit card recently launched by Citibank helps in more ways than one. It frees the customer from carrying cash, while giving him access to his deposits at most retail outlets. The debit card, like the credit card and other electronic means of payments goes beyond individual conveniences. It decreases overall costs in the banking system by reducing the number of cheques issued in the system.

The more extensive the use of cheques, the higher is the cost to the banking system.

In countries like the United States, Canada, Australia and United Kingdom, extensive usage of cheques has resulted in higher banking costs as against that in Switzerland, the Netherlands and Germany (countries which have a greater extent of electronic transactions).

Where are the savings?
Although pruning of branches and trimming of staff reduce costs, the main cost reduction happens only when cheque-processing volumes are reduced. This is because closing branches just relocates cheque-related activities, which could at the most save around 10-20 per cent of the costs since centralisation benefits.

For a bank where cheque processing is heavy, as much as 55 per cent of total costs can relate to issuance, processing and reconciliation of cheques and other paper-based transaction instruments such as drafts.

As per one estimate, the cost of a cheque transaction over the counter fully costed would be around $1.07, while that of a full service ATM would be $0.27 and that of an Internet transaction or a direct debit (using debit card) or credit would be less than $.10.

Electronic bill payments (ATMs, Internet, or debit cards) would go a long way in lowering the costs for the banking system. In the United States, for example, retail customers draw up to 80 per cent of cheques and 90 per cent of cheques are drawn on companies, in the form of bill payments. According to a McKinsey report, annual savings through electronic payments by 2000 in the US alone would be around $2 billion.

The first movers
Other banks have taken initiatives in this direction as well. Indian Overseas Bank has tied up with MTNL for clearing telephone bills electronically. The facility would be extended by MTNL in the near future to cover customers having accounts in other banks.

While the scheme launched by MTNL in alliance with Indian Overseas Bank could be called a true electronic transaction, bill payment schemes trumpeted by others are far from it. Although, they give conveniences to customers, paper-cheques are ultimately drawn to pay the biller.