Banks, other PSPs to bear cost of lower transaction charges: Analysts

Among other things, the paper asks if credit card MDR and interchange should be regulated by the central bank.

Banks, other PSPs to bear cost of lower transaction charges: Analysts
While the paper offered some suggestions around fee structures across digital payment systems, it did not take a stand on whether overall transaction charges should rise or fall.

Banks and other payment service providers (PSPs) will have to absorb the burden of lower transaction charges in India’s payments ecosystem, analysts said a day after the Reserve Bank of India (RBI) released a discussion paper on the subject.

While the paper offered some suggestions around fee structures across digital payment systems, it did not take a stand on whether overall transaction charges should rise or fall.

Analysts at Macquarie Capital Securities (India), said in a note that since cash still forms more than 80% of all transactions in the economy and the key objective is to bring down its share, digital transaction charges must be brought down for individuals as well as merchants eventually. The cost will have to be borne by the banks, fintech, non-banking financial companies (NBFCs), payment aggregators and service providers, they said.

“Banks still can digest the impact better as they have always used payments as an acquisition engine and never made much money. The key challenge would be for various other intermediaries, which do not have the balance sheets to leverage on the customers acquired,” Macquarie said.

Also Read| HDFC Bank and Punjab National Bank hikes interest rates on deposits

Emkay Global Financial Services said that the discussion paper has once again raised the possibility of regulating or reducing merchant discount rate (MDR) or interchange fees on cards, prepaid payment instruments (PPIs) and wallets, which could hurt the profitability of players like HDFC Bank, SBI Card, ICICI Bank, Axis Bank, RBL Bank and Paytm.

“That said, the formula suggested by RBI should keep MDR at >1.2-2% v/s =2% now. Our rough workings suggest that a 10-basis point (bps) reduction in MDR/interchange fee could shave off card-business RoA (return on assets) by at least 50 bps,” Emkay said.

With the increasing adoption of digital payments and specialisations emerging in the ecosystem, the topic of charges demands a nuanced approach, said Harish Prasad, MD, Banking Solutions, India, FIS. “While banking has traditionally been a portfolio-based business where income for one set of services potentially compensates for the lack of income from other services, being able to move to a model of charging for each service independently for what it is really worth will lead to a more efficient banking system overall and will help consumers eventually,” Prasad said. The discussion paper is a step in that direction, he added.

Others were more critical of the paper for its unwillingness to clear the air on what direction the regulator wants charges to take. Analysts at ICICI Securities said given the paper is seeking feedback on 40 questions, no concrete outcome or decision is emerging from it to settle the overhang with certainty around charges on the different payment instruments. “Nonetheless, it is pertinent to gauge the direction in which, and on what aspects, the regulator is evaluating payment charges,” the broking firm added.

A discussion on the element of reward points in the credit card business and its impact on charges was missing from the paper, said Kotak Institutional Equities (KIE). A credit card offers three key functions – payment, an interest-free period to make the payment with an option to roll over into a loan, and reward points. “The first two are well discussed in the paper but it is largely silent on reward points. The acquirers have a rationale to have a reward point program that is currently funded through the MDR (merchant discount rate),” KIE said in a report.

Among other things, the paper asks if credit card MDR and interchange should be regulated by the central bank.

Similarly, Emkay analysts pointed out the paper’s omission of the high annual percentage rate (APR) of 40% being charged by credit card and Buy Now, Pay Later (BNPL) players. Some countries have started regulating APR or have a variable APR mechanism and so the possibility of a similar structure cannot be ruled out in the mid-to-long run in India either, Emkay said.

“Our quick discussions with card players suggest that RBI may either leave MDR on credit cards/wallets being determined by the market or may nudge players to slightly bring down the interchange fees,” the broking firm added.

Industry body Payments Council of India (PCI) on Thursday said it will submit its detailed feedback to the RBI within the stipulated timeframe.

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.

Photos