UPI vs plastic money: Banks don’t want to set up ATMs due to low rural card-usage

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Updated: May 16, 2019 7:00:22 AM

The government has reportedly pulled up banks for not putting in place enough point of sales (PoS) terminals for credit and debit cards. Against a target of 2 million machines—mobile and physical—banks appear to have installed some 6.5 lakh machines.

The government’s dissatisfaction over the small number of machines placed in rural areas is misplaced given the usage in rural India is very low. (Representational image)The government’s dissatisfaction over the small number of machines placed in rural areas is misplaced given the usage in rural India is very low. (Representational image)

The government has reportedly pulled up banks for not putting in place enough point of sales (PoS) terminals for credit and debit cards. Against a target of 2 million machines—mobile and physical—banks appear to have installed some 6.5 lakh machines. That’s not surprising because installing PoS machines can be an expensive proposition. And while banks may want the millions of RuPay cards they have issued to be used, there is the cost of running and maintaining the machines. The government’s dissatisfaction over the small number of machines placed in rural areas is misplaced given the usage in rural India is very low.

Indeed, it is unfair on the part of the government to impose targets without assessing the costs and subsidising the effort. That apart, the MDR (merchant discount rate) is also an issue; vendors are unwilling to bear the cost and are unable to pass on the costs to customers. The government also needs to accept that cash transactions remain tremendously popular. Much of the enthusiasm seen post-demonetisation seems to have been lost, partly because GST rates are too high.

This is borne out by the sharp jump in the currency in circulation, even if some of the increase is due to the general elections. In small-town or rural India, where much of earnings are in cash, it is no surprise that the preferred mode of payment, too, is cash.

Rather than coercing banks into distributing PoS machines, the government needs to push the BHIM app and the Unified Payments Interface (UPI) in general. Digitisation, other than via cards, is catching on going by the reported transactions on the UPI platform; in January, the value of transactions was `1.09 lakh crore, higher than the `1.05 lakh transacted via credit and debit cards. In March, the value of UPI transactions was `1.33 lakh crore compared with the total value transacted via cards of `1.1 lakh crore. Now, the government wants transaction-volumes of 40 billion clocked in the current year; of this, banks are expected to clock 34 billion. While players such as Google are driving digital payments, the key to pushing digitisation is to persuade vendors to opt for UPI.

Once they are converted, customers will follow. After all, 800 million bank accounts are linked to mobile phones and should be transaction-ready. The data trail from GST should help bankers assess the creditworthiness of MSMEs and lend to them at more affordable rates. Currently, the card piece of digital transactions is a loss-making proposition for banks, but they are otherwise inclined to encourage customers to transact digitally through their apps. Unfortunately, most state-owned lenders aren’t pushing digital transactions, probably because the technology costs are very high. Some support from the government to these banks could be a big boost for digitisation.

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