No free lunch: Rajan on ATM transactions

Second authentication for small value payments through credit cards can be reduced subject to conditions

Reserve Bank of India (RBI) Governor Raghuram Rajan on Monday said while there was criticism on reducing the number of free transactions at non-home bank automated teller machines (ATMs) from five to three a month, this was necessary, as banks had to pay for such transactions.

“There is no such thing as a free lunch; we tend to forget this sometimes. If your bank has to pay some other bank for those transactions, it has to collect it from somewhere. It does this by increasing some other fee on customers. It passes the cost back to customers,” he said, adding five such transactions cost a bank Rs 75-100.

The RBI chief said to the extent that everybody carried out five ATM transactions free and everybody incurred the same cost, the cost was passed to customers. But this led to distortions, as those carrying out five transactions benefited, while carrying out one or no transactions didn’t, he added.

“Should we mandate such cross-subsidy and subsidising people in use of cash?” he asked. The answer, he said, was a partial withdrawal of the mandate — from November, the number of free ATM transactions at non-home bank ATMs in six metros (Mumbai, Delhi, Kolkata, Chennai, Bangalore and Hyderabad) would be three a month.

Rajan clarified RBI wasn’t directing banks to charge for such transactions, but merely telling them that they could. “Banks can choose to subsidise. Overall, this will reduce the hidden cross-subsidy and make it more transparent.”

For credit card transactions, RBI has a two-step authentication process. Rajan said this would continue. He added some were bypassing this and clearing transactions abroad, contravening a number of rules. “The immediate pushback was RBI was against innovation. Whatever the innovation, you have to follow rules. If there is a rule in the book, we don’t allow it to be violated simply because the innovation is cool,” he said.

Such authentication, Rajan said, had strengthened security of transactions. He added now, RBI was considering how to innovate and allow easy small-value payments. It was mulling reducing second authentications for low-value payments, provided the card provider had systems to protect against misuse, he said, adding they would bear costs beyond a certain point in case a card was misused.

The governor raised questions related to the priority sector. One had to ask why some sectors secured credit more easily than others, he said, adding for instance, priority sector student loans were subsidised for study abroad, too. “Are students studying abroad the neediest in the country, or the most important? I am not saying this is bad, but we should ask questions.”