Fixing e-payments

Petrol pump battle over cards is just the beginning

The government had to step in to quell an emergent crisis when it declared on Monday that consumers at petrol pumps would not be required to pay extra if they used electronic modes of payment instead of cash. Earlier, there had been signs of incipient chaos at petrol pumps that refused to accept payment through various credit and debit cards. The petrol pump operators’ argument is reasonable. They point out that they run a low-margin business. Accepting cards in lieu of cash means that they have to pay something to the card issuer. This could very well wipe out their margins. In the initial weeks after demonetisation, special dispensation was made — the “merchant discount rate” or MDR was cancelled for the duration. But that special exception is now at an end, and many banks are charging for card transactions. The charges vary from 1 per cent for credit cards to between 0.25 per cent and 1 per cent for debit cards. Naturally, given the competitive and low-margin nature of the business, if this charge is restored, then pumps will seek to pass it on to consumers or simply stop accepting cards. That would not only have caused discontent but would also have been a very visible setback to the government’s current stated reason for the demonetisation exercise, namely to promote cashless transactions.

It is not surprising, therefore, that Petroleum Minister Dharmendra Pradhan has stepped in and stated flatly that consumers will not have to pay extra if they use cards. Petrol pumps are, for the moment, willing to accept card payments on the assumption that they will be compensated. Who will compensate them for their lost margin – banks or oil marketing companies – remains to be determined. The answer is not straightforward. It is unclear for reasons of equity and minority investor protection why oil marketing companies should pick up the tab for the government’s policy efforts. Nor is it clear why banks, including private-sector banks, should be forced to make decisions that may not be in their best interest.

This particular flashpoint is worth noting because it highlights another poorly thought through aspect of demonetisation: The regulation and design of the payment architecture that is supposed to substitute for much of India’s cash. Unlike cash, which just has a sunk cost when it is printed and then can be circulated in a costless manner, electronic transactions carry a small cost each time they are undertaken. Who will bear this cost? Will it be regulated, or will the market be free to operate? What is clear is that the costs should not be hidden as they have hitherto been, but instead be transparent to all involved. Merchants should be free to accept or refuse electronic transactions based on whether they are remunerative; and competition should be such that the costs of each transaction are driven down so that more and more merchants find them remunerative. It could be argued that the current system – based on an MDR that is set by the Reserve Bank of India – is built to provide steady money to banks. 

Either way, a rigid system is clearly not sustainable. A more market-driven and flexible payments architecture is needed, and the government should ideally already be working on the necessary policy design.