Government services to become cheaper

Consumers can save up to 2.5% on credit cards and 0.75% on debit for using government services

Transaction costs of government services are all set to go for customers. That is, paying utility bills, booking train tickets and paying fees for passport and central universities will become cheaper. The finance ministry has issued a memorandum asking government departments to take appropriate steps to bear all charges just like private merchants do for payment made through debit, credit cards and other digital means.

“Most government companies and institutions pass all the charges involved in a transaction to end users, as these costs are not accounted for in their budgets,” says Bhavin Mody, director, E-Billing Solutions, a payment gateway company.

If an individual is using online banking, the charges involved are low, a flat fee of Rs 10 or lower, but when they are using cards, it can be significant. The charges, called as merchant discount rate (MDR), is between 1.8 per cent and 2.5 per cent in case of credit card. For debit card, it’s 0.75 per cent for up to Rs 2,000 and one per cent for values above that.

Currently, if a person is making Rs 10,000 payment using credit card at a government institution, he has to pay Rs 180-250 extra, and Rs 100 if he uses debit card. “Due to this, many individuals prefer cheque or cash as a mode of payment,” says Nitin Gupta, CEO and co-founder, PayU, a payment gateway company.

The government’s move to bear MDR will bring down the transaction costs involved in fees paid at Central universities, taxes paid online, utility bill payments (electricity, gas, and telephone), payments made at passport offices, and tickets booked through Indian Railway Catering and Tourism Corporation’s or IRCTC’s website. “At present, most of these payments are done either through net banking or cheque, and very few payments are done by debit or credit card because of the transaction costs,” says A P Hota, managing director and CEO, NPCI.

It’s not yet clear whether MDR charged for payments made for fuel at petrol pumps will be borne by the government, as there’s confusion whether they would be treated as government entities or corporations. At present, the oil marketing companies pass the MDR to either customers or it’s absorbed by the card issuing banks, in case of co-branded cards.

Hota says there was a view that card transactions were not picking up at government institutions because the costs were passed to the end user. “Now, by doing away the MDR, the government has taken a step forward and this should encourage card transactions.”

As the finance ministry has issued the memorandum, only payments made to Central institutions will come down. “We believe state departments and local municipalities, too, will adopt it later, once the Centre fully implements this,” says Gupta.

Hota feels as the government has agreed to pay the MDR, the Reserve Bank of India may cap or reduce the transaction costs that banks charge on credit cards. RBI currently cap the charges for debit card transactions but it lets banks to decide on the MDR for credit card. These steps are being taken to reduce cash transactions and weed out black money menace. Just before the Budget this year, the Cabinet had approved steps to promote payments through cards and digital means. These included withdrawal of surcharge, service charge, and convenience fee on card and digital payments currently imposed by various government departments and organisations.

ALSO READ: Are we moving to a cashless society?

 

ALSO READ: RBI revs drive towards cashless economy