How Digital Payments May Have Helped Banks Amid The Pandemic

Amid the coronavirus pandemic where consumers and merchants are shunning cash in favour of contactless digital payments, there has been an obvious increase in the number of digital transactions in India. A report by NPCI (National Payments Corporation of India) said that in July, transactions through UPI registered the highest amount in a month at Rs 2.90 lakh crore and the volume of transactions: 149.73 crore, was the highest since the introduction of the interface.

A similar trend was seen in cards, the most preferred option for digital transactions in India after UPI. RBI data shows that the value of transactions made using credit and debit cards have recovered to pre-COVID levels. In June, the value of these card transactions more than doubled, that is, saw a 111 percent surge compared to April.

Those not using debit or credit cards at POS terminals in merchant outlets are using them to make online purchases.

What does the increase in digital transactions amid low-interest rates mean for banks?

To push economic growth that has been stalled or most possibly contracted due to the coronavirus pandemic, RBI has cut the repo rate to the lowest ever. Further, to push liquidity, the central bank has also taken policy measures for faster transmission of these rate cuts by banks to reach final consumers. As a result, banks have been cutting their lending rates, reducing their interest income potential.

Falling interest income, excessive funds in savings accounts of customers (increased interest outgo), 6-month moratorium, rise in "free" digital transactions like UPI and 3-month free ATM withdrawals, have hurt their income-earning venues.

Banks have already started charging or increasing fees

Back in March, soon after the outbreak of COVID-19 in India, Axis Bank had sent advisories to its customers that after 20 free transactions, it will impose Rs 2.5 per transaction less than or equal to Rs 1,000 and Rs 5 per transaction more than or equal to Rs 10,000. In addition, GST at 18 percent will be applicable to these transactions.

A recent Economic Times report said that burdened with high volumes and zero MDR, leading private banks have introduced different forms of processing fees in the lockdown months.

MDR or Merchant Discount Rate is a type of processing fee charged to merchants (seller or service provider) every time they accept payments made via digital transactions using cards or UPI. This fee is typically 1 to 3 percent of the overall value of the transaction. However, this fee is not charged on small value transactions or payments made using UPI.

Merchants also have the ability to negotiate for a particular rate with their bankers.

As for card payments, every time you swipe, tap or make an online payment using your credit/debit card, the card issuing company (like Mastercard or Visa) will charge a processing fee to the bank that issued your card, which is known as "switching fee."

Another place where banks can make a profit from digital transactions is the interchange fee. The issuing bank, that is the bank that has issued your card or where you hold an account (in case of UPI), will charge a percentage of the total transaction value plus a fixed amount to the bank that receives the amount as the interchange fee. Experts say that in the case of UPI payments, QR code payments, fintech players (payments service providers) like Google Pay, Paytm, who facilitate them are charged interchange fee for every payment processed.

As explained above, all these types of fees are either recovered from the sender or receiver of funds in a transaction. These may have been increased or charged on both sides in ways that may seem negligible to consumers who may not have noticed it.

This is because the sudden increase in the number of digital transactions has posed as an opportunity for banks to balance the decline in interest rates and higher risks of loan defaults by companies failing amid the pandemic. Moreover, there are increased costs associated with processing a large number of digital transactions.

It will not be surprising if more banks, especially private banks, start increasing these hidden charges, if not already done.