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Point of Sale Terminals: Citibank Case Study
Citibank, being one of the biggest banks in the United States, needs to look at other emerging countries as engines of growth for its organisation. India in recent years has emerged as one of the most important investment destinations for firms and companies around the world. Even during the financial turmoil that plagued the entire world, India was one country that was almost untouched by the turmoil. This was mainly due to the robust Indian Financial system.
One of the most important challenges facing Citibank was the low penetration of POS terminals in India and the low awareness levels about the modern methods of payment. The Payments System in India has evolved from the Cheques and pay orders to internet banking. The burgeoning middle class, however, presents a huge opportunity in terms of educating them about the modern methods of payment. Low penetration of OOS terminals has been another important reason. The government has itself taken various initiatives to set things in order on this front.
Citibank can take various initiatives like creating a separate division for Merchant Acquisition that will help in increasing the penetration of POS terminals in the country. Again, extensive marketing campaigns, ATL and BTL communications will help in educating the customers and generating a positive impact in their minds for using modern payment instruments in their daily lives.
Though India represents to be a huge emerging economy, the consumers need to know that penetration of POS terminals as well as education about the usage of internet and e-commerce is a potent tool for payments in their daily lives. Hence, it is a challenge that needs to be addressed in an amicable manner.
Citibank has huge penetration of both the Credit Card and Debit Card in USA. However, India remains to be a huge investment destination given the demography, spending power and the huge middle class still waiting to be tapped. The youth of India will be the engines of growth. But the recent economic turmoil plaguing the entire world economy has made one thing very clear that promoting credit and its use should be minimized to prevent any such occurrence again or create such a situation in a country like India. Hence, it is important to push the use of Debit Cards in a country like India.
Payment system in India
The Payments system in India is broadly divided into two categories: Large Value Clearing and Settlement Systems and Retail Electronic Payment Systems.
The Retail Electronic Payment System is again sub-divided as follows:
ECS: The Electronic Clearing Service had a Credit value of USD 36 bn for the FY 2011 (Financial Year ending March 2011) and a Debit value of USD 15 bn for FY 2011.
NEFT: The National Electronic Fund Transfer transactions were valued at USD 188 bn.
Cards: Credit Cards showed a transaction value of USD 15 bn whereas Debit Cards showed a transaction value of USD 8 bn.
India as a country presents a huge opportunity for digitization of payments because the consumer spending in India is growing at a rapid pace – a CAGR of 15%. However, almost 91% of the transactions done by consumers is in the form of cash. A FY12 estimate shows that only USD 22.8 bn worth of transactions would be routed through the PoS transactions route. Hence, this is a key area of concern for the government, which has now taken various steps to address the same.
The payments industry in India has evolved steadily over the last two decades with the Payments Channels undergoing evolution from Cash and Cheques, Electronic Transfers to Mobile Banking, Debit Card and Internet Payments to Prepaid & EMV based Card Payments.
The Government has also taken various steps in enabling the above evolution and continuing to do so. The launching of ‘Aadhaar’ cards and thereby enabling direct cash transfers to beneficiaries thereby reducing the system inefficiencies is a big step in this direction. The emergence of ‘IndiaPay’ through the NPCI (National Payments Corporation of India) will be a game changer for the India Payments Industry as it envisages ending the dominance of International Payment Networks. So also, it will make the system to be more affordable at every level in the ecosystem from the cost perspective thus ensuring to increase the penetration of electronic payment systems in India.
In a country like India with its varied cultures, demography, people and geography, the penetration of Debit Cards ought to be uneven. Moreover, the penetration of Point-of-Sale terminals which again differs from one part of the country to another is also very low.
According to RBI (2012) figures, the penetration of POS terminals at 497 per million is very low by any standards when compared to other emerging economies like Brazil with 24,951 POS terminals per million people and China with 1,845 POS terminals per million people (RBI, 2010). However interestingly, the density of POS terminals in India which is about 179 per 1,000 sq. km. is quite comparable to that of Brazil (566 per 1,000 sq. km.) and China (257 per 1,000 sq. km.). When we compare the number of transactions per POS, then it is lower for India at 712 when compared with that for Brazil (1,296) and China (1,967). The main reasons for such data may be twofold: one is that the penetration of organized retail India is very low – nearly 7%. The second is that the penetration of POS terminals is again low in the rural parts of India.
The reason for low penetration of POS terminals in urban areas is the prohibitively high cost of transactions done through POS terminals due to the high costs paid to international network providers. According to estimates, POS issuers generally have to pay about 0.2% of the transaction size. The total amount paid to international network providers was about USD 46 mn in FY11 which includes payments made for both Credit and Debit Cards.
Another reason for the low penetration of debit cards has been the high MDR (Merchant Discounting Rate) – this is basically the cost that the merchants have to pay to the acquiring banks if they provide the POS terminal facility to their customers. The RBI has already taken steps in this direction: this has been lowered to incentivise more and more merchants to provide POS terminals at their establishments. The MDR cannot exceed 0.75% of transaction value for transactions less than Rs. 2000 and cannot exceed 1% of transaction value for transactions above Rs. 2000. This will help in encouraging even smaller merchants to accept card payments because they will have to pay a lesser amount now.
A very potent reason for people to stay away from using Debit Cards or other such payment instruments is the increasing number of cases of frauds at POS terminals. The major frauds in this case include the Counterfeiting of Cards and Lost & Stolen Cards.