Credit cards on UPI may up costs for small business

MUMBAI: The move to enable credit card transactions on the Unified Payments Interface (UPI) platform will open up crores of small merchants and street vendors to using plastic money. While this may make cardholders happy, it will pass the cost of providing free credit of up to 45 days on to these small businesses, adding to their overheads. Currently, retailers accepting credit cards pay around Rs 13,000 crore every year to banks to meet these one-month ‘free credit’ costs.
A report on these charges had made a radical proposal that the credit risk and interest cost on these transactions should be separated from the merchant discount rate (MDR) — the fees that the shopkeeper pays to the bank for facilitating credit card payments.
The credit cost (interest) would then be billed directly to customers by the card-issuing bank. The savings for those merchants who already accept credit cards can always be passed on through discounts to customers, thereby boosting sales. The report has been written by Ashish Das, a professor in the mathematics department at IIT-Bombay. Das has authored several reports on payments and banking charges, many of which have led to policy changes.
The report, which seeks to address some of the questions raised by the RBI in its discussion paper on charges, agrees with the central bank’s statement on delinking cost of performing transactions from the cost of funds and credit risk. According to Das, widening the acceptance of creditcards for small shops, in absence of the above delinking proposal, would have an inflationary impact as credit card fees are twice that of debit cards, while a merchant pays nothing for receiving moneyvia UPI.
“Today, on a Rs 1,000 transaction, the merchant pays Rs 10 for debit card payments and Rs 20 if it is by way of credit card. These costs have to be built into overall costs as theycannot be passed on to customers by way of surcharge. ” Das adds that the number of customers using UPI today is far more than credit cards, so the argument that the merchant will lose out on the customer does not hold good.
On the issue of payment charges, Das has also questioned passing these on to customers in a non-transparent manner. This is being done in few merchant portals like IRCTC. “The payment receipts issued by the merchant do not account for the additional unaccounted money extracted by the payment aggregator and acquirer banks. Though there must exist a clear relationship between the consumer and whoever collects the additional money along with GST (with associated GSTIN), in practice such a relationship doesn’t exist,” the report said.

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