Domestic payment cards drive economic and social benefits

The LankaPay-JCB cobranded 2-in-1 card

A groundbreaking research carried out in five major continents across the world by Anthemis Group has found that domestic card schemes and infrastructure are beneficial to the local economy despite the globalisation trends. In addition, they also drive significant social benefits. 

Anthemis Group is a leading digital financial services investment and advisory firm focused on re-inventing financial services for the 21st century. The research found sound reasons why a number of markets will choose to operate domestic payment card schemes as the preferred option for in-country payments. 

According to the ‘National Payments Scheme Report’ published based on the above research, such Domestic payments contributes to more than 95% of the transactions. Routing domestic card transactions via a local switch has the potential to lower the costs, create services more suited to local market needs and minimise significant outflow of foreign exchange. Freedom from the risk of foreign political interference in domestic payments is also going to be increasingly important in the future where domestic providers have a clear advantage.

Economic benefit of domestic schemes

The analysis of the research showed that based on the data collected from the five continents, the cost to the economy by using a domestic scheme compared to an alternative International Card Scheme (ICS) could be as low as 25%. Subsequently, further analysis was performed to assess whether the comparison changes according to the size of the market; the research team tested the comparison with market sizes ranging from 100 million to two billion transactions per year. It was found that although unit transaction costs tend to be higher in smaller markets due to lack of scale (average transaction cost in a market of 100mn transactions per year market was approximately 40% higher compared to a one billion transactions per year market), the above cost reduction aspect broadly remained the same.

The biggest reason to use a domestic scheme is that in most markets less than 5% of cardholders ever transact internationally, but the ICS charge assessment fees on 100% of transactions. This does not appear to be fair. Most Central banks are in favour of low-cost domestic payment schemes as an aid to economic efficiency and believe that such schemes and local infrastructures provides a significantly lower cost option; they all stated that there is insufficient transparency in cost information from International players.

The researchers made a macro-level analysis by using published data for the past four years from ICS revenue growth and compared it to transaction and payment volume growth. Through this broad analysis, they found that a majority of the benefits of volume growth has not been shared with the member banks in country by the ICS and on the contrary, there was an average 4% price increase every year. To validate this high-level finding, the researchers obtained input from the retail banks that were surveyed. The majority of banks complained about rising ICS assessments fees over the four-year period. All of them stated that there had been a deliberate strategy by ICSs of increasing fees to members in order to deliver financial returns to their shareholders.

In the developing countries, the central banks were keen to see value retained locally with a preference for local solutions where possible. A critical factor in launching of a domestic Card Scheme in a country was that most of the fees for ICS programs go outside the country resulting in a loss of valuable foreign exchange. The overall conclusion that appears from the data is that domestic schemes and infrastructures are generally significantly lower cost for a market in aggregate than international solutions and therefore are a positive tool in increasing national economic efficiency.

“We always believed that establishing a National Card Scheme (NCS) in Sri Lanka was going to bring economic benefits to our country by saving millions of dollars in foreign exchange and this research further validates that fact. This is especially critical considering the current context of our country where a majority of the foreign exchange income sources have significantly dried up due to the COVID-19 pandemic,” states LankaClear General Manager/Chief Executive Officer Channa de Silva.

Need of a level playing field

A network business that spans worldwide enjoys significant economies of scale and can command a substantial advantage in a smaller market; hence, it is important to ensure that all players have a fair chance to compete for business. Central banks in most countries have openly stated that they wish to see more competition at all levels in the payments market, among payment businesses models, card schemes and payment service providers. 

Due to the market power and the sheer scale of international providers, it creates a potential case for regulatory intervention to prevent market failure of domestic providers. The domestic schemes surveyed agreed that there is a clear duty and role for central banks to promote sustainable competition between payment schemes.

Most of the central banks surveyed took the view that up-front incentive payments by card schemes to drive market share to them and away from domestic competitors are a significant issue and a distortion of the market. The retail banks surveyed each expressed the view that their own organisation looked at only short-term incentives and did not foresee the long-term program costs. 

Most of the deals offered by ICSs have upfront components, which can be initially attractive as they could be used for marketing and to cover any revenue shortfalls. Once the bank takes this initial bait, there is no way out. In the end, it ends up more expensive than going with a domestic scheme.  In instances where banks had committed to such deals, they were unanimous in stating that any returning of such fees were not entertained by the ICS and they merely extended the timeframes to get banks further entangled in their web.

“Sri Lanka launched its NCS in June 2019 with the primary objective of significantly reducing the cost of domestic card payments where the scheme is operated by LankaClear under the guidance of the Central Bank of Sri Lanka (CBSL),” explains de Silva. The lower cost structure to operate the scheme results in lower scheme fees and interchange fees, which are regulated by CBSL. 

De Silva opines, “Our promise to banks in Sri Lanka is that even though interchange fee per transaction earned by an issuer may be lower, there is a significant trade-off of greater merchant acceptance, thus, resulting in much higher revenue from increased volumes.”

Prospects of domestic payments providers

According to the same research, domestic schemes are concerned about their lack of investment resources and 46% of them identified this as an issue. However, they have figured out how to derive maximum benefit from the funds they have and consequently only 25% are concerned about their ability to introduce new services to meet market requirements. There is an impressive list of announcements of new services from the ICSs targeted to attract new members, generally through acquisitions, but the domestic schemes are also innovating with similar success.

Chip cards have now become ubiquitous, but it was domestic schemes in France that pioneered them. Single message debit was developed by domestic schemes not their international counterparts. ATMs are often a forgotten area, but there is considerable innovation in this area as shown by two clear examples of the Portuguese and Nigerian ATM networks run by the domestic scheme. 

In Turkey, BKM the domestic infrastructure provider developed the BKM Express wallet that met the needs of the Turkish banks. In the UK, there is a determined push by Vocalink the local payment processor and the national ATM network to make the Zapp scheme the preferred solution for mobile payments. Moreover, RuPay in India, which has already issued more than 590 million debit cards, is promoting the use of a range of segmented products including debit cards issued under the Pradhan Mantri Jan Dhan Yojana initiative for financial inclusivity.

The preferred option for domestic schemes to enable international acceptance is via a cobranding arrangement with the international schemes. LankaClear decided to partner with Japan Credit Bureau (JCB) to implement NCS, as they are one of the six ICSs who are part of a worldwide EMVCo alliance. 

“We decided to partner with JCB due to their superior technical capabilities and strong presence in Asia region where most of our people travel to. In addition, they are also an Asian country and their culture and values are much closer to ours,” states de Silva. 

JCB has established partnerships with more than 30 million merchants worldwide covering 23 countries and has in excess of 100 million cards circulating across the world. “We have already introduced an innovation into the market in partnership with JCB, which is the LankaPay-JCB cobranded 2-in-1 card. This card is capable of having “debit’ and “stored value” components built into a single chip and allows a customer to carry only a single card and use it for multiple purposes including as a transport card.” explains de Silva.

Brings social benefits

One of the deterrents for acceptance of card payments by the merchants has been the high commission or Merchant Discount Rate (MDR) charged by the banks. Based on fees charged by the ICSs, this could be as high as 3%. This is a real roadblock to popularise the card payment acceptance by the SME sector merchants, as their profits from goods sold is comparatively low. One of the key benefits of domestic card schemes is their ability to significantly lower the MDR for domestic card payments. Even though the fees earned by the banks would be lower, they have a higher gain by more merchants accepting such domestic card scheme payments.

“We have seen that a lot of SME merchants are reluctant to accept card payments in Sri Lanka due to the high MDR for card payments or they try to pass that fee to the customer. The CBSL has determined the maximum MDR for the LankaPay-JCB cobranded card payments would be 1%, which will encourage a significant number of SME merchants to accept such payments,” asserts de Silva.

In addition, most of the SME merchants do not transact with their banks as they deal only with cash. Since they only accept cash and in turn make their daily payments via cash, all their transactions are outside the formal banking system. They do not deposit their daily earnings in banks. Due to this, banks have no way of assessing their income to provide any credit facility to them based on their income. Thus, the only option for such SME merchants is to obtain small loans from loan sharks (Gini Poli Mudalali) who charge almost 10% daily interest. 

They pay exorbitant interest charges in desperation and become easy prey for these unscrupulous elements in the society. However, if they accept domestic card payments, they will start building a credit history because the money will directly go to their bank account. Within a few months, they will be eligible for credit facilities from their bank. This will solve a huge social problem, which is widely prevalent in the rural areas of our country.

“We would be able to address this social disparity by attracting more SME merchants to accept LankaPay-JCB cobranded card payments due to its lower MDR. We consider it our duty to work with all local banks in this national initiative and encourage them to support the SME merchants who drive almost 70% of the GDP in our economy,” concludes de Silva.