Threat of digital payment channels on Credit Cards in India
The payments ecosystem is evolving at a very rapid pace in India. With the advent of digital payment channels like Google Pay, Samsung Pay, Amazon Pay, Pay Pal etc. a large volume of transactions is getting routed through these channels. These new channels have started challenging the more traditional credit cards in various ways. In the below section we have tried to evaluate the threats posed by the digital payment channels to credit cards under the categories – ease of use, acceptability, ancillary benefits and security.
Ease of Use
Unified Payments Interface (UPI) in India has enabled digital payment channels to provide a seamless payment experience to their customers. The customers can simply select the payee from their contact list or add a mobile number and initiate the payment which gets reflected on their bank accounts immediately. This has not only allowed customers to make payments but also to receive payments. For example, a small-time carpenter/plumber can now deliver his/her services at the customer’s door steps and receive payments instantly on his/her bank account. Similarly, a landlord can now receive the rent for the rented property directly in his accounts through such channels without the tenant having to login to his net banking portal, adding payee and waiting for 24 hours to transfer the rent. These have opened up new avenues for performing business. Now anyone with a mobile phone and linked bank account is able to make/accept payments.
The credit card ecosystem on the other hand has evolved with contactless payments to provide a tap and go experience to its customers. But the penetration of contactless payments has still remained relatively sparse in India. The merchants accepting credit card have to register themselves with the banks before they can accept the payments. Small and medium sized merchants have stayed away from accepting credit cards till now.
Digital payment applications have an edge over credit cards in terms of acceptability. As mentioned above anyone having a bank account and a linked mobile phone can now accept payments. Digital payment channels have been able to penetrate one of the most unorganized payment sectors (peer to peer) and brought it under the digital ambit. According to recent trends UPI transactions by volume have clocked almost 800 million transactions in March 2019. This has increased from 178 million transactions in the same period in 2018. This trend clearly shows how the acceptance of digital payments is increasing at a rapid pace in India.
Credit cards on the other hand are accepted mostly at medium and large merchants. Also, the usage of credit cards in tier-2 and tier-3 cities are relatively low. As per RBI data, the volume of transactions done on credit cards at ATM and POS terminals was almost 175 million in May 2019 which has increased from 145 million in August 2018. Although the growth is significant, it clearly looks dwarfed when compared to the transactions performed on digital channels.
Credit cards offer a huge range of supplementary benefits to its customers. Loyalty points, cash back offers, movie vouchers, air miles, co-branded cards, lounge access and a host of other benefits are now part and parcel of a credit card offering. These definitely help issuers to attract new customers. The customers can also benefit a lot if they choose the right card and make optimized use of their credit card.
Digital payment channels on the other hand have mostly depended on cashback feature to attract new customers. The initial days of digital payments saw a huge volume of cash back transactions when the service providers invested heavily on acquiring new customers. These have gradually dried up as more and more customers have started using these digital channels for making payments. Digital payment channels will have to come up with some innovative perks for its customers to ensure customer loyalty in future.
Security is another aspect where the digital payment channels are scoring big time over more traditional methods of credit cards. Banks issuing and acquiring credit cards have to undergo PCI DSS compliance which is mandated by the card associations like MasterCard, Visa, AMEX. The compliance to PCI DSS ensures that the card data stored at the host are secured using stringent rules. However, this is still not full proof and a lot of frauds are reported for credit cards on a daily basis. There are multiple points in the card transaction life cycle where data leakage is possible. Sealing all these points with stringent rules becomes a big challenge for the card issuers. Now a days some banks are introducing virtual cards to eliminate these risks.
Digital payment channels are relatively more secure as these platforms ride on the security infrastructure provided by UPI and also use tokenization during the transaction processing. With tokenization, the customer’s account number is never visible to any third party. This makes the system less vulnerable and hence more secured.
With the push from government to promote a cashless economy, a lot of customers are moving towards non-cash mode of payments. Post demonetization the number of credit cards issued had seen a sudden spike. But with more and more digital payment options coming into the market, customers have gradually started moving towards these channels. Banks, credit card issuers and card associations have to start taking these threats seriously and disrupt themselves with new offerings to stay relevant in the near future.