India had 998 million debit cards in circulation in October 2018. Everyone expected that number to cross 1 billion before the year was out. Instead, November marked the beginning of a steady decline. Why is India shunning debit cards?Tarush Bhalla
The number of debit cards in circulation has seen a slow but steady decline since November last year, according to the latest data from the Reserve Bank of India (RBI).
While expectations ran high that the number of debit cards would cross 1 billion after hitting an all-time high of 998 million in October last year, the opposite happened. A total of 67 million debit cards went off the grid between October 2018 and January 2019.
The last time the total number of debit cards in the country dwindled was in June 2017. A total of 87 million debit cards were then removed from the system.
The current downward trend can be attributed to the RBI’s direction to banks to replace old magstripe debit and credit cards with the more secure, chip-based EMV cards, the global standard for credit and debit card payments.
Anil Ramachandran, EVP and Head, Marketing and Retail Unsecured Assets at IndusInd Bank, believes the RBI mandate to switch to EMV cards could be one of the reasons for this drop. Speaking to YourStory, he said,
“It might be my speculation, but the mandate on replacing older cards with chip-based EMV cards could be a reason. The other reason could be due to a large issuer taking cards off the system. One needs to understand that profitability of a card is based on its usability. Hence, an issuer could be cleaning and closing cards that are inactive.”
The reason behind the RBI’s mandate on EVM chip cards is to curb fraud. The black strip on a magnetic stripe card stores static information, while the information stored on EMV chip cards is in a dynamic format, making cloning difficult.
While the EMV mandate is a strong reason, Gayathri Parthasarthy, Partner and Head, Financial Services at KPMG in India, draws attention to the larger aspect around saturation of India’s debit card base. With 80 percent of India’s population banked, she says, debit cards might not see the stellar growth rate which they have been witnessing over the past two years. Gayathri explains,
“The debit card base as of January 2019 is about 930 million, which has grown from 845 million in January 2018 and 780 million in January 2017. The total number of bank accounts in India has reached about 1.57 billion; about 80 percent of the population has bank accounts. Considering these factors, the debit card base is nearing saturation and the phenomenal rate of addition of new cards of last two years might not repeat.”
Gayathri too believes that the slight decline “could be attributed to the EMV card mandate”.
“It is also possible that inactive cards or accounts have been weeded out in this process, which may have led to a reduction of total number of debit cards,” she adds.
With the number of debit cards falling, the usage of debit cards at point-of-sale (PoS) devices in the country has also dipped. In October last year, the total number of debit card transactions at PoS acceptance points in the country stood at 393 million, which declined to 376 million in November. It recovered to 387 million in December, and again fell to 373 million in January this year.
This is despite the fact that the PoS acceptance infrastructure in the country grew from 3.45 million devices in October last year, to 3.65 million devices in January this year.
RBI data also indicates that the total transaction value at PoS acceptance points from debit cards fell from Rs 54,298 crore in October 2018 to Rs 50,684 crore in January this year.
Hence, a larger question arises on the use case for cards at a time when payment instruments like Unified Payments Interface (UPI) are gaining traction.
Between February 2017 and 2018, UPI transactions in the country grew by almost 300 percent, rising from 171.4 million to 674.19 million, showcasing one of the highest growth rates for a payment instrument in the country.
So, what is the use case for cards in such a scenario?
Gayathri explains that the average transaction value for credit cards is approximately Rs 3,400 while that for debit cards is Rs 1,300. Compared to cards, the average transaction value on PPI (digital wallets) is about Rs 500. Clearly, larger ticket sizes and acceptance infrastructure in the country continue to favour plastic card infrastructure.
“The use cases of cards and other digital payment instruments (m-wallets and pre-paid instruments) have been quite different. Cards are generally used for high value transactions while wallets are being used for high-volume, small-ticket transactions where speed of transaction completion is also very important, e.g. toll payment, cab payments, etc.,” she says.
According to data from NPCI, average ticket size of UPI transactions stood between Rs 1,500 and Rs 1,600 over the last three months.
But digital wallets in the country are challenged by regulatory hurdles like KYC verification. Further, while guidelines for wallet interoperability have been released, it is yet to be seen how this pans out in the post-UPI era.
“Cards will still have their use cases in the short term. They also have an advantage due to the extensive existing acceptance infrastructure. Till the time we have similar acceptance infrastructure of an alternate payment instrument, cards will be relevant for their specific use cases,” Gayathri adds.
RBI’s data clearly shows that the biggest use case for debit cards is cash withdrawals at ATMs.
While debit card usage at ATMs stood at 869 million (transactions) in October last year, it rose to 880 million in January this year, despite a fall in the total number of debit cards in circulation. The debit card usage (i.e. number of transactions) saw a spike in December 2018, when 914 million transactions took place at ATMs.
This proves that cash continues to be king in the Indian payments market.
But despite the decline, the industry has come out in support of the RBI, to reinforce security on the card infrastructure. Anil adds,
“The regulator has played a positive role by enforcing security as critical for digital payments. First is the two-factor authentication (for payments) and second is the migration to EMV chips. And, it is just a matter of good practice since magnetic stripes can be skimmed easily, and EMVs can lead to fewer frauds. For us, nothing has changed because we have been issuing EMV chip cards from a long time.”
While there has been a decline in the usage of debit cards in the country, credit card circulation has continued to grow. The number of credit cards in the country grew from 42 million in October last year to 45 million in January this year.
This rise can be attributed to multiple factors, including online sales, multiple offers (including cashbacks, rewards and discounts), and consumer confidence in and comfort with these instruments post-demonetisation. Increasing income of individuals is also seen as one of the other reasons for growth in credit cards, according to payment experts.
With this growth, the usage of credit cards in the country at PoS devices has been hovering at around the 159 million transaction mark as of January 2019. Unlike debit cards, credit card circulation hasn’t seen any slump in growth, since demonetisation.
Whether plastic cards exist or not, payment experts believe that it is just a form factor and the task of payments and credit which they perform will be ubiquitous.
Sanjay Swamy, an early stage VC at Prime Venture Partners who has invested in payments startups like NiYO and Happay, which have launched co-branded cards, believes, “A card is just a physical token, which is backed by experience. And it is a choice (of form) given to customers. Now, they can also use QR codes to make payments. Hence, it is up to the customer to use what is comfortable for them. And banks and fintechs will provide that form factor.”