Make no mistake, the truce between banks and pump owners, deferring the move to 13 January from today, is only temporary. The Narendra Modi government will have to think of some out-of-the-box solutions to have a lasting solution to the ongoing deadlock at petrol pumps, where dealers have threatened to stop accepting card payments from 13 January after card companies started levying an up to 1 percent charge on petrol pump dealers to compensate their losses. If the government fails to find some short-term solutions until the time cash circulation returns to normal, it is running the risk of losing a critical phase of the cashless drive launched post the 8 November demonetisation.
There are few reasons why there isn’t an easy solution to this current problem popping up at roadside petrol pumps.
To begin with, petrol pumps are very low margin businesses. The margins can vary from less than a percent to 2 percent. One person whose family owns a petrol pump told this writer that petrol pumps mostly make money with some adjustments such as tinkering with their fuel meters or by introducing certain incentives to lure customers and thus make big volumes.
While other retailers, can pass on the surcharges on card payments to the end-consumer, pump dealers cannot. This is because fuel prices and margins are fixed. If banks charge 1 percent surcharge per transactions, the petrol dealer is left with almost nothing.
This wasn’t a major problem before demonetisation since card transactions contributed only a small portion of the total sales. But, the situation changed during November-December on account of severe cash shortage post demonetisation and the government’s aggressive digital push asking banks/ card companies/ general public to promote cashless transactions. Post this, card transactions (where you swipe a card at a PoS terminal) almost doubled.
Still, this didn’t pinch the dealer much since the government had waived transaction charges for 50 days. But, when this bonus period got over, the pain was being felt on card issuers (mainly banks) since there is a cost attached to each card transaction. A substantial surge in card transactions at petrol pumps meant their losses mounting and hence they were forced to impose a 1 percent charge on merchants. Even at other retailers, banks charge 2-2.5 percent per transaction but there it is possible to pass on the added burden to customer, here it is not.
What will happen now? Somebody has to compensate banks and pump owners — either the government, the end-consumer or the supply chain beginning with oil companies. Most likely, the buck will have to be passed to the consumer, otherwise the burden will be on the government exchequer, adding to its subsidy burden. That is if the waiver on card transactions will have to be continued in some manner if the idea is to promote cashless transactions. Else, it is a major roadblock in the Modi government’s cashless drive.
But, what is equally needed is transparency on charges. At present, some petrol dealers charge 2-2.5 percent on card payments from customer, give a part of that to the bank and take the rest. The consumer ends up paying to two parties on one card payment.
Are charges on card payments the only problem at petrol pumps? It is not. They also get the cash with a delay compared with cash transactions. Typically, money from sales done through PoS terminals are credited to the merchant’s bank overnight, but as Prashant K Reddy, member of TPPDA, says (read here), now it takes three days, forcing the dealers to borrow money to restock the petrol pumps, leading to tax issues.
Banks typically charge 2-2.5 percent on card transactions, while mobile wallets such as PayTM charge even higher—anywhere between 1-4 per cent. There we have a bigger problem.
Facing pressure on its ‘cashless drive’, the government has assured neither the customer not the pump owner will be charged.
“Let me make it clear that customers will not be levied with any surcharge. Petrol Pumps were worried that the surcharge will be upon their heads, but let me assure them that it will not befall on them as well. Oil Marketing companies and banks are in talks and the former has given an incentive to increase digital transactions,” Union Petroleum Minister Dharmendra Pradhan was quoted as saying.
But, this is unlikely to be a sustainable solution since neither of these two parties can endlessly compensate the losses of card transactions. Somebody needs to foot the bill. Banks and payment providers are unlikely to give up easily since they make money on charging a fee on such transactions. A significant jump in volume of cad payments is an opportunity for them if allowed to charge and pain if forced to give free of cost. In the case of banks, even the Reserve Bank of India (RBI) had cautioned about the government’s move to do away with merchant discount rate (MDR), which is the rate a card service provider (in this case, bank) charges to the merchant (read here). RBI had cautioned that this would make business unsustainable for banks.
With a sharp surge in card payments, either the government will have to bear the burden or let those consumers who would want to use cards for transactions pay the extra charge. The current crisis situation has arisen because there isn’t enough cash to go around post the ban of Rs 500, Rs 1,000 notes. Right now, there isn’t much choice to a significant majority of consumers but to pay by card. This is a short-term problem. Yet again, the challenge is to make enough lower denomination notes available in the system.
But, once the cash crunch eases, it is best to leave the decision whether to go cashless or not to the customer — if he wants to pay cash or use card. Make him pay the extra charge as is the case now inmost retail outlets, should he chooses to use the convenience of a card payment at petrol pumps. Banks, oil companies and petrol pumps are doing business for margins, not charity. This is the only sustainable solution to this problem. But, until the time the artificial cash crunch eases, the government will have to find a solution.
The current mess involving petrol pumps and banks on card payments is a lesson to the government that it isn’t wise to impose a cashless life on the consumer and it is better leave the choice to him.
Updated Date: Jan 09, 2017 12:56 PM