Thursday, May 21, 2009

Why card-based utility payments have not taken off in India?

It is unfortunate that internet based payments, despite its relative convenience when compared to physical across the counter payments, for utility services like property tax, water and sewerage tax, electricity and telephone bills have not taken off in India as expected. Across the country, online payments, through credit or debit cards, have been a small fraction of the total collections, even in urban centers and in well run public utilities.

For the past six months, we have been trying to introduce mobile based utility payments in our distribution utility (APEPDCL). Numerous meetings have been held with all the major payment service gateway providers and major public and private sector banks and numerous proposals have been initiated, though nothing has taken off.

Lack of adequate awareness and apprehensions about the security of such transactions, coupled with the difficulty of accessing the service, are partially responsible for the poor customer response. However, the major deterrent to more widespread use is the transaction value indexed user fee (as opposed to a flat rate) imposed on such transactions. In many ways, this user fee model is an excellent example of monopoly power and inefficient incidence of taxation.

A consumer wants to make his electricity bill payment online through his credit card. The credit card company (Visa and Master Card are the two major retail electronic payment network operators in developing economies like India) charges him a fee of 1.75% (or in the range) of the transaction value plus the service tax (12.36%) on the said fees. This means that consumer A, with a Rs 100 electricity bill has to pay a fee of Rs 1.75 to the card company, and consumer B, with a Rs 10000 bill has to pay Rs 175. In other words, the absolute value of the transaction fee increases with the value of the utility or service bills. This leads to incentive distortions and causes all round inefficiency for a variety of reasons, a couple of which are outlined below.

1. The transaction fee as a percentage of the bill amount dis-incentivizes the larger bills, while incentivizing smaller ones. This is likely to result in a large number of transactions of small amounts and a limited number of larger value transactions. However, since smaller bill value consumers like A are less likely to use credit card and internet to make their payments, than consumers like B, even the small value transactions do not materialize. Further, the higher bill consumers are more likely to use the services of people who can run the errand of physically remitting their bills at the collection counters.

Since these transactions are processed on-line, from the respective customer accounts, the actual transactions costs are the same (one would presume that the costs associated with such transactions are the same) for every transaction, irrespective of the amounts involved. It therefore stands to reason that the transaction fee should also be the same, or atleast have an upper limit. It is clearly evident that the high transaction fees are distorting the incentives and keeping away customers.

2. The consumers with the larger payouts make payments through their bank accounts or mainly through cash payments at the electricity utility's collection centers. Both have transaction costs, for both the consumer and the bank, and the latter is an extremely inefficient option. In case of cash payments, the consumer has to physically withdraw the cash, thereby imposing costs on both himself and the bank, and then make payments at the counters, which involves significant transaction and opportunity costs for both the consumer and the utility.

Changing the revenue model for credit/debit card payments for public utilities from a percentage based to a flat rate based system will be a Pareto improvement. The number of customers using the facility will multiply, the credit card service provider and banks will make more money, the collection efficiency of the public utilities will improve, the considerable transaction costs involved in across-the-counter payments will be minimized, and consumer satisfaction will invariably increase.

Utilities are also restrained by regulatory restrictions in either passing on the cost of the card transaction or bearing it itself. Private businesses selling goods and services on-line do not pass on the cost to the consumers and bear the transaction fee themselves or have some (of which I am not aware) arrangement with the network operators.

No comments: