Card issuers to ramp up point-of-sale chain

To grab a big fee earning opportunity, leading credit card issuers are adding a total of 1.2 lakh point-of-sale (POS) terminals in the next two months, which will increase the POS base by 60 per cent to 3.2 lakh terminals.

In the last 10 months, the number of POS terminals has galloped 67 per cent. The number of POS terminals at the end of 2004-05 was just 80,000.

Having a larger number of own POS terminals ensures a fee earning stream for banks, irrespective of whether the card swiped belongs to the same bank or to another bank.

The transaction fee, called merchant discount rate (MDR) in banking parlance and paid by merchant establishments, is shared by payment gateway providers (Visa International and MasterCard), the card issuing bank and the bank owning the POS terminal.

Merchant establishments pay up to 2 per cent of the bill value as transaction fee. A major chunk of this (110 basis points) goes to Visa or MasterCard, 30 basis points to the card issuing bank and the balance is retained by the bank owning the POS terminal.

If both the card issuing and the owner of the POS terminal is the same bank, then the fee earned is much higher. Spending on credit cards in 2004-05 was about Rs 26,000 crore.

Considering an average MDR of 1.5 per cent, almost Rs 400 crore was paid as transaction fee. Of this, about Rs 300 crore was paid to Visa and MasterCard, Rs 80 crore to cards issuing banks and Rs 20 crore was retained by banks owning the POS terminals.

The MDR is deducted upfront when merchant establishments present card bills to the bank owning the POS terminal for encashment.

T R Ramachandran, business manager - cards, Citibank, said, "As of now, we have installed 27,000 POS terminals in the country. We plan to add another 50,000 terminals in 2006."

Even HSBC plans to grow its POS terminals by 70 per cent this year. Nicholas Winsor, head - personal financial services, HSBC, said although the industry will see a substantial addition of POS terminals in the next two months, it is still relatively low for a country with a huge population and size.

The number of POS terminals is growing by leaps and bounds, but almost all of them will be concentrated in select urban pockets.

Banks are refraining from setting up more POS terminals outside the main cities as credit card penetration in semi-urban and rural areas is negligible and the debit cards issued in these areas are almost entirely used for only cash withdrawals.

Madhivanan B, joint general manager, ICICI Bank, said, "Banks should enter tier-II towns. Though they will initially incur losses, they will stand to gain over the long term as customers overcome the habit of using liquid cash."

Winsor of HSBC said banks need to look into factors like the growing number of nouveau-riche, increasing spends, mushrooming of mall culture in tier-II and tier-III towns, and the need to target small shops like grocery and provisions stores while planning their strategies for growth of POS terminals.