Consumer use of debit cards in India could grow if the Reserve Bank of India forces acquiring banks to lower the discount rates they charge merchants for debit card payments, suggests the results of a study by the Indian Institute of Technology in Mumbai.

Ashish Das and Rakhi Agarwal, professors n the school’s mathematics department, wrote the report “Cashless Payment System in India–A Roadmap,” which they submitted to the central bank for analysis and review. The research focused on India’s retail-payment system and the country's transition from cash-based purchases to cashless payments.

The best way to make the transition is by promoting payments initiated with debit cards and rationalizing the costs associated with their use, according to the report.

Though card-based payment systems have been in vogue for several years, their use and popularity are still limited,” the study found. Financial institutions in India have issued 19 million credit and 190 million debit cards, but cardholders on average conduct just one transaction per debit card annually compared with 11 transactions per credit card, the study noted.

Among the study’s major recommendations includes encouraging the use of no-frills debit cards, not tied to reward programs or co-branded and to increase awareness of debit cards among merchants and consumers through focused financial-education campaigns. The report also calls for acquirers to fix the merchant discount rate at 0.2% of the sale, capped at 20 rupees (43 U.S. cents or 33 euro cents), for no-frills debit cards. In India, acquires generally assess discount rates ranging between 1% and 2% for debit cards carrying the MasterCard or Visa brands, according to the report.

The study also recommends banning merchants from assessing surcharges on purchases initiated with no-frill debit cards and suggests that the central bank require the use of PINs to authenticate all debit card purchases to improve security.

It also recommended that customers be allowed to withdrawal cash as well at POS terminals when making purchases and merchants be given freedom to surcharge on credit cards, which it called a frilled product since it provides quick credit.

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