Anthemis Group, a global digital financial services investment and advisory firm, in a groundbreaking research report covering five major continents found that domestic payment card schemes are good for local economies and drive significant social benefits. Many countries prefer to operate domestic payment card schemes which account for 95% of all transactions, according to Anthemis’ National Payments Scheme Report. It found that routing domestic card transactions via a local switch has the potential to lower costs, create services more suited to local market needs, and minimize significant outflow of foreign exchange.
“We always believed that establishing a National Card Scheme (NCS) in Sri Lanka was going to bring economic benefits to our country by saving millions of dollars in foreign exchange and this research further validates that fact,” said Channa de Silva, General Manager and Chief Executive Officer of LankaClear.
“This is especially critical considering the current context of our country where a majority of the foreign exchange income sources have significantly dried up due to the Covid-19 pandemic”.
International cards charge assessment fees on all transactions despite less than 5% of cardholders ever travel outside their countries. This is why domestic card schemes are less costly to an economy, as low as 25% compared to international cards, leading to significant economic benefits. Anthemis also found that most central banks favoured low-cost domestic payment schemes not only because they aid economic efficiency; international card schemes tend to be less transparent about their fees.
The research found that while international card schemes benefitted from transaction volume growth in a given country, they have increased their fees by 4% annually too. To validate this finding, Anthemis surveyed major domestic banks who complained about international card schemes for deliberately increasing fees to impress their shareholders. As a result, central banks, especially in developing countries, are keen to see value retained locally with a preference for local solutions where possible, Anthemis found.
Levelling the field
A network business that spans worldwide enjoys significant economies of scale and can command a substantial advantage in a smaller market; hence, it is important to ensure that all players have a fair chance to compete for business. The Anthemis report found that central banks and domestic payment card companies favoured regulatory intervention to level the playing field. Central banks in most countries surveyed by Anthemis said that they wished to see more competition at all levels in the payments market. Commanding market positions and scale enjoyed by international card companies are compelling enough reasons for intervention to ensure a level-playing field for domestic cards, they said.
Most central banks also took the view that upfront incentive payments by card schemes to drive market share away from domestic competitors are a significant issue and a distortion of the market. The retail banks surveyed each expressed the view that they often looked at only short-term incentives and did not foresee the long-term costs.
Most of the deals offered by international card to lure banks were found to have upfront benefits which can be initially attractive and used to cover marketing costs and any revenue shortfalls. Once a bank swallows the bait, however, there is no way out. In the end, banks end up with an expensive international card scheme. “Sri Lanka launched its National Card Scheme in June 2019 with the primary objective of significantly reducing the cost of domestic card payments,” de Silva explained. Sri Lanka’s NCS is operated by LankaClear with the blessing and guidance from the Central Bank of Sri Lanka (CBSL).
The lower cost structure to operate the scheme results in lower scheme fees and interchange fees, which are regulated by the CBSL. “Our promise to banks in Sri Lanka is that even though interchange fee per transaction earned by an issuer may be lower, there is a significant trade-off of greater merchant acceptance, thus, resulting in much higher revenue from increased volumes,” de Silva says. To enable global payments, LankaClear has cobranded the National Card Scheme with an international payments company, Japan Credit Bureau (JCB). “We decided to partner with JCB due to their superior technical capabilities and strong presence in Asia where most of our people travel to,” de Silva said. JCB has issued over 100 million payment cards and has more than 30 million merchants across 23 countries. “We have already introduced an innovation into the market in partnership with JCB, which is the LankaPay-JCB cobranded 2-in1 card. This card is capable of having “debit’ and “stored value” components built into a single chip and allows a customer to carry only a single card and use it for multiple purposes including as a transport card,” de Silva said.
Most local merchants prefer not to accept cards because of the high commission or Merchant Discount Rate (MDR) charged by banks on purchases made by international credit card brands. These fees could be as high as 3%.
“Many SME merchants are reluctant to accept card payments in Sri Lanka due to the high MDR. If they do accept cards, then they try to pass that fee to the consumer. The Central Bank has determined that the maximum MDR for LankaPay-JCB co-branded card payments would be 1%, which will encourage a significant number of SMEs to accept our cards,” de Silva said.
This will enable SMEs to solidify relationships with banks because daily sales revenues get banked rather than remain in the till. Since they only deal in cash, small businesses remain outside the formal banking system. However, if they accept domestic card payments, they will start building a credit history because the money will directly go to their bank account. Within a few months, they will be eligible for credit facilities from their bank.
This will solve a prevalent social problem of accessing credit. “We will address this social disparity with the LankaPay-JCB co-branded payments card network,” de Silva said. “The impact will transform Sri Lanka’s economy”.