New debit & credit card rules in India: a brief overview

March 16, 2020, became the turning point for Indian cardholders

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New debit & credit card rules in India: a brief overview. Source: unsplash.com

March 16, 2020, became the turning point for Indian cardholders. According to the new directive issued by the Reserve Bank of India (RBI), all those debit or credit cards that have never been used for online/contactless transactions will get this feature blocked.

The Reserve Bank of India (RBI) is India’s central bank, which not only controls the issue and supply of the Indian rupee but also is the regulator of the entire national banking system. The bank is also active in promoting financial inclusion policy and is a leading member of the Alliance for Financial Inclusion (AFI).

In the last 8 years, India has made great efforts to enhance financial inclusion. Government policies brought impressive results. In 2011 only 40% of adult Indians had a bank account. An overwhelming majority of Indians, especially in rural areas, were financially weak and had no access to either traditional or alternative banking means. Seven years later, almost 80% of adult Indians had bank accounts, according to the Global Findex Database published in April 2018.

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Indian banking system consisted of 18 public sector banks. Source: shutterstock.com

The Indian banking system consisted of 18 public sector banks, 22 private sector banks, 46 foreign banks, 53 regional rural banks, 1,542 urban cooperative banks and 94,384 rural cooperative banks as of September 2019.

As of November 2019, the banks of India have issued over 54 million credit cards and 830 million debit cards. For every 100 people in India, there are only three credit cards. A comparable penetration figure for the US is 320.

Whereas with credit cards (which are not so numerous), the number and the total value of transactions are much higher at POS than at ATMs, the tendency of using debit cards is quite different.

Namely, in November 2019, debit cardholders conducted 639 million ATM withdrawals and cash payments using over Rs 300 billion. However, the same cardholders made only 423 million POS transactions spending around Rs 50 billion.

Perhaps, the predominance of cash operations would be even greater if Indian customers were not allowed only eight free ATM transactions per month. Of these, five are at the ATM of the bank which has issued the card.

The total value of transactions are much higher at POS than at ATMs. Source: flickr.com

Anyway, these statistics clearly show that online transactions are not too popular among debit cardholders in India. It is no wonder since current active e-commerce penetration in India stands at only 28%.

At the same time, the number of bank card frauds is on the rise. Recently, a piece of horrible news hit the headlines. The data of nearly 1.3 million debit and credit cards of Indian banking customers that can fetch up to $130 million for cybercriminals are available on the Dark Web for open sale. Before that, due to a large financial data breach, nearly 3.2 million debit cards across 19 banks were compromised. Around 90 ATMs were impacted and at least 641 customers lost Rs 130,000 in fraudulent transactions.

Previously, RBI said that India recorded an accelerated growth rate of over 50% in the volume of retail electronic payment transactions in the last four years, backed by higher financial inclusion and adoption of mobile payments. The cashless upheaval seen in 2018-19 was largely due to the steep growth in the Unified Payments Interface (UPI) which powers multiple accounts from participating banks, and offers several banking services all in a single mobile application.

However, bigger digital growth cannot be expected unless online and contactless transactions can occur in a safe cyber environment. Today, this is not always the case. In fact, India was ranked among the top five countries globally that are vulnerable to credit card fraud, according to the 2016 Global Consumer Fraud Report. That is one of the reasons why progress in terms of reducing cash in circulation as a percentage of GDP has been quite insignificant.

Therefore, the new RBI rules are aimed to enhance the convenience and security of using bank cards nationwide.

From now on, the default options for all credit and debit cards issued in India will allow only domestic card transactions at ATMs and PoS terminals in India at the time of issuance/re-issuance of the card.

RBI added that bank customers will be able to switch on/off different types of transactions – domestic and international, online transactions or contactless transactions and set/modify transaction limits (within the overall card limit set by the issuer) on a 24/7 basis through multiple channels.

Banks will also provide cardholders with alerts via SMS. Source: unsplash.com

These channels should include mobile applications, internet banking, ATMs, or interactive voice response.

Banks will also provide cardholders with alerts via SMS or mail whenever there is any change in the status of the card.

If a debit or a credit card hasn’t ever been used for an online/contactless transactions before March 16, this option will be automatically disabled. The cards issued after that date won’t have card-not-present payments set as a default feature either.

Once blocked, the cardholder can re-apply for a contactless payment feature on the debit/credit card. Although this innovation may bring additional hassle to the banking experience, it should prevent many fraudulent transactions in case the card gets lost or stolen.

Other RBI’s incentives aimed at boosting the national cashless economy in 2020 include introducing a “Digital Payments Index” (DPI) and a Self-Regulatory Organisation (SRO) for proper cooperation between the entities in the payment system.

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