Competition in banking space is heating up. With the increase in number of market players, while the entire market size has increased, the traditional service providers also seem to be increasingly worried about losing business to the challengers.
Ongoing developments
As a result, new ways of revenue generation are being explored by traditional service providers. These include charging customers for cash deposits and withdrawals, and for failing to maintain a minimum balance in their bank accounts.
It has been argued that such charges are necessary to cover operational costs, including handling, maintaining, transporting, counting, security and recycling of cash. Several public sector banks were mandated by the government to open loss making Jan Dhan accounts under the Pradhan Mantri Jan Dhan Yojana, and it has been claimed that such charges are essential to subsidise operation of these accounts. Service providers expect that such charges will dissuade the consumers from undertaking cash transactions, and will boost digital payments, one of the key objectives of present government, despite the creaking digital infrastructure having a different story to tell.
“This evolving scenario is quite complex and must force stakeholders to review the nature of interaction between consumers and other stakeholders in the financial sector.
It must also force us to relook at the role of government in the sector”, observed Pradeep S Mehta, Secretary General of CUTS International.
Interaction with consumers
Expounding further, Mr. Mehta noted that consumer is often at the receiving end of suboptimal regulation in financial sector. While banks are free to impose such charges, owing to weak regulatory scenario, consumers have no power to decide the manner of payment or evade liability if not correctly disclosed of the charges. As a result, most banks have issued circulars of these charges in English (and some in Hindi), and have uploaded them on their websites. Minimum efforts have been made to disseminate such crucial information in local languages. As a result, most consumers would not be aware of such charges and will continue to operate like in the past.
Mehta observed, “What should happen is, at every instance a charge is triggered, the bank must be mandated to inform customer of the charge, should she decide to go ahead with the transaction. Comparisons between charges of same nature imposed by different banks should be available in public domain, for consumers to make informed choice, and benefit from the competition.”
He added, “In most cases, these charges are automatically deducted from consumers account, without their consent and knowledge. Consumers should have a right to choose how and when a payment is to be made to the bank.”
Role of government
The government had forced the public sector banks to open unsustainable Jan Dhan accounts and it is no surprise that the banks are experimenting with ways to recoup their losses. “The question to be asked is”, Mehta quipped, “did no better alternatives exist for connecting the last mile, than forcing banks to open, now mostly inactive, accounts.” We have made significant technological progress and non-banks wallets operators are reaching the last mile at the fraction of costs. Was it not possible to rope in such market players in to reach the grassroots, while putting in place adequate safeguards to manage risks? “The problem lies within the regulatory mindset of entity based regulation and inability to appreciate the merit in activity based regulation.” Mehta added.
If we fail to relook at such fundamental issues in the financial sector, and ignore them under the garb of promoting digital payments, it will not take time for consumers’ trust in formal financial system to erode.
For further details, please contact:
Pradeep S Mehta,psm@cuts.org ,
Vijay Singh, vs@cuts.org