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The Reserve Bank of India (RBI) should rationalise the interchange fees for Aadhaar Enabled Payments System (AePS) transactions and also disincentivise Business Correspondents (BCs) for unfair business activities to generate commission, according to State Bank of India’s economic research report Ecowrap.

This can ensure a level playing field in the BC model followed by public sector banks (PSBs) and other banks.

AePS is a bank-led model that allows online interoperable financial inclusion transactions at point of sale/PoS (micro ATM) through the BC of any bank using Aadhaar authentication.

BCs are retail agents engaged by banks to provide banking services at locations other than a bank branch/ATM.

How to make BCs more viable

PSBs mostly follow ‘branch-led BC model’, while other banks follow ‘branch less/ micro ATM/kiosk application on mobile/corporate BC model’ for financial inclusion.

Three key facts

The report underscored three facts — more than 77 per cent Pradhan Mantri Jan Dhan Yojana (PMJDY) accounts have been opened by PSBs; the number of BCs/customer service points (CSPs) of other banks largely outnumbered that of PSBs and, over the years, OFF-US transactions are increasing.

Data indicate that the share of AePS “OFF-US” transactions (where the card issuing bank and acquiring bank are different entities) in AePS increased from 4 per cent in September 2016 to 51 per cent in September 2021.

In AePS “ON-US” transaction, the card issuing bank and the acquiring bank are the same entity.

“Considering these facts, PSBs (that opened around 77 per cent of the PMJDY accounts) are now net payers of interchange fee. We estimate that the PSBs could be paying ₹600-700 crore per annum as interchange fee,” said Soumya Kanti Ghosh, Chief Economic Adviser, SBI.

He emphasised that since AePS works like a PoS, logically the ‘acquiring bank’ (the bank which has installed the PoS terminal at the merchant location) should pay the interchange fee to the ‘issuing bank’(the bank which has issued the card to the customer).

Alternatively, there could be rationalisation in interchange fee as there is no level playing field in infrastructure provided by all banks.

Holistic financial inclusion

With requisite savings, banks can further strengthen/upgrade their BC model and promote financial inclusion in a more holistic manner, the report said.

Currently, the account opening bank pays an interchange fee to the operator of the BC/ CSP when a customer makes a transaction at micro ATM that does not belong to the account opening bank (that is OFF-US transaction).

At present the interchange fee is 0.5 per cent of transaction amount (minimum ₹1 and maximum ₹15) for an OFF-US financial transaction and ₹5-7 for non-financial transaction.

The report noted that BCs convert AePS ON-US transactions of one set of bank customers to AePS OFF-US issuer transactions and also carry out multiple AePS ON-US and AePS OFF-US transactions on the primary bank application/software.

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SBI’s economic research department cautioned that the ‘micro ATM/kiosk application on mobile’ model might also lead to several frauds as the mobile BCs introduce themselves as government persons and need biometric authentication to provide different types of subsidy.

PSBs, who are active in financial inclusion activities, have opened a large number of PMJDY accounts (out of 44 crore accounts, PSBs opened 34 crore accounts and non-PSBs 1.3 crore, rest RRBs) with minimal balance and thus incur recurring expenditure by way of servicing such customers, including issuance of free RuPay debit card, besides monthly remuneration for BC operations.