GoI to pay debit card fees

The government of India recently announced [ToI link] that it would bear the merchant charges for all debit card transactions up to ₹2000 for two years starting early 2018.

Each debit transaction will cost the government up to ₹60. It is well recognized In socioeconomics that people respond to tiny nudges and incentives and really, this ₹60 nudge is minuscule.

Globally, credit card companies push through roughly 2000 transactions every second. Let’s assume debit cards have somewhat similar adoption rates. Furthermore, let’s assume a developing economy like India accounts for 100 transactions per second and 70% of those are ₹2000 or below.

Therefore, in one year, the government can expect to pay out

100x0.7x86400x365x2000x0.03 <= ₹132 billion or roughly $2 billion.

Final assumption: let’s assume about half of Indian debit cards belong to nationalized banks. This means that the government proposes to give up to $1 Billion each year to private entities to encourage the use of debit cards.

In return, the government gets far more visibility into the economy since there are fewer cash transactions.

For a $2 Trillion economy like India, spending up to $2 Billion ($1B each year for 2 years to private banks) to bring more economic activity outside the black and grey markets is a decent price to pay.

Edit 1: moving payments to debit cards has an ancillary benefit I had not thought of before, namely, taxes. With GST now the law of the land, let’s assume every ₹2000 transaction has a tax rate of 12%. In effect, the government is paying 3% in debit card fees to gain 12% in taxes for an effective ROI of 400%.