Banks Can Boost Revenues By Freeing Up Debit Card Limits

The other day, when one of my credit cards was about to expire, I was thinking of not renewing it and putting my debit cards to use instead. I was assuming that I’d be able to use my debit card to the full extent of my bank balances.

However, this was not to be.

When I inquired with my bank – a leading private sector bank in India – I was surprised to learn that my debit card usage was capped at INR 20K per day regardless of whether I use it to withdraw cash from an ATM or for making payment at a point-of-sale (POS). Since this is a ridiculously low figure – and at least an order of magnitude lower than the credit line available on any credit card – I decided to proceed with renewing my credit card.

ATM and POS happen to be payment channels with very different characteristics, cost and revenue structures. An ATM has a finite number of cassettes for storing currency notes. This poses a physical limit on the amount of cash it can hold at any given time, so an ATM cash withdrawal limit of INR 20K per day seems reasonable. However, such a low limit doesn’t make any sense for a POS transaction which doesn’t involve any physical storage or exchange of money and, as long as I have enough money in my account, does not pose any credit risk to the bank.

Security concerns can’t be the reason for imposing a POS limit on debit cards since banks permit much higher amounts on credit cards which, unlike debit card transactions, don’t require a PIN.

Unlike an ATM transaction on which banks in India can’t earn any fees – according to recent legislation, both on-us and alien bank ATM cash withdrawals are free-of-cost to account holders – every POS transaction returns 0.5-1% of the transaction value to banks by way of merchant fees.

By suppressing the POS limit to the levels of ATM cash withdrawals, Indian banks seem to be losing out on an important source of revenues.

As far as I remember from my personal experience, banks in the UK, Germany and the USA don’t have the same usage limits for ATM and POS. In the UK and Germany, ATM withdrawal limits are typically GBP / EUR 200 per day, whereas you can charge your entire bank balance to your debit card in supermarkets and other points-of-sale. In the USA, you can actually put through transactions that bust your bank balance: Many banks would permit you to do this – albeit for a hefty fee that ranges from US$ 25 to US$ 35 per transaction – if you enroll for their so-called overdraft protection programs (more on that here and here).

By freeing up POS usage limits for debit cards, banks in India have the opportunity to earn additional revenues, just as their counterparts in other countries do.

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