October 2011

Cards in India
The Processing Challenge
Rudolph Schnepf, Senior Product Manager, SmartStream
With continuous rise in middle
class households and shift in
consumer spending patterns, the
Indian card market has been
growing rapidly. This huge
demand is providing tremendous
growth opportunities for card
issuers, suppliers, and
manufacturers.As of the middle of
2010, payments made through
debit cards had increased 40
percent year on year according to
Reserve Bank of India (RBI)
statistics. And this is likely to
continue rising mid-term as the
number of cards issued also
grows. Analysts at Research and
Markets predict that the number
of debit cards issued by banks will
grow at a CAGR of around 27
percent during 2011 to 2013 and
will remain buoyant, owing to low
payment card penetration coupled
with surge in card spending due
to rising income levels of the
Indian population. Long term, the
number of credit cards in India at
present, estimated at 22 million is
tiny for a country with a
population exceeding 1.1 billion.
Furthermore, given that many
cardholders have multiple cards,
the total number of cardholders is
smaller than the number of cards
currently in circulation. Card
issuers and banks clearly have a
huge opportunity to expand their
customer bases over the next five
years. However with these
opportunities come concerns
around how to manage card
processing infrastructures and
ensure the correct and timely
credit and debit of accounts.

Managing expanding volumes

As with many other operational
areas, while there is an immediate
need to introduce automation,

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managing their ATM/POS/Card

operations.
Although this has enabled the
banks to offset their operational
risk through this model, they still
run the reputational risk for
unresolved claims and complaints.
The banks have little or no
visibility of exceptions until the
managed services vendor reports
into them. A singular exception
management layer for all
ATM/POS and cards operations
would ensure these banks have
far greater control over their
operations.
firms must also consider future
volume trends and business
objectives. Despite the impressive
rates of growth, the Indian market
for financial cards is only
beginning to show its enormous
potential.
Future growth will be driven by
rising consumerism, intensifying
competition among card issuers
and an expanding financial
architecture. Demand for credit
and debit cards has also been
fuelled by improvements in
payment infrastructure across the
country. Most Indian banks have
widened their networks of ATMs
to expand their business, and
there has also been an increase in
the number of point of sale (POS)
terminals.
As the number of deployed
ATMs/POS systems has increased
over the last few years, banks
have outsourced part of their ATM
operations, from site conception
to operations including
reconciliations to managed
services providers. As a result,
these large banks have ended up
with multiple outsourced vendors

Noting this, the RBI issued

guidance (RBI/2009-10/64) back
in 2009 to highlight the need for
strict internal controls to be put in
place. It stated: With a view to
ensuring that the quality of
customer service is ensured on an
on-going basis in banks/NBFCs,
the Standing Committee on
Customer Service in each
bank/NBFC should review on a
monthly basis the credit card
operations including reports of
defaulters to the CIBIL, credit card
related complaints and take
measures to improve the services
and ensure the orderly growth in
the credit card operations. Banks
should put up detailed quarterly
analysis of credit card related
complaints to their Top
Management. Card issuing banks
should have in place a suitable
monitoring mechanism to
randomly check the genuineness
of merchant transactions.
However, the large number of
disputes caused by the technical
decline of card transactions is
causing a serious problem for
both the banks and issuers. The

COMPLIANCE, RISK & OPPORTUNITY

October 2011

National Payments Corporation of

India (NPCI) has indicated that the
decline rate in November 2010
stood at 1.7 percent. The current
target is 1 percent, given that
international benchmarks for large
transactions systems such as Link
in the UK have a decline rate of
around 0.5 percent.

These current processing

infrastructures will be unable to
effectively manage neither the
card volumes nor their increasing
complexity. It will require banks
moving from monthly or weekly
reconciliations to daily and intraday, real-time transaction
monitoring.

The single biggest reason for the

decline rate is that during the
transaction lifecycle there are
errors that create rogue
transactions. These rogue
transactions are not identified by
systems and resolved correctly,
consequently causing a higher
than desirable failure rate.

The most effective method of

enabling this level of monitoring
is through a conciliation solution,
creating a control system that
automates critical functions in
real-time. It can add value through
cash requirement forecasting for
ATMs, financial reporting to
understand individual ATM
profitability and usage and realtime event management.

Introducing automation as a
control layer
So how can banks and issuers
overcome this? Ideally, there
needs to be systems and
processes in place to identify,
resolve and resubmit rogue
transactions in an automated way
through real-time monitoring of
the full lifecycle of the card
transaction.
The current reconciliation
environment at many firms is still
too reliant on multiple databases
and historical data to monitor all
card-related transactions, whether
the management is performed in
house, or by a third party under
an outsourcing arrangement. The
situation will become more acute
as the number of ATMs increases
and the number of transactions
increases. This will be further
compounded by the increasing
complexity that is emerging in the
Indian payments space as the
NPCI offers more services,
including cheque transactions,
remittances 24x7, mobile
payments, ACH & POS, NEFT and
its new card scheme, RUPAY.

COMPLIANCE, RISK & OPPORTUNITY

The benefits of this automated

approach include:
Enhanced transaction
management - Efficient and
sophisticated reconciliation
processes creates higher STP
rates, while all exceptions are
dealt with promptly.
Improved reputation - More
efficient monitoring and event
management reduces account
errors, such as double
bookings due to stand in and
authorisation duplication.
Increased profitability - Realtime monitoring of cash
positions within ATMs enables
firms to invest those funds
elsewhere, while accurate
forecasting and monitoring
ensures optimal cash levels.
Lower operational costs Greater automation removes
manually intensive processes
and provides greater visibility
into invoices from third
parties.

More efficient operations Lower number of exception

items enables staff to focus
efforts on added value tasks.
Improved fraud monitoring Rapid access to transaction and
counterparty data enables firms
to limit exposures and provide
more efficient resolution. ATM
cash levels can also be
monitored to ensure inventory
and expected loads match.

Managing future growth

Customer service is fundamental
to banks and ATMs in particular
represent a critical point of
interaction between the bank and
their customer. Issues such as
incorrectly debiting/crediting
accounts, or account blockers that
prevent payments being released
can cause significant reputational
issues. It also directly impacts
operational costs, as banks
investigate the root cause for the
account issues. With increasing
competition in the ATM market,
there will be increasing
operational cost pressures and the
need for more efficient
transaction measurement. An
independent control layer
provided by an automated
reconciliation solution can
effectively manage risk and
increase visibility into positions
and authorised transactions.
With more cards, more
transactions and transactions at
higher values, the ability to
manage this growth in an efficient
and cost-effective manner will be
a factor that sets the good banks
apart. They will be the ones with
enhanced customer service, with
lower operating costs that can
react to market changes to offer
consumers the service they
demand and expect.

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