LankaClear, the entity that spearheaded significant innovations in the financial ecosystem over the past two decades, is bringing forth a new chapter in cashless transactions in Sri Lanka. The organization has set into motion the development of a National Card Scheme (NCS) that will offer significant perks to banks, merchants, and users around the island.
Moreover, this new infrastructure will reduce costs by routing all domestic transactions locally while facilitating international payments via the JCB network. Last but not least, the service will also offer a significant incentive to the merchants who currently own a POS (Point of Sale) terminal. This is through a below-market rate merchant commission of 1%, removing a key barrier currently preventing them from going cashless. In conversation with Arteculate, General Manager / CEO of LankaClear, Channa de Silva shared how the NCS removes obstacles to card payments in Sri Lanka.
The current state of card payments in Sri Lanka
Sri Lanka has a significant gap to bridge in a world headed towards a cashless future. In 2019, its banks issued over 23 million debit cards (more than its population) and 2 million credit cards. However, the average number of transactions carried out via a single Point-of-Sales (POS) terminal remained less than 4 per day.
Elaborating on this observation, Channa, explains, “What this indicates is that there is a wide disparity in the market. Currently, there are over 90,000 POS terminals in use island-wide. Those installed in large shopping malls and supermarket chains process several thousand daily transactions. In contrast, the data indicates that many POS terminals out there especially in the SME sector aren’t processing any transactions at all.”
Diving into the problem, LankaClear identified that this lack of use stemmed from several issues that affected stakeholders across the board. From banks to small merchants alike, various matters needed to be addressed. With the development of the NCS, LankaClear set into motion a solution that would address these concerns for all and help them enjoy the benefits of going cashless.
Resolving the challenges faced by merchants
By and large, Sri Lanka is a nation driven by cash. A tiny subset of the economy may depend on card payments, which saw some growth during COVID-19. However, it remains relatively isolated to urban centers in the western province and restricted to large value transactions. In comparison, the vast majority of Sri Lanka’s merchants falling under the SME category are based beyond the borders of the Western Province deal in cash.
Such businesses have shown heavy resistance to utilizing card payments. This resistance stems from the fact that their profit margins are typically 10% or less of the final price of a product. Hence, the additional surcharge by banks of 3-3.5% to process card transactions is untenable. Furthermore, customers are generally content with paying by cash. Thanks to the vast network of inter-connected ATMs by banks, today, anyone can easily find one within walking distance and obtain cash.
However, if this problem were to be resolved and more merchants start accepting card payments, there would be tangible benefits. Primarily, they would be able to build a credit history with banks. This positive credit report, in turn, would allow them access to formal channels of credit like loans to grow their business. Currently, the lack of credible credit histories leaves them vulnerable to informal channels with high-interest rates.
Unlocking a new opportunity to help banks grow
While the accessibility of cash, historically, is a success of the banking system, the ATM network is now holding it back from the next stage of growth. By and large, banks have typically focused on high-value transactions to obtain high commissions from a fewer number of transactions. Hence, their efforts to push card payments have predominantly been in the Western Province. However, this shouldn’t merely have a for-profit motive.
Instead, the costs of processing such transactions are also a crucial driver. “Whenever you swipe a card by an existing international card scheme, there are numerous fees associated with it. Even if the transaction is between yourself and a local merchant, banks must settle these costs in US Dollars with international card schemes. Often, local banks have little negotiating room on these complex fee structures. Collectively, it is estimated that Sri Lanka annually loses more than LKR 10 billion in foreign exchange alone to process local card payments.” This outflow represents a significant loss to the country without any value addition given the current foreign exchange crisis.
Yet, solving this problem goes beyond simply addressing a heavy forex outflow. It opens the door to unlock a new growth opportunity for banks. The SME market beyond the Western Province sees a large volume of cash transactions daily. By reducing the costs borne by banks, it’d be possible to unlock the full potential of card payments and their benefits.
The implementation & benefits of the LankaClear NCS
From its inception, the overarching mission of NCS was to provide a holistic solution to the problems faced by all stakeholders, which was to empower consumers, merchants, and banks to gain the benefits of utilizing card payments. Over time, this would serve as the foundation to accelerate the adoption of other forms of cashless payments. By considering these factors, the concept of NCS was conceptualized under the supervision of the Central Bank of Sri Lanka.
First and foremost, to address the issue faced by merchants, the NCS charges only a 1% Merchant Discount Rate (MDR). Reducing the commission makes it possible for merchants to accept card payments without incurring a significant loss. In turn, this acceptance is the beginning of a ripple effect where banks can tap into a new market with a high volume of transactions. At the same time, the NCS also ensures lower fees that banks have to bear in processing card payments.
At the same time, cards under the LankaClear NCS offer several benefits to consumers. Primarily, it supports several features such as conducting debit and credit transactions, ATM withdrawals, and offline tap and go payments via a single card. Additionally, these cards would allow customers to enjoy a 50% reduction in cross-bank ATM withdrawal fees. Finally, banks and merchants would start offering better discounts for card payments since their cost structure would drastically go down. This trifecta, when combined, is poised to drive a new era in the transaction ecosystem for Sri Lanka.
The optimal approach to a domestic card scheme is a co-branding arrangement with an international partner, LankaClear collaborated with JCB International (formerly known as Japan Credit Bureau) to implement the NCS. “We decided to partner with JCB due to their superior technical capabilities and strong presence in the Asian region where most of our people visit. In addition, they are also an Asian country, and their culture and values are much closer to ours,“ states Channa. Today, JCB has established partnerships with more than 30 million merchants worldwide, covering 23 countries and having over 100 million cards circulating worldwide.
What lies ahead for the NCS in Sri Lanka
At the moment, several banks have started issuing cards under the NCS scheme. The list includes Peoples Bank and Regional Development Bank with NSB, Bank of Ceylon, Seylan Bank, Commercial Bank & Cargills Bank in the pipeline to join shortly. “We believe that the framework, benefits, and incentives that we have implemented with the NCS will encourage merchants to begin accepting this card and increase transaction volume in small-ticket transactions,’ added Channa.
LankaClear’s National Card Scheme is poised to solve many issues faced by all stakeholders to adopt card payments. This potential is backed by research carried out by the Anthemis Group. The research identified that domestic card schemes and infrastructure bring significant benefits to local economies. The report reiterates the primary benefit of such schemes is routing domestic card transactions via a local switch to reduce costs, create services suited for local market needs, and minimize a significant outflow of foreign exchange in developing countries.
In closing, Channa stated, “We always believed that establishing a National Card Scheme (NCS) in Sri Lanka was going to bring economic benefits to our country by saving millions of dollars in foreign exchange, and this research further validates that fact. This is especially critical considering the current context of our country where a majority of the foreign exchange income sources have significantly dried up from the perils of the Covid-19 Pandemic.”