Cashless impediments

LAHORE: The government is encouraging a cashless economy and providing sales tax incentive on payments through internet banking, and debit and credit cards. Still the limits imposed on maximum amount that can be transacted through debit cards, impede many transactions.

From a risk perspective, debit cards are generally safer for banks compared to credit cards. This is because debit cards are linked directly to the depositor’s account, which means that the cardholder can only spend the amount that is available in their account at the time of the transaction.

Since the funds are already present in the account, there is no credit risk for the bank. If a debit card transaction is attempted without sufficient funds, it will typically be declined, reducing the chances of the bank incurring losses due to non-payment.

On the other hand, credit cards allow users to make purchases beyond their current account balance, up to a predetermined credit limit. This introduces an element of credit risk for the bank, as they are essentially lending money to the cardholder for each transaction.

If the cardholder does not repay the credit card balance, the bank could potentially face losses. Still higher limits are available through credit cards than on debit cards.

The limit imposed on daily transactions through debit cards force the cardholder to make cash payments and incur higher costs. For instance a debit card holder desires to purchase an item costing Rs770,000. If the payment is made through debit card, the Rs770,000 item would cost Rs744,000 which is a saving of Rs26,000.

A debit cardholder maintaining a deposit of Rs3 million cannot purchase the item online because his/her transaction limit is much less ranging from Rs50,000 to Rs150,000. This is unfair. The buyer would pay Rs26,000 more despite having an adequate amount in his/her account.

However, banks say that there is a reason why there is a limit on the maximum purchase amount. It is for the carholder’s security. Even though debit cards are linked to existing funds, there's a risk of fraud and unauthorised transactions.

By setting a purchase limit, banks can mitigate the potential impact of fraud or misuse. If a debit card with a higher limit were compromised, it could lead to larger unauthorised transactions, creating more significant financial and logistical challenges for both the bank and the cardholder.

But if the credit card holder identifies himself/herself through his dedicated mobile app to the bank officials on bank’s secure line, the official can approve the required amount and subject the approval to entering the one time permission (OTP) on his/her official phone number to ensure completion of the transaction.

This OTP is regularly sent to cardholders on transactions or even when sending money or making online payments of bills on a daily basis.

As for the concern about limiting the documentation of the economy, a banker said it is important to note that banks implement these measures primarily to manage risk and provide security to both customers and the financial institution.

While it might deter some larger transactions, the overall impact on the economy’s documentation is likely minimal, especially given the vast array of payment methods available for various transaction sizes. Moreover, the primary intent of debit cards is to facilitate convenient access to funds that are already available, rather than serving as a tool for large-scale or credit-based transactions.

Large transactions increase immediate outflow of deposits from banks. The measure though is unfair for the depositor who has enough funds, but still has to part with higher cost because they cannot transmit the amount through a debit card.