December 18

Anisha Singh / Suraj Nair

Are ‘Convenience Fees’ Halting the Adoption of Digital Finance?

Have you purchased an airline ticket, booked a hotel room through your favourite travel aggregator, or transferred money to a bank account through any of the several mobile wallets/banking options that exist today? If yes, then you would not have failed to notice the ‘convenience’ fee levied upon each of these transactions. In today’s digital world, no transaction is truly free. If you’ve ever considered that it will be far cheaper to pay for any of the aforementioned in cash (just to avoid the various such fees involved), you might just have stumbled upon the dilemma that is present for millions and millions of low-income users across the world, who are being slowly nudged toward embracing digital payments.

It’s no secret that India’s transition to a “less-cash society” is truly under way, aided by pro-active policy and the large number of innovators and enablers in the ecosystem today. The success of this transition hinges upon stakeholders across all sections of society adopting and using digital financial systems. In price-sensitive developing markets such as India, transaction costs are a key consideration in product take-up. To ensure continued usage, research suggests that fee structures should aim to encourage those behaviours that are favourable for the long-term transition to a cash-less ecosystem, i.e. lower fees for cash-in and higher fees for cash-out. However, at present, the poor acceptance infrastructure, costs of POS terminals and debit card transactions prove cumbersome for merchants. Meanwhile, transaction costs for withdrawal and transfer of money form an additional cost to consumers. Given the hindrances on both sides, will service providers be able to successfully digitalize the ecosystem of transactions?

A number of mobile-based payment options are currently available in India, each having its own pricing structure – either slab-based or percentage-based. Transaction costs vary by transaction type; transfers from one mobile phone to another are priced differently from transfers from a mobile phone to a bank account and so on. Costs associated with smaller transaction amounts are thus likely to be higher (on a percentage basis), for slab-based models. Thus, low-income households, who are likely to transact in smaller amounts on a regular basis, are likely to spend far more on transaction costs, than customers transacting larger amounts. More importantly, the manner in which this information is communicated to customers has significant implications for informed choice and social welfare.

As a majority of the population is still coming to terms with the rapid changes associated with the transition to an increasingly digital payments ecosystem – can consumers with lower levels of literacy and numeracy skills calculate the exact cost of a transaction, under different models? How simple will it be for such consumers to make an informed choice about the cheapest option for the value of the transaction they are considering? A recent study by Innovations for Poverty Action highlights the need for further research to understand how customers comprehend different pricing models, given the deficiencies in numeracy skills among many customers at the base of the pyramid in order to inform best practices.

Recently IFMR LEAD, in collaboration with J.P. Morgan, conducted a pilot as part of “Digital Financial Inclusion and Consumer Capabilities in India” with lower-income urban and rural households in Pune, Maharashtra. The research explored the willingness of customers to pay for digital transactions such as withdrawals and money transfers. Our analysis indicates that this segment is more willing to contribute a larger proportion of monthly income toward transferring money to a bank account and least willing to pay for withdrawing money in cash. Accordingly, mobile wallet providers have the highest service fees for withdrawing money in cash.

The pilot study also tested the understanding of different pricing structures, by testing which option low-income consumers choose when presented with slab-based and percentage-based pricing scenarios for a transaction of a given amount. Here are a few questions the pilot sought to answer:


What do individuals choose when slab pricing results in zero costs but percentage incurs a small charge?

Surprisingly, a significant proportion of low-income household respondents still chose the option with the 3 percent cost.


Which option do individuals choose when percentage pricing is clearly cheaper than slab-based options?

Even when slab pricing is seven times more expensive than percentage options, a majority of individuals still choose slab-based pricing.


Which option do individuals choose at equal costs?

Consumers still indicate a preference of one pricing structure over another, with more individuals choosing the less intuitive percentage-based pricing, misinterpreting the percentage costs by miles.


Which option do individuals choose for higher amounts, wherein the percentage pricing is clearly more expensive than slab pricing?       

Most individuals are able to differentiate in pricing and choose the correct structure.

With the rapidly evolving market, a number of new entrants and frequent changes to pricing, a quick online search yields multiple, and often conflicting pieces of information on fee structures of each provider. This lack of clarity coupled with the high number of players in the market following different pricing structures does not bode well for customers. It is evident that the market is still in its early stages of development and more awareness needs to be created among customers to help them make a comparative assessment of the various product features. A supply-side push toward mobile money and other digital products can result in inefficient and costly choices by consumers and has implications for social welfare as well.


Role of Human Touch

As customers make the gradual transition from over-the-counter bank transfers to digital platforms, it is imperative to balance the digital interface with human contact. Last-mile agents and Common Service Centres (CSCs) can play a vital role in onboarding low-income consumers to digital platforms, thereby maintaining a human interface and providing consumers with an outlet to understand pricing implications and make optimal choices.


Human-Centred Design

Service providers can apply principles of human-centred design to tailor digital products to fit the needs of low-income consumers. Currently, the market has seen undifferentiated targeting and low levels of personalization and customization of applications. By identifying segment-specific needs, providers can create more intuitive displays of pricing structures within easy-to-use platforms. Additionally, some providers currently offer variation within slab-based pricing for transfers to mobile wallets and percentage-based pricing for transfers to bank accounts. Keeping consumer capabilities in mind, there is a need for standardization of pricing structures by providers.


Regulatory Frameworks

Lastly, regulatory intervention could aim to establish a price ceiling as well as best practices guidelines on transparency of cost structures.

Besides building consumer capabilities, for mobile money providers, fee structures can be used as a tool to incentivize behaviours that will help develop a robust service. Rather than setting pricing in order to capture as much direct revenue as possible early on, fee structures should be used for two main objectives. These include:  a) reducing friction to prospective customers trying the service (e.g. reducing upfront fees); and b) encouraging behaviours that will be accretive to the service developing over the long-term (e.g. for service with a wallet component, having lower fees for cash-in and vice versa for cash-out).

Whilst there are several service providers aiming to offer “free” transactions; by no means does this mean that pricing will disappear – instead the cost burden may shift to intermediaries such as merchants through merchant discount rates.


Anisha Singh is a senior research associate at IFMR LEAD.

Suraj Nair is a research manager at IFMR LEAD


Image credit: Blue Diamond Gallery

Homepage photo: Connie via Flickr.




digital finance, digital payments, financial inclusion, mobile finance, product design, savings