The year 2019 was an important one for the growth of digital payments in India. In October, Unified Payments Interface (UPI), the country’s instant payment system, clocked up over 1 billion transactions for the first time. Since then, it has done so every month.
Its growing popularity has benefited home-grown startups such as Paytm and PhonePe (now owned by Flipkart) and global players like Google Pay. But this momentum now faces a hurdle that industry representatives fear could seriously hurt the sector.
The central government has made the merchant discount rate (MDR), a form of fee collected by banks, on UPI and RuRpay debit card transactions zero. The rule came into effect on January 1. This will rob banks, payment services providers and other stakeholders propping up the digital payments ecosystem of crucial revenue. The government has also made it mandatory for businesses with a turnover of Rs 50 crore to offer digital payment options.
Finance minister Nirmala Sitharaman had given the first indications of the measures in her budget speech in July 2019, but the industry didn’t expect them to take this form.
For every transaction, a merchant pays MDR to its bank as a fee for accepting digital payments via UPI, Ru-Pay cards and other instruments. Both UPI and RuPay platforms are managed by the National Payments Corporation of India (NPCI). The bank, in turn, pays portions of MDR as interchange fee, network fee and payments service provider (PSP) fees to stakeholders involved in the digital payment process, including the customer’s bank. NPCI gets a fee as well for UPI and RuPay transactions.
So, MDR is a source of revenue for multiple entities.
Since demonetisation in 2016, the Narendra Modi government has consistently backed digital payments. The avowed intent behind the zero MDR decision is to encourage merchants, who prefer cash to avoid paying a fee on digital transactions, to make the switch. But a dozen industry executives told STOI this would do more harm than good to the sector, slowing down adoption and growth. Sameer Nigam, co-founder and CEO of payments player PhonePe, had said the step was “most unfortunate”.
The early signs of the fallout are apparent. Last month, the Indian Bank Association (IBA) conveyed to NPCI that banks cannot pay interchange fee as there was no merchant discount rate. NPCI accepted the request. “There was too much pressure on NPCI from the association. It had to approve zero interchange fee,” an official familiar with the developments said.
In January, representatives of e-payments firm met Sitharaman and shared their frank views, saying the new MDR step will hamper e-payments and the government should roll it back or compensate affected players for the revenue loss. The revenue hit is expected to be around Rs 1,800 crore to Rs 2,000 crore (see graphic). One of the attendees told that TOI the government was curious as to why payments firms were making a noise about the issue. “If banks don’t get any money, how will they pay us? Non-banking entities are also concerned about the issue as a matter of principle,” this person said.
There was no fresh announcement on the issue on in the Union Budget presented on February 1. But the issue is believed to have reached the Prime Minister’s Office. “Right now, there’s a little hope that a solution will be worked out and the stakeholders will get some money. But in three or six months, things could come to a standstill (if the issue is not resolved),” said Naveen Surya, chairman of the fintech convergence council under the Internet and Mobile Association of India (IAMAI). “If there’s no revenue for anyone, it will reach that stage.” IAMAI has been a part of meetings with the government along with payments players and regulators. IAMAI, other associations and large firms will continue to press the government for a solution.
“The clock is ticking, especially after the budget. I think it could be another month or two before the government makes any move,” said an industry expert. Till then, banks might push Visa or Mastercard as in the current rules, there is no incentive to promote RuPay cards, which have a base of around 600 million.
“With the zero MDR regime kicking in, banks will be forced to cut costs. High-end customers have always preferred Visa and Mastercard to RuPay, so banks may be keen on offering them to customer segments which make transactions beyond ATM withdrawals,” said Ritesh Pai, chief digital officer, Yes Bank.
A senior executive with another bank agreed with Pai. “Why would banks push Ru-Pay when they can make money with Visa and Mastercard?” the executive said.
So far, the government has kept mum. But sources in the finance ministry said internal discussions were underway. “As of January 31, there were 38 crore Jan Dhan account holders in India. Of these, 29 crore hold RuPay debit cards. RuPay offers complimentary personal accident insurance, and social security schemes are also riding on RuPay, so it makes sense to ensure there is wider acceptance and higher volumes. The government may rethink the zero MDR move based on representations made by the industry,” a ministry official said. The UPI network is also a government initiative, and it’s a concern that growth of the ecosystem is in question, the official added.
“For a social security scheme to have a wider reach and be sustainable [cheaper], it should have high volumes. If fewer banks issue RuPay cards, the cost of coverage will go up. There are other initiatives like RuPay Kissan debit card for farmers, which offer short-term credit and insurance. So, there’s a strong financial inclusion angle in ensuring wider distribution of Ru-Pay,” said a senior banker working with the Centre.
While the interchange fee is zero, the switching fee, another major revenue stream for NPCI, has not been made nil yet. “Yes, NPCI gets somewhere about 10% from the total MDR. But it’s a broader issue than NPCI revenue. NPCI, apps like PhonePe, Google Pay and Paytm won’t get revenue in the zero-MDR era,” another banker said.
PhonePe’s Nigam said acquiring banks had little leeway now. “With MDR nil, they cannot afford to pay issuers any interchange. Without interchange and PSP fees, issuing banks have no skin in the game left. A sad day for the UPI and Rupay story,” said Nigam. But Nigam’s rival, Paytm founder Vijay Shekhar Sharma, holds a different view. In a recent interaction with TOI, he said: “Zero MDR is a force multiplier for digital payments.” He added the government should support payments players by reimbursing them.
From the growth of UPI payments, it’s clear more users are embracing this instrument. But with a billion transactions a month being recorded now, the failure rate — when the payment is not completed — is also increasing. In absence of revenue, banks and apps may not invest funds to upgrade the infrastructure, fear industry experts. “Digital transactions are the backbone of fintech; they are driving the economy. Imagine if the transaction failure rate on UPI and cards climbs up in a few years. What solutions do we have? Customers will go back to cash or use solutions which will be costlier than the current options,” said IAMAI’s Surya.
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