One man’s meat is another man’s poison. While the Central Government may have played to the gallery of consumers and merchants by making zero Merchant Discount Rate (MDR) mandatory for Rupay and UPI, this has certainly put some players in the payments industry in a spot, as a question mark arises on the survival of their business model, especially those in the merchant-acquiring space.

Negative impact

So much so that several players are now wondering as to whether the Centre has now nationalised the payments industry by mandating zero MDR on Rupay and UPI from January 1. One thing is for sure. The merchant-acquiring business will suffer. There will be a significant negative impact on the payment ecosystem – innovation, job losses, and slowdown in the expansion of digital payments in India – according to Vishwas Patel, Chairman, Payments Council of India (PCI), and Director, Infibeam Avenues.

“Payment Service Providers play a vital role in growing digital payments. The prohibition on charge of MDR on Rupay and UPI will kill the industry and make the business model unviable. It is like nationalisation of the payments industry,” said Patel.

It will also result in near stoppage in customer incentive spends by the participants. Elimination of MDR will dry out revenues and, therefore, create a catastrophic situation for new start-ups and fintechs as banks will not pay for their services, said Patel.

A better system would be that MDR, if not charged to the merchants, should be borne by the government, according to the PCI, the representative body of merchant acquirers and aggregators.

This will help the acquirers to focus and invest in expansion of the acquiring infrastructure. Additionally, if there is zero revenue from the more than 500 million plus Rupay debit cards that are active in our country, then service providers will start withdrawing the existing deployed PoS terminals from unviable small shops and establishments, as continued maintenance of these PoS machines, training, and supply of printer rolls will increase their losses. If the government wants to grow digital payments, then MDR zero is not the solution; a lower controlled MDR, along with added tax benefits to merchants, will go a long way in growing acceptance in India, according to the PCI

‘Investments to be hit’

Navin Surya, Chairman Emeritus, Payments Council of India, said the decision to hastily implement zero MDR for Rupay as well as UPI will impact the whole digital payment industry as well as investments into the industry. This is especially true for debit cards, which require infrastructure such as PoS and switches and continuous operations to mitigate risks, and frauds will become extremely difficult to manage, according to Surya.

The current ongoing regime of ‘No MDR Charge for below ₹2,000 transactions’ was already working and was supported by the industry, he said. Various discussions and reports from payments expert committees before this year’s Budget (Nandan Nilekani and earlier RP Watal Committee of NITI Ayog) recommended market-driven pricing and only correction in the ratio of sharing between issuing and acquiring banks with an increase for the acquiring bank to drive PoS deployment for the merchant.

Digital payments (as against cash) during demonetisation was around 13 per cent of the retail spend; now it is around 11 per cent with increase in cash in circulation. “Such move would weaken the industry position to drive growth aggressively.

“Also, it is irrational to pass on benefits to large retail merchants for transactions above ₹2,000 as they are also earning revenue and doing business for profits. RBI/banks subsidising to reduce their cost is misplaced,” he added.

For UPI, on the other hand, considering a relatively lower capex and operations cost, and lower and efficient model could be appropriate, but free is not the right model.

“We hope the government reconsiders this and discusses this with the larger ecosystems of the payment industry involved beyond just banks and payment networks,”said Surya.

A positive move

Not all are on the same page as the PCI. For instance, Mandar Agashe, founder and Vice-Chairman, Sarvatra Technologies, felt the government move to do away with MDR is a great booster dose for the growth of debit card and UPI transactions.

This would make it easy for every merchant to start accepting payments via Rupay debit card and UPI and push digital payments in a big way at merhant outlets.

Related Topics
comment COMMENT NOW