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Zero MDR won't help in expanding digital payments

August 7, 2023


NPCI will incur revenue losses to the tune of 200 crores annually

Bankers claim that they would incur a loss of Rs. 5000 crores

What am I talking about here?

In the budget speech of July 2019, the Union Finance Minister announced that businesses with an annual turnover exceeding INR 50 crore must offer digital payment options such as BHIM UPI, UPI QR Code, and Aadhar Pay to their customer. She said that no Merchant Discount Rate (MDR) could be charged for providing these digital payment options.

The products that are subject to the Zero MDR regime include RuPay Debit Cards, BHIM UPI, UPI QR Code, and Aadhar pay – all belong to the National Payments Corporation of India (NPCI). The idea is to promote NPCI’s products over other digital payment products through zero MDR.

However, would it be successful in doing it?

NPCI will face revenue losses, and it disincentivizes banks from adopting NPCI’s payment instruments.

The banks do all the heavy lifting in fulfilling the transactions of NPCI’s products. Banks incur several costs on the infrastructure needed to complete the transactions, and the MDR charges were bread and butter for them.

How does this affect the expansion of digital payments?

Banks won’t be too enthused about spending money on setting up the acceptance or the point of sale infrastructure. So, the underserved and unserved would continue to remain so. The UPI transactions, however, can go through mobile applications. Here again, the heavy lifting is done by the banks and not by the app providers.

The banks’ participation in the application space would go down. They might start to charge the customers instead of the merchants for availing the facility to do UPI transactions. After a certain number of transactions, they may charge a transaction fee to the customer.

A bank cannot run its business without transactional revenues, as the infrastructure spends for the transactional environment is reasonably high. After all, most banks in India are either publicly listed companies, and their biggest motivation is to make money for their shareholders.

The most critical cog in the digital payments wheel is the bank, and when they don’t participate in the ecosystem, naturally, that would mean the end of growth for digital payments.

Should Zero MDR be the way forward?

MDR should be market-driven, and capping MDRs or removing MDRs will hinder the digital payments industry growth. While the zero MDR policy is currently in place only for NPCI products, it may well extend to other products and even international card schemes.

This would force the payment companies to look at alternative revenue sources, where they would use the payment data to cross-sell other products.

In essence, this would make digital payment provision unviable and would decrease the penetration of digital payments.

Sabapathy Narayanan

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