MDR waiver to boost UPI payments, may hit earnings of banks, PoS providers

But the move will hit the earnings of banks and PoS providers

The waiver of merchant discount rate (MDR), a charge borne by merchants on digital payments, has left the industry divided.

Experts and industry participants Business Standard spoke to are of the opinion that the move incentivises a pocket of customers (only person-to-merchant transactions) and large retailers to use UPI-linked payment modes while it cripples banks and payment intermediaries like point-of-sale (PoS) providers whose earnings will see a dip.

In the Union Budget, the government announced that no MDR will be charged on businesses with a turnover of over Rs 50 crore or their customers. Those in this bracket will not be charged any fee on accepting payments through digital means   like “BHIM UPI, UPI-QR Code, Aadhaar Pay, certain debit cards, NEFT, RTGS”. The charge will be borne by the banks and the Reserve Bank of India (RBI).

While more clarity is awaited from the government’s side, a look at the proposal suggests that large retail chains — say a Shoppers Stop or a Big Bazaar — will benefit from accepting UPI payments as they would pocket more money by not having to pay MDR, said Byas Nambisan, chief executive officer (CEO) at Ezetap Mobile Solutions, an enterprise-focussed digital payments service provider.

In the case of debit and credit card payments, a merchant has to pay 1-3 per cent of the transaction value as MDR to the issuing bank. To be sure, the government has said “some” debit cards will be exempt from MDR, which means that debit cards from certain banks or card networks will be more preferred over others at retails establishments. However, MDR on payments through credit cards will continue.

There is little difference for merchants using popular mobile payment apps like Paytm, Google Pay or BHIM, as these companies do not pass on charges to merchants on their platforms — a strategy to expand their business. Moreover, there is no charge on UPI payments on transactions of up to Rs 2,000 till 1 January 2020 — a subsidy the government announced in late 2017. 

Mobile payments leader Paytm lauded the announcement. “It is overall great for the industry. The Paytm model is built on zero MDR, giving the merchant an opportunity to sell online or becoming a financial services customer,” the company said in a statement.

However, industry participants said the burden of MDR waiver will be borne by banking partners of digital payment companies leaving the banks less incentivised to promote digital payment services. 

In a digital transaction, say a card payment at a supermarket, the super market (merchant) pays a charge to its banking partner (called the “acquirer”, which also typically provides the PoS infrastructure). The acquiring bank then has to pay a fee, higher than what it gets from the merchant, to the banking partner of the customer (called the issuing bank). This rate is called inter-charge rate. The MDR is meant to support merchant acquisition cost of the acquirer while the inter-change rate is earnings made by the bank for nudging its customer to spend.

With the waiver, major “acquirer” banks, including big names like HDFC, Axis Bank and ICICI, will take a hit on their earnings, said experts.

In a statement, the Payments Council of India, which represents digital payments players, said the Budget announcement “will deflate the hard work done by the acquiring industry, and MDR, if not charged to the customers and merchants, should be borne by the government. This will help the acquirers to focus and invest in the expansion of the acquiring infrastructure.”

The council argued that various committees have recommended lowering of fee but never a complete waiver. An RBI-constituted committee on Deepening of Digital Payments, chaired by Nandan Nilekani, in its recommendations submitted in May, said that MDR and inter-charge rate framework should be based on “market-based pricing with support and focus to drive merchant, acquiring.”

It also recommended lowering of inter-charge rate by 15 basis points.

“The announced MDR measure will have a positive impact on the demand for digital payments with possibly more merchants opting for digital payments, while acquirers and banks will look to migrate merchants to lower MDR solutions like QR codes in a bid to contain their revenue leakage,” said Mahesh Makhija, Partner and Leader, Digital and Emerging Tech, EY.

“Value-added services to merchants such as lending at PoS will gain emphasis as acquirers look to recover lost revenue streams due to zero MDR,” he added.