Fintechs raise UPI payment charging concerns with FM Nirmala Sitharaman

Financial technology (fintech) companies brought up the contentious issue of implementing a merchant discount rate (MDR) for Unified Payments Interface (UPI) transactions during an open house session with Finance Minister Nirmala Sitharaman earlier this week, according to attendees who spoke to Business Standard.

"A few fintech players discussed monetisation in the payments space, highlighting the absence of MDR for UPI," said one person.

The MDR on UPI payments has been a longstanding demand from the fintech industry, asserting they don’t generate revenue from such transactions. This has led them to explore alternative avenues like distributing insurance, mutual funds, and loans to customers.

“Payment companies face challenges in making profits. There was a proposal to introduce some MDR so that we could generate revenue. Since fintechs struggle to make money, they seek other avenues like distribution,” the person explained.

MDR is the rate charged to a merchant for payment processing services on various payment instruments.

In August 2022, the Reserve Bank of India (RBI) released a discussion paper proposing a tiered structure charge on UPI payments based on different amount bands. The paper sought feedback on whether MDR should be imposed based on transaction value or as a fixed amount irrespective of the transaction value. It also sought input on whether the RBI should decide on charges or if the market should determine if charges are introduced at all.

Following the RBI discussion paper, the finance ministry clarified that there was no proposal to levy charges on UPI transactions. The proposal has been on the back burner since then.

Industry players believe that MDR should be ‘market-driven, fair, and reasonable’, considering fintechs in the payments space are largely for-profit and cannot sustain themselves by offering services gratis.

“The MDR challenge with UPI has been discussed even before with government officials. We don’t get a clear answer despite discussions. You can’t expect commercial entities, driven by profit metrics, to serve for free,” a senior fintech executive said.

Industry players suggest the challenge with applying an MDR to UPI transactions is largely an issue of ‘intent’.

“The pricing model is simple. You already have a model in place for debit and credit cards. The pricing model with UPI should be similar to or slightly lower than the MDR on card-based transactions, keeping in mind the volume of transactions,” the person added.

Another person added that digital payment services using UPI rails require a clear business model to operate sustainably.

“Bringing in MDR on UPI transactions will give a fillip to banks to invest more in payment infrastructure. The reality is that the growth drivers on UPI are currently led by foreign players flush with money. Players here wouldn’t want to burn that kind of money, especially when there is no clear business model,” a fintech industry executive said.

UPI transactions reached a new high in value in January, touching Rs 18.41 trillion, up marginally by 1 per cent from Rs 18.23 trillion in December. Transactions increased by 1.5 per cent to 12.2 billion, compared to 12.02 billion in October.

The meeting was called following several fintech players writing to the finance minister about the RBI decision to bar Paytm Payments Bank from allowing transactions after March 15. Interestingly, none of those who attended the meeting raised the payments bank issue, said another person.