BS BFSI Summit: MDR necessary to drive growth in digital payments

The merchant discount rate (MDR), which has been the most debated aspect in Unified Payments Interface (UPI), continued to get divided opinion from industry players at the Business Standard BFSI Insight Summit. 

There is a need for an MDR for larger merchants along with a zero per cent MDR for small and medium merchants to drive sustainable growth of digital payments while maintaining scale, said Vishwas Patel, joint managing director, Infibeam Avenues and chairman, Payments Council of India, at the Business Standard BFSI Summit in Mumbai. 

“We have a zero MDR for big merchants, which have billion dollar budgets for UPI, and the government is paying for it.

Essentially, taxpayer money is subventing UPI transactions of big merchants, who can easily afford it. Why not do it only for small and medium merchants at zero MDR, where we can grow it?” Patel asked. 

Merchants will be able to afford a low control MDR of 0.2 per cent as out of a transaction of Rs 100, they will still be able to get Rs 99.80, he added.

Sharath Balasu, director, product management, Google Pay, agrees. In order to operate payments at India-scale, it is necessary for digital payment companies to find a sustainable path for operations, he said. 

“I think it is critical that this industry as a whole becomes self-sustainable as economically it is going to matter a lot. I don’t think anyone has deep enough pockets to operate at India-scale if one cannot figure out a sustainable path,” Balasu added. 

However, a free UPI ecosystem will drive increased adoption among customers and businesses, especially in areas which experience a lag in the adoption of the digital payments system, said Kalyan Kumar, executive director, Punjab National Bank. 

“A lot of scope for adoption is pending. The regulator and government are looking at perspectives of all stakeholders (and) can take a decision. But, charging users will not be a good gesture looking at the scope available at the present stage.

However, National Payments Corporation of India (NPCI) has already implemented a 1.1 per cent interchange fee on UPI for pre-payment instruments if charges are more than Rs 2,000,” Kumar said. 

Meanwhile, Arif Khan, chief innovation officer (CIO), Razorpay, cautions against a hubris about India’s record transaction volumes. He emphasises on the need to focus on the country’s payment infrastructure. 

UPI crossed 10 billion transactions in volume for the first time in August 2023. The payments system recorded a slight decline in September, recording 10.56 billion transactions. This was down 0.2 per cent from 10.58 billion in August.

“On the payments side, some of the infrastructure is an old chassis. Some of those chassis will need to be upgraded and with that we will have security and reliability, among other things. We should not be in the hubris that we have done it all right when it comes to numbers such as 10 billion UPI transactions, or 400-500 million IMPS transactions. We need to accept that there is a long way to go. We should continue to learn and improve,” Khan added.

Additionally, Patel emphasised that while Indians over the UPI ecosystem have the ability to pay, the focus should now shift to the ability of merchants and other entities to collect payments digitally. 

“We need to change the focus on the ability to collect payments digitally. Today, the acceptance in Tier 3 and Tier 4 levels as well as downwards is still not there. We need to make it easy, convenient as well as cost effective for not only the merchant but also the ecosystem. One thing we can do is promote merchant education,” Patel added.  

Balasu said there’s still a long way to go when it comes to digital inclusion. 

“I don't think by any means the story on inclusion is done yet. We still have to worry about people who don’t have smartphones. We need to build more trust in the ecosystem, drive more education and awareness,” Balasu added. 

Apart from focusing on driving awareness for better digital and financial inclusion in the country, it is necessary that digital payment systems offer a secure experience to all users. 

“The user experience is very important. If a fraud or failed transaction happens even once, it gives a bad name to an entrant who is new to the digital payment space. Cybersecurity and frauds will be the single-largest hindrance. There are 10 districts in the country, which contribute over 80 per cent of cyber frauds. As long as we have jurisdictions like Jamtara, it is going to be difficult to have a trust of an aam aadmi (common man) on the digital payments side,” said Jatinder Handoo, chief executive officer (CEO) at the Digital Lenders Association of India (DLAI). 

Education and awareness among the masses will absorb more users in the fold of digital payments. 

“Literacy and awareness, via simple campaigns using All India Radio or a local radio or local melas are necessary. Once we take the other part of Bharat along with us in this digital payment journey, we will have more and more numbers coming up,” Handoo said. 

Additionally, Handoo said there is a need to have separate self-regulatory organisations (SROs) for major segments in financial services.  

“I look into it as an activity-based SRO. Predominantly, there are two streams in fintech; digital payments and digital lending. It is the responsibility of SROs to make sure that there are adequate capability developments in place. Moreover, SROs will need to handhold entities to meet regulations,” Handoo added. 

Moreover, as India’s digital payments ecosystem grows, cash has also grown simultaneously. 

Several factors contribute to this phenomenon, including cultural preferences and limitations in infrastructure. They also include concerns about the safety and security of digital payments, Kumar said. 

“First reason is cultural preferences. We find there are lots of limitations in infrastructure. And, cash is tangible and there are concerns about safety and security of digital payments,” he added.