The Reserve Bank of India (RBI) on August 17 released a discussion paper on regulating various payment system-related charges which triggered a fresh round of debate on whether or not payments instruments like United Payments Interface (UPI) and Rupay-based cards should attract Merchant Discount Rate (MDR) charges.
In this explainer, Moneycontrol explains what MDR is and whether the renewed charges, if any, will have an impact on businesses:
What did the RBI’s discussion paper say?
The RBI’s discussion paper contained 40 questions on various charges involved in using the Immediate Payment Service (IMPS), National Electronic Funds Transfer (NEFT) system, Real Time Gross Settlement (RTGS) system and UPI. It also covers charges included while using payment instruments such as debit cards, credit cards and Prepaid Payment Instruments (PPIs).
"Charges for payment services should be reasonable and competitively determined for users while also providing optimal revenue stream for the intermediaries," the RBI said.
A question which is being widely debated is whether MDR should be charged for UPI transactions.
MDR is the rate or amount that a merchant pays for using a lender’s credit card or debit card services for accepting their customers’ bills.
Presently, only Rupay-based debit cards and UPI do not attract any MDR charge.
“The current MDR design for mature products is set up like a percentage of transaction value, while something like UPI has zero MDR, the bone of contention today,” said Amit Das, CEO and Co-founder of Think360.ai.
While the RBI has also sought response on queries related to payment charges in the NEFT/RTGS systems, among others, industry members are largely divided on imposition of MDR charges in UPI.
The Union Ministry of Finance on August 21 publicised its stance saying that there was no consideration in the government to levy any charges for UPI services. The concerns of the service providers for cost recovery have to be met through other means, it said. “The Govt had provided financial support for #DigitalPayment ecosystem last year and has announced the same this year as well to encourage further adoption of #DigitalPayments and promotion of payment platforms that are economical and user-friendly,” the ministry said.
There are both pros and cons attached to imposing MDR charges in UPI, says Anuj Kacker, Co-Founder at fintech company Freo.
“Pro is that if you want innovation to increase and companies to enter into innovative models, business models have to be sustainable and make money as companies are not earning from customers. So definitely, if you charge something, more people will enter and innovate,” Kacker said.
“On the other side, UPI was created for 'nation-building'. If you think about it, local kirana stores and all shopkeepers also have UPI QR codes outside their shops. The moment you say you will charge, the shopkeeper will refuse and ask for cash. That will unnecessarily force people to take out cash,” he added.
Will the RBI impose charges on UPI?
As per experts, considering the government response and rapid pace of digital payments adoption in India, it’s unlikely that the RBI will impose higher rates on UPI transactions. An arrangement, however, can be made where small-ticket UPI transactions are excluded from the MDR regime while large-ticket transactions are subject to charges.
What impact will waiver of MDR charges on credit card transactions, if any, have?
The central bank’s discussion paper sought response on whether the present credit card MDR charges were reasonable and should RBI regulate MDR for credit cards. As per Rajat Deshpande, CEO & Co-Founder at FinBox, the industry is more concerned about possible cuts in MDR charges for credit cards as it could have a much higher impact on players involved.
“MDR for credit cards are usually set by acquiring banks; card networks such as Visa and Mastercard only set the interchange rate. This is usually determined by market forces, and it should be. It cannot be a blanket either-or approach,” Deshpande said.
“Small-value transactions are not viable for banks, especially the ones who operate on legacy systems. It would take reengineering of business processes for banks to achieve cost efficiency in enabling low-value payments. Hence, there should be a flexible model - one that incentivises banks and at the same time does not disincentivise users,” he added.
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